Recent data released by Absa, FNB and Statistics SA indicates 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.

According to Statistics SA, there was an overall decline of 11.2% in plans passed year on year and an even more significant 33.5% year on year contraction in buildings completed. Notwithstanding the fact that the recession may be over in terms of GDP numbers, the lagging effects and impact on the 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 housed, flats and townhouses completed year on year. However, relatice to national data, KwaZulu-Natal 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 a cumulative year on year decline of 35.7% in the number of buildings completed in these two provinces.

The statistics below provide some insight into the economics of this sector.

Full title small homes (>80m2 - down by 31.4% year on year) and full title larger homes (<80m2 - down by 23.7% year on year) showed less contraction than sectional title flats and townhouses (down by 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 to 37 years as lenders raised the stakes for creditworthy mortgagees. As a result, sellers have had to rely on older, more qualified buyers, who may be down-scaling 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 are increasingly turning to price band statisitics, 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, bus rapid transport and the Gautrain) or even sports facilities, depending on the type of development under consideration. The needs of the target market and its specific demographics msut 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 infrastructure, water, power, sewage, roads and lighting have to be in place before the first house can be built. The sooner 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 to determine appropriate price bands, demographic reports and other specialist property reports to ease the pain and ensure that decisions are informed and impact positively on 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 who are dependent on this industry. While growth in this sector is expected to remain pedestrian during the next 12 months, the worst appears to be over.

Source: sapta.co.za

Courtesy: Agent – The Official Publication of the Estate Agency Affairs Board

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