Transfer Duty - The Better News

The recent reduction in transfer duty is clearly welcomed by the lower to middle end of prospective buyers, but are there implications which inadvertently affect other market sectors?

There’s little doubt the government wants to assist those at the entry and middle level of the property ladder, and they’ve done just that by moving the goalposts in their favour - zero transfer duty to the R750 000 ceiling, and 3 percent for the value thereafter, up to R1 250 000. Over fifty percent of bond applications to bond originator ooba are first-time buyers purchasing at an average price of R850 000.  Moving up from there to the R2,2m mark, loose estimates suggest that this band of buyers accounts for at least another 30 to 40 percent of the buying market. Reduced transfer duties certainly affect a significant proportion of South Africans. As Myles Wakefield, CEO of Wakefield puts it succinctly, “It’s the Robin Hood factor, because the increase in transfer duty at the upper end of the market is taking up that financial deficit which the government will feel at the lower to middle end.” 

But what are the other factors which come into play with the lowered – and raised - transfer duty at each end of the buying spectrum, and are they potentially good news for builders, developers, those wanting to build, and even investors?

Looking at the somewhat beleaguered residential building industry of the past few years, Wakefield does see a little reflected light for the industry: “Before the new transfer duty figures, it was a given that a second-hand home cost around 30 percent less than a new build. The new transfer duties aren’t going to turn everything on its head, but it certainly makes building in that upper bracket more appealing. If you buy a piece of land for R1,5m, you’ll be paying the lowered transfer duties on that. Then you pay the builder for a R3,5m build. The alternative is to pay the increased transfer duties on the full R5m you’ve spent on an older property - the higher the price you pay, the steeper those fees. Bottom line, the new transfer duties effectively narrow that gap between a new build and an existing one.” And of course, if it encourages owners to build, it’s good for the building industry.    

Government hasn’t only targeted first time home buyers, but also those in the middle sector. As Wakefield says, “They don’t want South Africans to rent, they want them to own their own homes, and ultimately build wealth that way. Low interest rates and now reduced transfer duties will further narrow that cost differential between renting and buying, that is, paying rent or paying a bond.

“In addition, banks have eased up on lending money – in particular, the granting of 100 percent bonds. One of the biggest difficulties – and obstacles to buying a home - in the lower to mid price ranges, is a lack of cash to fund the additional costs. You can’t get away from transfer costs, and banks have long given up covering those with the 108 percent bonds. Lowered transfer duty means smaller cash requirements, and that’s a definite plus for buyers up to the R2,250m mark, the band which benefits from the new ruling.”  

How do these lowered transfer duties affect investors? With property in the middle sector that bit more affordable, significant stock shortages - therefore high demand from both buyers and renters - it’s an attractive proposition for investors. Competition is destined to intensify even further in this sector.

In addition, Wakefield says, “Investors, too, are positively affected by the easing up of the 100 percent bonds from banks, because many investors prefer to keep their equity out of the property to make their return on investment higher. Arguably, the more cash you put into something, the more you ‘de-risk’ the project, but your returns aren’t as high because you’re tying up funds. Property investors are on the increase – they like the fact that, apart from house/apartment prices increasing steadily as they are – particularly in this sector – the shortage of stock means it’s rare to have a vacant property, and they get inflationary increases in rentals.”  Property answers two parts of the investment equation – provides an income as well as capital growth, and that works for commercial investors as much as residential.

And in among all this, there’s a global trend towards the lowered responsibilities and element of freedom which accompanies renting rather than purchasing, as much at the upper ends of the market as the lower. In South Africa, renting at the middle to top end largely revolves around a desire by young professionals for increased mobility or even multinationals on contract; at the lower and lower-middle end, it’s largely been about an inability to raise finance. For investors, this simply adds one more significant reason why buying into that middle market in strategic places countrywide, simply makes great sense.