Construction in 2010/2011- where to from here?
Recent data just released by ABSA, FNB and Statistics SA indicate continuing difficulty in the construction sector. This has a very real effect on real-estate supply and demand cycles as well as risk associated with credit extension..png)
According to Statistics SA, there was an overall decline of 11, 2% of plans passed year-on-year (y/y) and an even more significant 33,5% y/y contraction in buildings completed. Notwithstanding the fact that the recession may be over in terms of GDP numbers, the lagging effects and impact on demand for new houses will take some time to play out.
The decline is not represented equally across all provinces. Some areas have experienced more pain than others. For example, Kwazulu Natal has experienced a 24, 4% decline in plans passed and a depressing 49, 9% decrease in the number of new houses, flats and townhouses completed y/y. However, relative to national data, KZN only accounts for a small slice, about 8%, of the pie. The two largest players, Gauteng and the Western Cape (accounting for 62% of buildings completed) have also fared dismally. The past year has seen these two provinces have a cumulative y/y decline of 35, 7% in the number of buildings completed.
Drilling below the statistics provides some insights into the economics of this sector.
Full-title small homes (≤80m²- down by 31.4% y/y) and full-title larger homes (≥80m²- down by 23.7% y/y) showed less contraction than sectional title flats / townhouses (down 43.5%). Overall demand for sectional title properties has lagged the mini-recovery in other sectors of the real-estate economy. Sectional title has traditionally seen young families discover the joys of home ownership. During the economic downturn, though, the average age of first-time buyers has increased from 31 years old to 37 years old as lenders raised the stakes for creditworthy mortgagees. As a result sellers have had to rely on older, more qualified buyers who may be downscaling due to lifestyle or financial reasons. Then too, some developers just got it wrong; creating spectacularly finished high-price units for which buyers are few and far between.
Thankfully most property developers are approaching each project with more science and less thumb-suck. Rather than simply relying on anecdotal evidence of WHWN (what’s hot, what’s not), they increasingly turning to price-band statistics, demographics and historical supply and demand cycles to forecast viability in a particular area.
With continued reticence on the part of credit-extenders, developers have to be smart about choosing projects that are correctly aligned with the subject suburb. In addition to proximity to logical amenities such as schools, hospitals, shopping centres, parks, gyms, and libraries, planners also consider traffic flow, transport hubs (taxis, bus, BRT, GauTrain), or even sports facilities depending on the type of development under consideration. The needs of the target market and its specific demographics must be taken into account, their income level and their risk profile. Developers generally only receive funding after furnishing proof that 60% or more of the plot-and-plans have been sold.
“Time is money”, and nowhere is this more true than in the preliminary phases of a development. Massive input costs for infra-structure, water, power, sewage, roads, lighting etc. have to be in place before the first house can be built. The quicker the units can be sold off-plan the faster developers and their investors can see a return on their investment.
The South African Property Transfer Guide (SAPTG) supplies developers and contractors with specific reports to assist them in determining appropriate price-bands, demographic reports and other specialist property reports to ease the pain and ensure that decisions are informed and positively impact the bottom line.
The most recent rate cut will make new developments more affordable for those who are in the enviable position of being able to purchase a new home. The collective effect of the past two rate cuts will no doubt also provide a modest confidence boost for contractors, architects, developers and others dependant on this industry. While we expect growth in this sector to remain pedestrian during the next 12 months, the worst it appears is over.
For more information on developers reports, please contact us.
Dieter Deppisch, 22 November 2010