South Africa has undergone significant political, social, and economic change in the last ten years, as it has emerged from the apartheid era. This article presents an overview and analysis of the South African real estate market over the 1980-99 period, including overall performance analysis, an assessment of the portfolio diversification benefits of real estate, and performance analysis in the post-apartheid period of 1994-99. The future outlook for the South African economy and real estate market is also critically assessed.
South Africa has undergone significant political, social, and economic change in the last ten years. Following forty-five years of apartheid, 1994 saw the introduction of multi-racial democratic rule, with Nelson Mandela elected as president. The resulting Government of National Unity introduced an agenda of reconciliation, national integration, and economic reform, with this restructuring process implemented through economic development strategies including the Reconstruction and Development Program (1994), the Growth, Employment and Redistribution Program (1996) and the Restitution of Land Rights Act (1994).
Following the introduction of this political reform process, various measures were implemented to facilitate South Africa into the international community. These measures included the lifting of international sanctions (1991), normalization of relations with major international financial institutions (1993), establishing a unitary currency system (1995) and the relaxation of foreign exchange controls to encourage overseas investment (1998).
While the direct and indirect real estate aspects of emerging markets (e.g., Chile, Poland, Russia, China, Thailand, Europe, Asia) have received increasing attention in recent years (Barry, Rodriquez and Lipscomb, 1996; Alvayay and Schwartz, 1997; Sharkawy and Chotipanich, 1998; Belniak and Chan, 1999; Kaganova, 1999; Lu and Mei, 1999; Schwartz, 2000; McGreal, Parsa and Keivani, 2001; and Zhang, 2001), the significant transformation in South Africa since 1991 has only seen a small amount of South African real estate-related research appearing in the international journals. This has largely focused on the issues of South African real estate tax (Van Der Walt, 1991; Van Zyl and Vink, 1996; and Franzsen, 1999), and land rights (Harrison, 1992; Terblanche, 1996; and Wilson, Du Plessis and Pienaar, 2000), with Wilson et al. giving full details regarding the historic aspects of the political reform process in South Africa.
With the South African real estate market being large in global emerging market terms, it has the potential to be a key investment target in the future. The purpose of this research is to present an overview and analysis of the South African real estate market over the 1980-99 period, as well as the performance analysis of the other major asset classes in South Africa. Differences in post-1994 real estate performance are highlighted and the future outlook for the South African economy and real estate market is also critically assessed.
General Profile of South Africa
South Africa is one of the major countries on the African continent. With Pretoria as the administrative capital, other South African cities of international stature are Johannesburg and Cape Town. The government has functioned as a democratic republic since 1994; initially with Nelson Mandela as president, and more recently with Tambo Mbeki as president.
Of the total population of over 43 million, 76% are African, 13% of European origins and 11% Mixed/Asian. Along with English and Afrikaans, there are nine other local dialects as the official languages of South Africa. Literacy levels currently stand at 82%. Exhibit I presents a fuller social profile of South Africa as of December 1999. Improving the health and education status in South Africa remains a high priority. In the current 2000/01 budget, 13.3% and 20.8% of total government expenditure is allocated to the health and education sectors respectively (ABSA, 2000). The high incidence of HIV/AIDS has prompted increased priorities to health expenditure. These levels of expenditure in South Africa to health and education (as % of GDP) are nearly 50% above the average world levels in recent years (ABSA, 2000).
Economic and Financial Profile
The World Bank has officially classified South Africa as a "upper middle" income country with an emergent market, ranked ninety-second in the world (World Bank, 2000). Its income distribution has high inequality (Gini Index = 0.59), only exceeded by Sierra Leone (0.63), Brazil (0.60) and Guatemala (0.60) (World Bank, 2000). Based on the United Nations' "human development" index, South Africa is ranked 101st in the world (United Nations Development Programme, 1999).
Over the 1980-99 period, South Africa experienced a rapid fall in the value of the rand. From a level of 1 rand = U.S.$1.28 in 1980, this level fell to U.S.$0.39 (1990), U.S.$0.28 (1995) and US$0.15 in 1999. Inflation was also high over this period, averaging 11.7% per annum over 1980-99, with inflation levels of 14%-20% characterizing the 1985-91 period. Post-1994 has seen a significant reduction in inflation levels in South Africa, with levels of 6%-9% characterizing this period (SARB, 2000).
Like many emergent markets, South Africa in recent years has experienced the conflict between strong demands for public services by the newly enfranchised African population and the need for fiscal restraint required for economic stability (ABSA, 2000). This is also reflected in the conflict of financial liberalization to attract foreign investment capital and the need for financial control to ensure currency and economic stability (ABSA, 2000).
South Africa has implemented significant economic development strategies, including the Reconstruction and Development Program (1994) and the Growth, Employment and Redistribution Program (1996) aimed at continued financial discipline, reducing the budget deficit, and removing exchange controls. Recent budgets have targeted domestic reform to attract investment grade ratings, foreign investment, and export opportunities (ABSA, 2000).
Despite these measures, recent years have seen poor economic growth in South Africa, characterized by a declining GDP, a reduced exchange rate against the U.S. dollar and high unemployment. The unemployment rate is currently 34%, but as high as 60% in terms of formal sector employment. Inflation in 1999 was 8%. Recent currency market volatility, depreciation of the rand and increased oil prices introduced further inflationary pressure in 2000.
Full details on a range of South African economic and financial indicators as of December 1999 are shown in Exhibit 2, with further details of South Africa's economic and fiscal policy given in ABSA (1999, 2000), Toit (2000) and Toit and Jacobs (2000).
South Africa's industrial base is supported by a good infrastructure via road, rail, air and seaports, with an ample energy supply. This is complemented by an international standard banking system and stock market, with the Johannesburg Stock Exchange being the nineteenth largest (market capitalization of U.S.$260 billion) in the world. One of the major thrusts of South Africa's economic reform programs in recent years has been attracting foreign investment to South Africa. The abolition of the financial rand, removal of exchange controls for foreign investors, privatization of public entities (e.g., Sun Air, Telkom, SABC, Airports Company) and the restructuring of public entities (e.g., Telkom, Eskom, Denel, Transnet) are key elements in enhancing foreign investment confidence in South Africa. Foreign direct investment (FDI) in South Africa has increased significantly in recent years, with the level of R27.3 billion in 1999 being significantly above the level of R14.4 billion in 1998 and R9.9 billion in 1997. While the telecommunications sector accounted for 25% of FDI over the 1995-98 period, the real estate sector accounted for 5% of FDI, and the hotel/leisure sector accounted for a further 9% of FDI. The U.S. provided 50% of this foreign direct investment, with the top five FDI contributors (U.S., Malaysia, UK, Germany and Japan) accounting for 90% of total FDI in South Africa over years 1995-98 (SARB, 2000).
Overall, foreign investment success to date has been modest, with total net capital inflow of only U.S.$1.74 billion during 1994-98. Local business confidence has been low in recent years, with some major companies (e.g., Anglo-American Corporation, Billiton) relocating their primary stock exchange listing from South Africa to London. The significantly increased crime rate in many areas of South Africa is a major concern and is also expected to deter some potential foreign investors.
Since 1994, a number of major international funds managers have established investment funds, with a significant focus on South African stocks and bonds. These funds include:
* Morgan Stanley: Africa Investment Fund: $319 million
* Alliance Capital: Southern Africa Fund: $127 million
* Old Mutual: South Africa Trust: $114 million
* Baring International: Simba Fund: $36 million
* Fleming: New South African Fund: $85 million
* Regent: Undervalued Assets Africa Fund: $10 million
* Mercury: Southern Africa Investors: $50 million.
Overall, recent years have seen South Africa focus on resolving structural issues in the economy. Fiscal policy, that was previously conservative and limiting economic growth and job creation, has now moved towards prioritizing economic growth (ABSA, 2000). Further details on the economic and financial profile of South Africa are available from the websites listed in the Appendix.
Real Estate Players Profile
As an overview of the South African office market, a profile of the key South African office markets in Johannesburg, Cape Town, Pretoria and Durban as of December 1999 is presented in Exhibit 3 (SAPOA, 2000). This profile confirms the high vacancy rates in the CBD office markets (10.0%-26.1%) compared to the non-CBD office markets (3.8%-6.7%). Most committed new office developments are scheduled for the non-CBD sector.
Major players in the real estate investment market in South Africa include insurance companies (e.g., Old Mutual, Sanlan, Southern Life), pension funds (e.g., Mines Pension Fund, Eskom Pension Fund, Armskor Pension Fund), listed property trusts (e.g., Marriott, Allan Gray, Prima, Centrecity) and real estate companies (e.g., Liberty International, Anglo American). Insurance companies and pension funds have typically had an average of 8% of their portfolio in real estate in recent years, being below the level of 10% in 1990. Both the listed property trust and real estate companies sectors represent important indirect real estate sectors listed on the Johannesburg Stock Exchange.
To facilitate real estate development and the real estate transaction-process, the real estate industry in South Africa is supported by a well-established professional services sector comprising real estate developers, financiers and brokers/consultants, as shown in Exhibit 4. Many of these real estate professional services (e.g., CB Richard Ellis) typify the expanded international role of real estate professional services as markets mature (Keogh and D'Arcy, 1994).
To further expand the professional stature of the South African real estate industry, professional real estate associations are key elements in South African real estate. The Property Council of South Africa (PROCSA) [previously South African Property Owners Association (SAPOA)] is the leading professional association for the commercial real estate industry in South Africa and produces real estate performance indices in conjunction with IPD. Appraisers are represented with the South African Institute of Valuers (SAIV), with 1600 members accounting for 75% of registered appraisers in South Africa. Other professional associations are the Institute of Estate Agents of South Africa (IEASA), the Institute of Property Practitioners of South Africa (IPPSA) and the Building Industries Federation of South Africa (BIFSA). At an international level, FIABCI has recently established a local chapter in South Africa.
Similarly, to expand training opportunities for further participants in the real estate sector in South Africa, the South African government has prioritized education in their economic development strategies. Universities offering real estate programs include the University of South Africa, Stellenbosch University, University of Cape Town and the University of Witwatersrand. The establishment of the African Real Estate Society (AfRES) in 1997 will facilitate further international exchange in real estate education and research.
Further details on the real estate players in South Africa shown in Exhibit 4 are available from the respective websites listed in the Appendix.
Data Sources and Methodology
CB Richard Ellis South African Property Index
The CB Richard Ellis property indices are value-weighted, appraisal-based indices for South Africa, with capital return performance reported on an annual basis for 198099 (CB Richard Ellis, 2000). Indices are reported for total real estate and the five real estate sub-sectors of CBD office, non-CBD office, retail, industrial, and hotel.
As of December 1999, these indices comprised 350 income-producing properties valued at R16.75 billion (U.S.$2.51 billion), with Exhibit 5 giving the contributions of each of the real estate sectors to the index. The twenty-year timeframe for the CB Richard Ellis property index is an advantage for long-term performance analysis, and forms the basis for the South African real estate performance analysis discussed later. Newell and Webb (1998) give further details on the composition, characteristics, and performance of the CB Richard Ellis property indices.
As an additional real estate performance indicator, the United Kingdom-based IPD (Investment Property Databank) in conjunction with PROCSA have now established the SAPIX/IPD Property Index. These indices are appraisal-based, and report capital, income, and total returns for South African real estate on an annual basis for 1995-- 99 (SAPIX/IPD, 2000). Indices are reported for total property and the office, retail, and industrial real estate sub-sectors.
These real estate indices comprised 1547 income-producing properties valued at R31.5 billion (U.S.$4.73 billion) as of December 1999, with Exhibit 5 giving the contributions of each of the real estate sectors to the index. This portfolio represents 50% of the institutionally-owned real estate market in South Africa. The current five-- year timeframe for these SAPIX/IPD indices is limiting; hence the CB Richard Ellis real estate indices are used in the subsequent performance analyses discussed.
Other Asset Class Performance Indicators
Equivalent performance indicators for the other major asset classes in this study over the 1980-99 period are:
* Stocks-Johannesburg Stock Exchange (JSE) overall index, property trust sub-index and the real estate companies sub-index;
* 10-year government bonds; and
* 90-day Treasury bills.
Performance analysis was carried out for the various asset classes over years 1980-- 99. Sub-period analyses for 1980-93 and 1994-99 were also carried out to assess investment performance in the post-apartheid period. As South Africa experienced high levels of inflation over much of 1980-99, real returns were analyzed over this period.
Real Estate Performance in South Africa: 1980-99
Exhibit 6 presents the performance of real estate in South Africa over the 1980-99 period, and Exhibit 7 presents the performance of property trusts and real estate companies with the overall South African stock market over 1980-99. The lesser alignment of the stock market since 1994 with the property trust and real estate company sectors is amply shown in Exhibit 7.
The performance analysis for the various asset classes over 1980-99 (in real terms) is shown in Exhibit 8. Of the real estate sectors, retail was the best performed (2.5% p.a.), with industrial the worst performed (-6.9% p.a.) over this twenty-year period. The overall stock market was the best performed (4.9% p.a.) over this period, with the property trust sector (-6.0% p.a.) and real estate company sector (-3.9% p.a.) significantly under-performing the overall stock market.
The investment risk profiles attached to each of the real estate sectors (6.74%-11.86%) were significantly below that seen for the stock market (22.66%) and the indirect real estate sectors (17.20%-19.49%). The low risk for South African real estate is partly attributable to the use of appraisal-based information in the CB Richard Ellis real estate indices, as evidenced by the significant serial correlation (up to one year) in several of the real estate performance series, including the total, CBD office, and non-- CBD office returns series.
On a risk-adjusted basis, Exhibit 8 confirms the lesser performance of the real estate sectors (Sharpe Indices of - 1.41 to - 0.01), compared to the stronger performance of stocks (Sharpe Index = 0.10), bonds and cash in South Africa over this twenty-year period. Similarly, it confirms the underperformance of the two indirect real estate sectors (Sharpe Indices of -0.50 to -0.33) relative to the stock market over 1980-- 99. The strong performance of cash and bonds over this period is reflected in the ten-- year bond rate (nominal) ranging from 11.74%-17.92%, and the 90-day bill rate (nominal) ranging from 6.62%-18.26% over this period.
Exhibit 9 presents the inter-asset correlation matrix for the various asset classes over the 1980-99 period. All of the real estate sectors were highly correlated, ranging from r = 0.39 to 0.88. The real estate sectors were not significantly correlated with the South African stock market (r - -0.07 to 0.21), hence providing diversification benefits in a mixed-asset portfolio.
However, property trusts and real estate companies showed strong alignment with both the real estate markets (r = 0.32 to 0.46) and the stock market (r - 0.31 to 0.58). In the case of property trusts, this correlation was stronger with the stock market (r = 0.58) than with the real estate market (r = 0.45). The high correlations evidenced between the property trust sector and the real estate market (r = 0.32 to 0.46) are in direct contrast to the low correlations between these two sectors typically seen for the U.S. and Australia. These high correlations have significant implications for the diversification benefits of property trusts in South African portfolios, with property trusts providing less diversification benefits in a South African mixed-asset portfolio than that typically seen by REITs and property trusts in the equivalent U.S. and Australian investment portfolios.
Post-Apartheid Real Estate Performance: 1994-99
With South Africa emerging from the apartheid era in 1993, it is important to assess the performance of real estate and the associated asset classes in the post-apartheid era of 1994-99. Exhibit 10 presents the performance analysis of real estate in South Africa over 1994-99 benchmarked against the earlier period of 1980-93.
Relative to performance in 1980-93, the CBD office market showed lesser performance over 1994-99 (-1.2% p.a. versus -6.5% p.a.), with the other real estate sectors giving comparable performance. All real estate sectors (except industrial) had lower levels of risk over years 1994-99 as compared to 1980-93, with this largely reflecting increased economic stability and international investment acceptance of South Africa in the post-apartheid era.
For the South African stock market sectors, the real estate companies sector showed lesser performance over 1994-99 (-1.2% p.a. versus -10.1% p.a.), with the overall stock market and property trust sector giving comparable performance. The overall stock market and the indirect real estate sectors had higher levels of risk over years 1994-99, with the overall stock market risk increasing from 21.66% to 27.03% over years 1980-93 to 1994-99.
Exhibit 11 presents the South African inter-asset correlations over years 1980-93 (Panel A) and 1994-99 (Panel B). The post-apartheid era has seen a stronger correlation between real estate and the stock market, with the correlation over years 1994-99 being 0.72, reflecting lesser portfolio diversification benefits by real estate in recent years. Over this period, property trusts and real estate also experienced a significant increase in correlation between these two sectors, increasing from r = 0.39 over years 1980-93 to r = 0.74 over 1994-99. Similar increases in correlation over years 1994-99 were also seen for real estate and bonds.
This article has provided an overview of the significant changes that have occurred in South Africa since 1994 and has highlighted the performance of direct and indirect real estate in South Africa over the last twenty years. With South Africa being one of the largest emerging markets globally and strategically restructuring their economic policy into an international investment perspective, the role of real estate in South Africa has become increasingly important. In particular, the post-apartheid period of the 1994-99 period has seen South African real estate exhibit lower risk than previously seen over years 1980-93, as well as exhibiting a stronger correlation with the South African stock market in this post-apartheid period.
With future economic policy in South Africa focusing on structural reform, economic growth, job creation and overseas investment opportunities, the ongoing implications for real estate are also highly significant. The resolution of these key economic and social issues in South Africa should see an increased role for real estate in investment portfolios in South Africa, both at a national and international investor level. The availability of international standard real estate performance indicators such as the CB Richard Ellis and the SAPIX/IPD real estate series should see an ongoing effective evaluation of the contribution of real estate to investment portfolios in South Africa to enable more informed property investment decision-making.
Real Estate Information Technology
Grant I. Thrall
University of Florida
Department of Geography
Campus Box 117315
Gainesville, FL 32611
This section reports on, and advances the frontiers of, Real Estate Information Technology. It provides a forum for discussion of how technology is changing: (1) research and education; (2) forecasting; (3) how real estate is practiced; and (4) real estate itself. This section provides reviews and commentaries on technologies relevant to real estate. This section will also serve as a forum for commentary on issues and problems associated with the adoption of new real estate information technology.
The Editorial Board seeks articles that address, in a timely manner, issues of real estate information technology. The Board seeks articles that will be of interest to both academics and practitioners. Manuscripts will receive anonymous peer review.
John S. Baen (2002-2005)
University of North Texas
Anton Barth (2002-2005)
Steven Laposa (2002-2003)
Issac Mebolugbe (2002-2005)
Fannie Mae Foundation
Norman G. Miller (2002-2003)
University of Cincinnati
Glenn Mueller (2002)
Johns Hopkins University & Legg Mason
Maurico Rodriguez (2002)
Texas Christian University
Ko Wang (2002)
California State University-Fullerton
Larry Wofford (2002-2004)
Elaine Worzala (2002-2004)
University of San Diego
ABSA Bank, Prospects for the South African Economy: 1999-2015, October 1999. ABSA Bank, Economic Spotlight on the Millennium Budget, No. 29, March 2000.
Alvayay, J. and A. Schwartz, Housing and Mortgage Market Policies in Chile, Journal of Real Estate Literature, 1997, 5:1, 47-57.
Barry, C., M. Rodriguez and J. Lipscomb, Diversification Potential From Real Estate Companies in Emerging Capital Markets, Journal of Real Estate Portfolio Management, 1996, 2:2, 10718.
Belniak, S. and A. Schwartz, The Nascent Polish Real Estate Market, Journal of Real Estate Literature, 2000, 8:1, 21-33.
CB Richard Ellis Africa, CB Richard Ellis African Investment Property Index: December 1999, CB Richard Ellis Africa, 2000, Johannesburg.
Chan, N., Land Use Rights in Mainland China: Problems and Recommendations for Improvements, Journal of Real Estate Literature, 1999, 7:1, 53-63.
Franzsen, R., The Present Status of Property Tax in South Africa, Journal of Property Tax Assessment and Administration, 1999, 4:1, 3-13.
Harrison, P., The Policies and Politics of Informal Settlement in South Africa: A Historical Perspective, African Insight, 1992, 1.
Kaganova, O., Russian Home Building in Transition, Journal of Real Estate Literature, 1999, 7:1, 65-77.
Keogh, J. and E. D'Arcy, Market Maturity and Property Market Behavior: A European Comparison of Mature and Emergent Markets, Journal of Property Research, 1994, 11, 21535.
Lu, K. and J. Mei, The Return Distributions of Property Shares in Emerging Markets, Journal of Real Estate Portfolio Management, 1999, 5:2, 145-59.
McGreal, S., A. Parsa and R. Keivani, Perceptions of Real Estate Markets in Central Europe: A Survey of European Investors, Journal of Real Estate Literature, 2001, 9:2, 145-59. Newell, G. and J. Webb, Real Estate Performance Benchmarks in New Zealand and South Africa, Journal of Real Estate Literature, 1998, 6:2, 137-43.
SAPOA, Office Vacancy Survey, December 1999, SAPOA, 2000, Sandton.
SAPIX/IPD, South African Property Index: December 1999, SAPIX/IPD, 2000, Johannesburg. SARB, Quarterly Economic Review, Monetary Developments, Interest Rates and Financial Markets, March 2000, No.215.
Sharkawy, A. and S. Chotipanich, Housing Segmentation in Developing Countries in Transition: A Recent Case Study of Residential Development in Bangkok, Journal of Real Estate Literature, 1998, 6:1, 29-43.
Terblanche, N., Restitution of Land Rights in South Africa: Issues and Challenges to Property Valuers, Australian Land Economics Review, 1996, 2:2, 3-11.
Toit, J., The Structure of the South African Economy, ABSA Bank, 2000.
Toit, J. and A. Jacobs, The Structure of the South African Economy, ABSA Bank, 2000. United Nations Development Programme, Globalization With a Human Face, 1999, Oxford University Press, New York.
Van Der Walt, A., Land Law Without the Land Acts: Predicaments and Possibilities, Journal of Contemporary Roman-Dutch Law, 1991, 54:4, 738-51.
Van Zyl, J. and N. Vink, An Agricultural Economic View on Land Taxation in South Africa, Journal of Property Tax Assessment and Administration, 1996, 2:1, 101-21.
Wilson, P., P. Du Plessis and J. Pienaar, Land Claims of Indigenous Peoples-The Impact on Property Values: A Comparative Study on South Africa and Australia, Journal of Real Estate Literature, 2000, 8:1, 35-56.
World Bank, Entering the 21" Century, 2000, Oxford University Press, New York.
Zhang, X., Risk and Uncertainty in the Chinese Housing Market, Journal of Real Estate Literature, 2001, 9:2, 161-71.
Graeme Newell,* Peter Acheampong** and Piet Du Plessis***
*University of Western Sydney, Penrith South 1797 Australia or email@example.com.
**University of Western Sydney, Penrith South 1797 Australia or firstname.lastname@example.org.
***Stellenbosch University, South Africa or email@example.com.
Websites for Useful Information on South Africa
Economics and Finance Websites
South African Reserve Bank: www.sarb.co.za and www.resbank.co.za
Johannesburg Stock Exchange: www.jse.co.za
World Bank: www.worldbank.org
Real Estate Market Player Websites
Real Estate Investors
Old Mutual Properties: www.oldmutual.co.za
Sanlam Properties: www.sanlam.co.za
Liberty Life Properties: www.liblifeprop.com
RMB Properties: www.rmb.co.za
Eskom Pension Fund: www.eskom.co.za
Transnet Pension Fund: www.transnet.co.za
Real Estate Developers
Murray and Roberts Construction: www.murrob.co.za
Colliers RMS: www.colliers.co.za
NBS Devco: www.nbs.co.za
Group Five: www.group5.co.za
Real Estate Financiers
Investec Property Finance: www.investec.com.za
First National Bank: www.fnb.co.za
Standard Bank: www.standardbank.co.za
Nedcor Bank: www.nedcor.co.za
Real Estate Brokers/Consultants
JH Isaacs Property Services: www.jhi.co.za
Seef Commercial Properties: www.seef.com
CB Richard Ellis Africa: www.cbrichardellis.com
Progneg Property: www.progneg.co.za
Annesberg Real Estate: www.annesberg.co.za…