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 The property market review

 

 Prevailing confidence in the property market, while still low, varies from sector to sector. In a way, it’s like a sputtering high performance engine running on low grade fuel. The question is, why?

The results of the First National Bank (FNB)/Bureau of Economic Research (BER) building confidence index survey, released on the 9 June 2011, revealed that the percentage of respondents who are satisfied with prevailing business conditions remained low but static at a composite 24 out of a possible 100 during the 2Q 2011.

Out of the six sectors covered by the survey, four showed increases in confidence (building contractors, architects, quantity surveyors and manufacturers of building materials) and two showed declines (building sub-contractors and retailers of building materials), 2Q 2011 compared to 1Q 2011. Manufacturers of building materials appear to be on another planet, or know something the rest of us do not know. Some may experience cash flow problems as a result of their exuberance and go under. On the other hand, the gamble may pay off if government comes through on its planned infrastructure spend.

Table 1: Results of the FNB/BER BCI by Sector
Sector1Q 20112Q 2011Difference% Change
Architects2629311.5
Quantity surveyors3341824.2
Building contractors – Residential2024420.0
Building contractors – Non residential1116545.5
Building sub-contractors (plumbers, electricians, carpenters and shop fitters)3624-12-33.3
Manufacturers of building materials (cement, bricks and glass)42521525.0
Retailers of building material and hardware283-25-89.3

To understand the negatives in the BNB/BER BCI results, one needs to look at the Statistics SA’s data on new plans passed. When we do so, we can see why building sub-contractors and retailers are negative. Table 2 below shows that plans passed for Other residential buildings has dropped quite significantly with Additions and alterations showing a very slight decline. We can also see from Table 3 that Gauteng and Limpopo are down.

Table 2: Building plans passed by larger municipalities at current prices – National
Estimates at current pricesJan to Apr 2010Jan to Apr 2011Difference% Change
R’000R’000R’000%
Residential buildings7 657 2058 433 486776 28110.1
Dwelling-houses5 843 1776 216 042372 8656.4
Flats and townhouses1 299 2241 970 334671 11051.7
Other residential buildings514 804247 110-267 694-52.0
Non residential buildings4 100 3524 431 878331 5268.1
Additions and alterations6 488 8606 447 468-41 392-0.6
Total18 246 41719 312 8321 066 4155.8

 

Table 3: Building plans passed by larger municipalities at current prices – Provincial
Estimates at current pricesJan to Apr 2010Jan to Apr 2011Difference% Change
R’000R’000R’000
Western Cape3 743 7794 021 979278 2007.4
Eastern Cape958 944976 27417 3301.8
Northern Cape130 801204 49073 68956.3
Free State567 710627 79360 08310.6
KwaZulu-Natal3 732 1073 900 301168 1944.5
North West564 945636 81371 86812.7
Gauteng7 263 6797 108 109-155 570-2.1
Mpumalanga773 2911 427 400654 10984.6
Limpopo511 161409 673-101 488-19.9
Total18 246 41719 312 8321 066 4155.8

New versus existing house prices

Since the 90s new house prices have been consistently greater than existing house prices. However, the difference in pricing has never before been as high as it is now. At the end of 4Q 2010, a new house was 51% more expensive than an existing house! Does this mean new houses are over priced or that existing houses under valued? ABSA’s latest report on housing indicates that existing house prices look set to fall even further. This will increase the gap between new and existing even more. The question is will builders be able to continue with this level of competition, and for the foreseeable future?

Negative factors

  • Business and consumers are still smarting from the recent recession (caused by greedy, irresponsible banks in the USA).
  • Fears of a double dip recession abound.
  • The USA’s current debt position and economic policies add to these fears and puts a damper on world recovery, which effects business and consumer confidence both here and abroad.
  • The increases in the costs of food, electricity and petrol in South Africa have placed a strain on household budgets and reduced disposable income.
  • Of the 18.51 million credit active consumers in South Africa, 46.5% have impaired credit records – as of 4Q 2010.
  • The household debt to disposable income ratio, 77.6% Q4 2010, being as high as it is now, it is making the task of obtaining bank loans for building projects difficult.

Positive factors

  • On the positive side, interest rates are low
  • As was announced by the Minister of Finance in his budget speech in February this year, transfer duty on property has been reduced – on average by 38%. Property priced at R600 000 or less will not be subject to transfer duty at all. And, as of 23 February 2011, this will also apply to legal persons, such as close corporations, companies and trusts.
  • Very encouraging is the noticeable increase, albeit from a very low level, in the volume of work available to building contractors. However, these are plans and not contracts.

While actual building activity picked up in 2Q 2011 for the first time in more than a year, conditions remain extremely tough. Compared to a year ago activity levels are still lower and profitability remains depressed as firms need to submit very competitive tenders to get contracts. Notwithstanding these unfavourable conditions, the fact remains that the volume of work available has increased, albeit from a very low level. And. with the Maputo Corridor between Johannesburg and the Port of Maputo a huge success, Mpumalanga is booming.

In closing, a wise sage once said that it is better to be cautious than to be sorry. Another said patience is a virtue. So, while we need to be positive, we should tread carefully. And, in taking a long-term view, as we should, when it comes to property, we know that difficult times don’t last forever – unless of course some politician doesn’t mess things up.


Chris Koen, Business Partners Limited Regional General Manager, Inland West, in talking about non-residential properties, of which light commercial properties make up 75% of the book, is quite encouraged by the turnaround in the market.

“While the market is not fully recovered there are signs of it stabilising. Investors are looking for good commercial properties but these are in short supply. As such these properties come at a premium. New developments are slow in picking up because of the average 25% differential in costs between existing and new properties,” he said.


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