SA Property Auctions - How large are the discounts at distressed auctions?
How large are the discounts at distressed auctions?
The property bubble has burst globally and the world wide economy has shrunk. Property values in almost every country have dropped and although no-one knows how much further they will fall, there is no doubt that the market is starting to present unprecedented value to buyers. The credit crunch has slowed the ‘new home loans’ market and there is now institutional aversion to risk. Whereas 100% and even 125% loan-to-value (LTV) mortgages were commonplace as the market reached its high watermark, 80% LTV will become the norm.
“Hardest hit,” says Rael Levitt, CEO of Alliance Group, “are consumers without deposits who desperately grasped the rapidly escalating property ladder. Their prediction - and hope - that house prices would continue to spiral, backfired and they are now struggling to hold on to their property. The ‘double whammy,’ of collapsing prices and the dearth of mortgage approvals is hitting home owners hard. Some are losing their grip.
Distressed properties worldwide are usually sold in property auctions. The number of repossessed homes up for auction soared by almost 300% between the second half of 2008 and the same period in 2007.
It was quite different a year ago. Property auctions in South Africa have a long-term reputation as a place to find bargains but as the property boom reached unprecedented heights, auction houses were packed with eager investors keen to pay strong prices to boost their buy-to-let portfolios. Now the auction floors are still packed – but there are bargains to be had. “It’s a buyer’s market,” says Levitt, “and investors are finding that auctions are presenting unique buying opportunities. Those who have access to cash are seeing the best deals in more than a decade. South African banks, unlike many in advanced economies are still in business and astute buyers are using the lower interest rate environment to finance their deals. This will continue as predicted interest rates drop by 350 basis points to 10.5 by year end.
Jacques du Toit, Senior Property Analyst at Absa says, “The household sector is forecast to continue experiencing some financial strain this year, despite declining inflation and interest rates. This view is closely related to an expected poorly performing economy, which may lead to further job losses, increased negative sentiment in the household and business sectors, and lower levels of consumer and investor confidence. As a result, the housing market is expected to remain under pressure for much of 2009, with house prices forecast to drop by a nominal 3% - 4% and a real 8% - 8,5% this year.’’
And in this economic climate distressed property levels spiral. As a result auction sales spike but ironically not that many are willing to take the punt as prices have fallen and seem to be more eager when prices are at an all time high. Those who are prepared to gamble in a boom market, won’t risk investing into a buyer’s market. “Which allows those who source the finance, together with investors with deep pockets and ready access to cash to clean up,” says Levitt. While lenders are out of pocket, the real winners are those who realise what a unique period this in the fluctuating market to invest in distressed properties.
Housing repossessions and distressed selling are a sad result of the worldwide property slump and economic downturn. It is devastating for the home owners, banks and the general economy and unfortunately as the economic crisis deepens the number of houses that are sold through distressed channels are set to rise.
Lower interest rates may assist those who are falling into arrears, however this might not do enough to prevent more repossessions taking place. The economic outlook is not good and more people will find themselves struggling financially in the next few months. Unfortunately mortgage payments are often the payment that struggling borrowers neglect and because of this, more and more people are finding themselves losing their houses with record numbers of properties being sold under the auctioneer’s gavel.
The sad fact that mortgage defaults are on the up means more distressed properties are being sold at auction. Lenders are not in the business of owning houses – they do not want the properties on their books so they need a quick and easy way to get rid of them and selling them at auction is often the best way of doing this.
Financial institutions are turning to auction houses throughout the world to sell distressed property
Courtesy: Alliance Group
“Information courtesy of the Alliance Group Property Investor Guide, available at all Alliance Group offices nationwide. To find out more, call 0861 ALLIANCE, or visit www.alliancegroup.co.za to download an electronic version“