Luxury shows signs of distress
2009/04/08
Although luxury properties form a relatively small part of the distressed residential market, tighter credit, rising unemployment, negative investor sentiment and falling house prices are starting to take their toll.
As the residential property recession grows in South Africa, jumbo mortgage loan defaults (outstanding mortgages of over R5m) are growing. Rael Levitt, Alliance Group CEO, says wealthy suburbs are no longer immune to the downward correction in house prices.
The Alliance Distressed Asset Index indicates that the residential property market is in the third quarter of a technical recession and that repossession, insolvencies and distressed property in the luxury market jumped in the first quarter of 2009.
Mortgage stress, where bondholders are in arrears for two months or less is showing a sharp increase across the board - from 75,000 in the third quarter of 2008 to 130,000 in the last. And severe mortgage stress, where bondholders are over four months in arrears, has catapulted from 8,000 in the second quarter of 2008 to over 35,000 in the last quarter.
The Distressed Asset Index also indicates that 80% of bondholders who are in severe mortgage stress will in all likelihood have to sell or lose their homes. And further defaults are expected across the market. There are approximately 1,200 houses per month being sold forcibly through legal channels, which includes sales in execution, insolvency sales and bank's voluntary distressed sales channels.
"Although distressed luxury residential property comes off a very low base, it is increasing and the interest rates cuts are only having a muted effect on these jumbo mortgage arrears," says Levitt.
Properties in previously unaffected upmarket suburbs like Clifton, Franschoek, Camps Bay, Plettenberg Bay, Sandhurst, Hyde Park and Umhlanga are starting to trickle on to the market. "These homeowners, who borrowed against their properties, are now in trouble. Although private and corporate bankers do not rush to execute against jumbo mortgage defaulters and rather work with their clients on pre-foreclosure deals, the market is now seeing a growing trend of jumbo mortgage distressed sales," says Levitt.
A foreclosed luxury mansion in Sandhurst, Johannesburg, in December last year is a case in point. Auctioned by The Alliance Group for R65m, the property represents the top end of the market. On 17 April a further five liquidated homes will come under the hammer in the country's most expensive suburb.
"This trend is certainly not isolated, but it is presenting the greatest bargain-buying opportunity for cash-rich speculators that this country has seen in decades," says Levitt.
The Alliance Group is also dealing with several distressed golf estates which should enter the market in the next few months. Levitt says the last time they sold off bankrupt golf estates such as Simola in Knysna and the Riviera at the Vaal was in early 2000.
And it's happening worldwide. A recent article in the British Financial Times titled "Repossessed riches" reports that luxury is under increasing liquidation. The article cites struggling cities such as Miami, the Costa del Sol, Marbella and Dubai.
The forecasts for this year are not promising – either here or overseas. Levitt says, "No-one knows how long foreclosed homes will continue to filter on to our luxury property market. But we believe that by 2010 there will have a rapid rebound and owners of upmarket homes will have a unique opportunity to present their properties to a worldwide audience."
Sadly, many jumbo mortgage holders will not benefit from this exposure at this eagerly anticipated event. The bargain hunters, who are snapping up properties now, will be the real winners at the World Cup.
Source :Property news
