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Lessons learned from Bay Area real estate market developers

During Q1 2019, ABSA stats revealed that South African housing prices increased by 3.96% (nominal increase), but fell 0.51% in real terms. Owing to increasing pressures in the South African macroeconomic realm, housing prices look likely to experience tepid growth over the near-term. One of the biggest bugbears to real estate appreciation is the lacklustre performance of the South African economy during the first half of 2019 (3.2% contraction). The SARB (South African Reserve Bank) reduced its guidance on growth from 1.3% to just 1%, and despite being the continent's second-largest economy, prospects remain grim. Various restrictive laws such as capital gains tax on non-resident real estate investments cut into the overall profitability of investment opportunities, in stark contrast to the housing boom in the early 2000s. The global financial crisis put paid to the housing market boom and house prices plunged 16.5% in real terms.
Source: Danny Haber Business Journals (New Developer Wants to Bring Down Housing Costs)

Evidence suggests that the bond market (mortgage market) in South Africa is declining, with the number of mortgages approved dropping by 1.2% during 2018. In terms of overall percentages, the mortgage market declined from 31.1% of gross domestic product in 2013, to 29.5% of gross domestic product in 2016, dropping further to 28.8% of gross domestic product in 2018. However, the silver lining in the South African real estate market is the rental market. Global Property Guide research indicates that South African rentals of fully furnished apartments generate substantial yields in the region of 6.5% – 9.3%. In the Gauteng area, the most desirable rental markets include Westcliff, Sandhurst, Parktown, Parkview, Sandhurst, Illovo, Houghton, Hyde Park, and Melrose. Gross rental yields in the Cape area are lower than in Gauteng and typically range from 5% - 8.3%. In much the same way as other international markets like the US, and Europe, falling interest rates are the norm. In the United States, declining interest rates tend to have an upward bias on property prices, since the cost of financing real estate is less over the lifespan of the loan. In South Africa and elsewhere, many challenges exist in hot markets where excess demand exists.

Workable solutions for real estate challenges

Source: Rental Stats and Trends (RentHop) San Francisco Bay Area California

In the United States, the Bay Area presents as a classic case study in this regard. The property market in the greater San Francisco metropolis is such that limited supply and heavily overpriced real estate serves as a strong deterrent to homeownership. As a result, Bay Area residents, including people working in and around San Francisco are struggling to find affordable housing. An op-ed in Bloomberg by Alexandre Tanzi revealed a surprising trend in California's Bay Area as home values declined through the month of July 2019. Year-on-year, home values dropped 1.1% in San Francisco (data provided by Zillow), and 10.5% in San Jose. The price volatility measured 10.5% in San Francisco over the year, marking a dramatic period in the Bay Area's real estate market. In 2018, surging real estate prices in the San Francisco Bay Area prompted a mass listing of properties for sale, flooding the market which typically experiences excess demand.

Rental stats and trends paint an interesting picture for studio apartments, one-bedroom apartments, and two-bedroom apartments with median rentals in the San Francisco Bay Area for a studio listed at $2,569, with the top 25% of rentals going for $3,159. One-bedroom apartments rent at a median price of $1,975, and the top 25% are listed at $2,445. Two-bedroom apartments rent at a premium in the San Francisco Bay Area. The median price is $2,800, and the top 25% rent out at $5,500. The problem is that most people living and working in the Bay Area cannot afford these rentals, leading many to seek alternative solutions for example living outside of the area and commuting in to San Francisco on a daily basis.

While many real estate developers are eager to get started on new construction and rent at a premium, this does nothing to assist the masses of low-and middle-income earners looking for affordable housing in the Bay Area. Enter Danny Haber and his company oWOW. This innovative real estate development outfit is all about providing premium-grade accommodation below market price. Given the severity of the housing crisis in the Bay Area, what with thousands of homeless people and scores of working-class people who simply cannot afford to pay their rentals, developers like Haber have been hard at work with affordable housing projects. oWOW is different to other development companies, since it is a vertically integrated development, design, and construction corporation geared towards top-tier living. The company makes use of adaptable and affordable units with a flexible wall system known as ‘Magic Walls’. These modular units can easily convert studio apartments into multi-bedroom/bathroom apartments in the same square footage.

Already, oWOW has created several major projects across the Oakland and Bay Area, including 674 23rd Street, 960 Howard Street, 1919 Market Street, and 316 12th Street. Haber has been lauded as a visionary real estate developer in an area that is struggling to provide for the needs of its renters and homeowners. His company has perfected the development of repeatable designs with standardized kits and low costs of operations. Dubbed ‘Housing Redefined’, this unique way of building apartments and delivering them to the market allows for cost savings to be passed on to stakeholders along the value chain. Residents get to enjoy the cost savings in the form of lower rentals, without having to sacrifice any of the luxuries and high-quality lifestyles that they desire. Rising rental prices in desirable areas are a double-edged sword; homeowners get to enjoy the benefits of increased rental rates, but renters are having to fork out an increasing percentage of their earnings in the process. Projects like 674 23rd Street have far-reaching implications for a much broader audience, and are possibly a viable solution in South Africa too.

About Boris Dzhingarov

Boris Dzhingarov graduated UNWE with a major in marketing. He is the CEO of ESBO ltd brand mentioning agency. He writes for several online sites such as Tech.co, Semrush.com, Tweakyourbiz.com, Socialnomics.net. Boris is the founder of MonetaryLibrary.com and cryptoext.com.

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