Scenario Planning for Property Investment

Scenario Planning for Property Investment

Property Insights

2012-09-27

Due to uncertainty around South Africa’s economic prospects - in particular the significant unemployment challenges coupled with the recent mining sector unrest - experienced South African property investors understand the importance of planning for projected future outcomes in these turbulent times. Beyond just planning six to twelve months ahead, however, successful property investment requires real skills to successfully formulate strategies for predicting long-term outcomes.

Scenario planning for property investors requires an understanding of a handful of fundamental pillars that ultimately determine future outcomes:
  • Enlightened political policies are a vital part of investor confidence. When governments provide stable environments where transparent, accountable and credible modes of interaction are encouraged and maintained, business thrives. In South Africa, political bureaucracy and local council inefficiencies are hampering much needed growth and development, in particular with respect to service delivery and rising property taxes.
  • Economic growth is dependent on direct foreign investment, robust local economic activity and a healthy, educated population with rising per capita incomes. Locally, real growth is proving elusive where high unemployment levels persist and HIV related illnesses compound our existing social issues. Recent union and strike action activity  is also crippling the local economy and in turn hampering critical direct foreign investment.
  • Demand cycles need to be monitored and can be predicted via measurable indicators such as market demand, building plan approvals at local council, recent rental and sale pricing and investor return statistics – all of which also point to possible future trends.
  • Development costs associated with construction have a direct effect on the viability of development projects. Directly related to costs are the levels of market competition, productivity levels, the cost of capital, interest rate levels, equity return demands, pricing stability and any related long term financial positions.These factors need to be favourable to ensure development venture success.
  • Predicting and understanding consumer market trends is critical, because profits are made when demand and supply are matched via accurate space assessments in conjunction with relevant product supply. Property trends do not always coincide with demand for the various property types; for example, in most cases residential demand often lags behind that of industrial and office property through a market recovery. Developers need to ensure the timing of product to market coincides with demand cycles.
Scenario planning can only become meaningful if all of the variables above are correlated back to the recurring and fluctuating levels of economic activity that business experiences over long periods of time.

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