Covid-19: Luxury property market takes 40% hit as sector feels strain

The unfolding Covid-19 economic disaster has prompted an unprecedented bargain bonanza in the property market, with luxury mansion prices down by about 40%.

The luxury market, already under strain before Covid-19, is in free fall. But it’s not all bad news as more attractive prices and low interest rates generate sales at the lower end of the market, particularly among first-time buyers.

Market data points to a historic shake-up of both residential and commercial property, with average house prices in the R1.5m-R3m range down 5% this year.

However, the window of opportunity for residential buyers coincides with dismal prospects for the commercial property and property development sectors. A big percentage of companies are defaulting on office rentals as the effect of almost three months of lockdown is felt.

The call to work from home to minimise the spread of the virus has radically altered future prospects in this market sector, with a similar drop in demand for industrial property due to the ailing economy.

In addition, the property development sector has raised the alarm about a massive backlog in deeds offices as staff take sick leave. In the Western Cape the backlog is so bad it has prompted legal intervention from the Cape Town Attorneys Association, which obtained a court order to compel the Cape Town deeds office to open this week.

The association is also demanding details of how the deeds office intends to manage staffing levels during the Covid-19 period.

Glowing property outlooks from several experts this week were offset by warnings of an extended economic slump, with economic contraction likely to limit the number of would-be buyers.

The latest property barometer from First National Bank (FNB) predicts a 45% reduction in housing sales in 2020 — worse than the 40% contraction in 2009 during the global financial crisis.

“We expect pressure to reverberate across all price segments, although higher-end and luxury markets will likely be the hardest hit,” said FNB.

The extent of the price dip is likely to depend on the duration of the economic downturn. “It is still early days to see the full effect on the commercial property market,” said Maxol Properties principal broker Bruce Clark, who specialises in the Midrand area in Gauteng.

“Offices were a train smash even before Covid. A lot of people are now working from home. To mitigate the effects of the pandemic, many landlords are now offering very attractive lease incentives or even shorter-term lease periods. Reduced rental amounts are also being considered by some.

“While that can’t go on forever, a lot of companies in the short term may downsize their office space requirement. On the other hand, companies may have to increase the amount of space per person [to comply with health protocols].”

Cape Town property investor Alon Kowen said the rising property market has gone into reverse. “People were overreaching [with prices] before and fetching what they were asking. Now you almost have to under-reach to attract the buyers,” said Kowen, adding that prices on the Atlantic seaboard illustrate the broader market dynamics.

“For anything between R3m and R15m, it is safe to say there is a 20% or 25% price adjustment. But anything north of R25m there can be 30% or more reduction, and the big numbers can be even more.”

Seeff Property Group chair Samuel Seeff said the depreciation of the rand may also assist bargain hunting. “It means that high-end property is now about 20% to 30% cheaper for those paying in dollars, pounds or euros. Prices are already down by about 20% since 2018 and we expect a further decline of around 20% to 30%,” he said.

Dogon Group Properties founder Denise Dogon confirmed sale prices have dropped during lockdown — “The higher-end sales are considerably lower than the asking price” — but said the market remains active thanks to the lower interest rate.

“There’s no doubt that [mortgage bond] repayments are much less and there is much more affordability — that is very positive. And we’ve had a significant amount of small sales under R3m, which is also positive.”

Deeds office snags are delaying transfers, however. Only 17% of 11,977 registrations lodged at the Cape Town deeds office between May 12 and June 3 had been completed, according to Cape Town Attorneys Association court documents.

“You can’t just close your doors haphazardly when you are operating in a space where doing so would affect millions of people,” said association chair Clive Hendricks.

Western Cape Property Development Forum chair Deon van Zyl said the backlog affects an estimated 24,000 deeds, resulting in a ripple effect that affected banks, conveyancers, estate agents and the South African Revenue Service.