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The Sectional Title Housing Market Segment still mildly outperforms the Full Title Segment

Sectional Title homes have seen a long term rise in prominence in South Africa’s property trade, driven by mounting urban land and infrastructure scarcity, which requires a “drive” towards smaller average sized properties as we look to utilize land and infrastructure more economically. But these long term structural changes don’t exempt it from shorter term cyclical fluctuations. And indeed, as a cyclical slowdown plays out, both the Sectional and Full Title Segments have recently found themselves softening.

In an attempt to measure the progress of the Sectional Title Segment’s growth, we use deeds data transactions by individuals only (“Natural Persons”), which we believe should be a good proxy for residential transactions by individual households.

Here, we see the volume and value of Sectional Title transactions having increased in significance since 2010 after a 2008/9 recession dip.

We see Sectional Title transactions volume having risen to 29.94% of total property transactions by individuals by the 3rd quarter of 2016, from a cyclical low of 23.58% in the 3rd quarter of 2010.

The relative recovery in Sectional Title transaction volumes more or less followed a post-recession recovery in 1st time buying levels from around 2010/11, with the highly cyclical 1st time buyers believed to typically be a significant source of demand for smaller-sized Sectional Title homes.

This period of relatively strong Sectional Title demand post-2010 has contributed to the segment’s average house price inflation catching up with the Full Title average, and even marginally exceeding it for much of the time from 2012 onward.

This, however, may have been changing in recent times, with the highly cyclical and interest rate-sensitive 1st time buyer percentage having fallen back from an early-2014 high of 28% of total home buying, to 18% by the 3rd quarter of 2016.

And so we have seen a hint of a move towards flattening out in the trend in Sectional Title transaction volumes’ share of total transactions since 2015, and sectional title volume growth has been a bit slower than that of Full Title in recent quarters.

In addition, although the FNB Sectional Title House Price Index remained at a slightly faster growth rate than Full Title, i.e. 6.08% year-on-year vs Full Title’s growth of 5.36%, both house price indices were experiencing slowing growth, but with the Sectional Title Index’s growth having slowed a little more significantly off a higher base.

Younger and 1st time buyers are more credit-dependent and thus interest rate-sensitive than repeat home buyers on average, and we believe that rising interest rates since early-2014 have been key in cooling off 1st time buyer levels to a greater extent than they have cooled of the overall market.

This, in turn, may be cooling Sectional Title demand just a bit more than that of Full Title.

As yet, though, our group of FNB Valuers still perceive a stronger Demand relative to Supply in the Sectional Title Market compared to Full Title, as reflected in the FNB Valuers’ Market Strength Index (MSI) for Sectional Title property (explanatory notes on page 4) measuring 52.37 in the 3rd quarter of 2016, compared to Full Title’s 50.04 level.

However, when we measure year-on-year growth of the MSI, we see a more significant slowing, from a higher growth rate back early in 2014, in the MSI for Sectional Title compared to the MSI for Full Title.

Within both the Full Title and Sectional Title segments, it is very clear that “smaller is still better” when one compares the relative strength of the various sub-segments, although all have been slowing.

The smallest sized Sectional Title sub-segment, namely the “Less than 2 Bedroom” segment, still showed the strongest price inflation to the tune of 9.8% in the 3rd quarter of 2016. Significantly behind was the 2 Bedroom sub-segment with 6.5% price growth, while the largest “3 Bedroom and More” category was the slowest sub-segment with 5.3% average price growth.

All 3 of these sub-segments showed slowing price growth from prior quarters.

In the Full Title segment, the same relative picture emerges.

The smallest sub-segment, i.e. the “2 Bedrooms and Less” category, showed the strongest price inflation to the tune of 6.4% in the 3rd quarter of 2016. This was followed by the 3 bedroom segment with 5.7%, while the largest “4 Bedroom and More” segment showed the slowest price growth of 2.6%.

Like the Sectional Title sub-segments, the 3 Full Title sub-segments had all shown some mild slowing in price growth of late.

In short, the Sectional Title Segment is typically more cyclical than the Full Title Market. This means that in tougher economic and interest rate times it can weaken a bit more significantly then the Full Title Market. Both segments have started to show signs of softening, but to date certain of the key performance indicators still put Sectional Title as mildly stronger than the Full Title Segment. This comes through in the segment’s slightly superior house price inflation in the 3rd quarter as well as its higher Market Strength Index compared to that of Full Title.

However, we believe that 1st time and younger age group buyer demand is more important to the Sectional Title Market than to the Full Title Segment, and this group is seeing a decline in significance in the market of late. We therefore don’t believe that the Sectional Title Segment will remain stronger then the Full Title Market for too much longer, as both segments soften.