Erwin Rode the Forecaster

Source: The Property Magazine

Erwin Rode is a property economist, a registered valuer and a founder of the national property research firm Rode & Associates, which consults on the property market to the country’s largest financial institutions and prominent property developers Erwin Rode started his professional career as a journalist in the 1960s.

Looking around at his colleagues one day, he imagined them all 30 years down the line, still sitting in their corners, hunched over typewriters, and realised this was not right for him. What did feel right, however, were the business reports that he had avidly begun poring over in the financial sections of any printed media he could lay his hands on. Without being sure of precisely where he wanted to be – but with a strong interest in the academics of the economy – he made the leap from journalism first into the retail world and from there into selling insurance policies with Old Mutual; a tough training ground, but one which taught him a great deal about finance and led to the completion of an MBA.‘Thereafter I wanted to be transferred to either Old Mutual’s share analysis side or the property side,’ explains Erwin. ‘My first preference was share analysis. But they didn’t want me!

The competition in that field was much higher at the time’. The share market’s loss was property’s gain: with a broad brief from Old Mutual to ‘research property’, Erwin began his first timeseries in the late 1970s: ‘It was very difficult at the time because no scientific calculations of performance had yet been done. In those days it was all about institutional property, and what mattered was the size of the portfolio you had – the performance of it never really mattered. I was lucky in that I knew an old timer in Johannesburg who was one of the foremost property developers and brokers in those days – with the help of his old files we put together data and it was clear there was this long cycle. And you could see that at the time that property was in a trough. So surely that must be the right time to buy?

‘It was a good time to start a research career because of other professionals such as actuaries, who needed more science into the property field in order to do their jobs and who were introducing concepts such as discounted cash flow, which had long been applied in the share analysis game. Before then, if you wanted the current rental rate of a property, you’d phone your friendly broker and he’ll tell you gladly whatever he thought it should be. What people hadn’t yet realized was that you needed history – statistics over time, both longitudinal and cross-sectional. 

So that is the innovation I brought about to the industry: to introduce the economist’s skill to the property game in South Africa.’Thirty years down the line and having started his own business in 1987, Erwin’s research has taken him through two property booms – in the early 1980s (which he foresaw during his period with Old Mutual and which allowed the company to buy R70-million worth of prime office space when rentals were still R4.50/m² – a figure which trebled in three years) and the second boom being the one which the market currently finds itself in.‘Of course, what separates the children from the grownups is when the market tips,’ says Erwin. 

‘As a researcher, the most exciting time is when you’ve stuck out your neck to make forecasts and then two, three years later you are proven right. That’s high risk – but I’m a high-risk person. It takes a measure of obstinacy to do that – to say “look, the property game is now over” – nobody ever makes friends by forecasting bad times. It got me fired from Old Mutual. But that is the risk of all forecasters – when a company goes through bad times, the first thing they start cutting back on is research.’An interesting factor that has emerged over the past few years from Erwin’s research is that – even though they share a common denominator in the South African economy – the residential and non-residential cycles no longer run synchronously:

‘In the mid-90s they started parting ways. That was the time of the excruciatingly high interest rates brought about by Chris Stals [then governor of the Reserve Bank] in 1989 to flight inflation. My theory is that higher interest rates affected the residential market more than the commercial market. But then the rates came down and residential had its run.

So that’s how it happens; you have long periods of mediocre performance where it’s hellishly difficult to make money in the property game or even just to stay afloat. And then all of a sudden you’ve got this boost in the market and a very sharp reaction (like you had in the early 2000s) and then there’s disequilibrium and the market closes shop, because then it’s too high again.

‘Property has a long lifecycle. In South Africa the history of a building averages about 30 years – in Europe it could be centuries – but you must remember that it takes many years to plan and put up a building; which makes it difficult to match demand with supply. But once you’ve got an oversupply the only way the equilibrium can be restored is by demand gradually eating away at the oversupply and for that you need a buoyant economy. And the realisation that it could take many years for that equilibrium to be restored.’