Home­builders’ bat­tle

But don’t ex­pect cheaper build­ing rates just yet

Finweek English Edition - - Companies & Markets -

RES­I­DEN­TIAL build­ing con­trac­tors and de­vel­op­ers face a bleak 2009 as plans for new hous­ing projects slump to a seven-year low. Fig­ures re­leased by Statis­tics SA last week show the value of res­i­den­tial build­ing plans ap­proved be­tween Jan­uary and Novem­ber last year fell 25,5% year-on-year.

Not only are fewer new homes, town­houses and flats be­ing built but work on the ren­o­va­tions and ex­ten­sions front is also dry­ing up. First Na­tional Bank’s lat­est res­i­den­tial prop­erty barom­e­ter re­ports the per­cent­age of home­own­ers spending money on value-adding fixed in­vest­ments has dropped sharply from around 30% in fourth quar­ter 2006 to 13% in fourth quar­ter 2008.

De­spite the slow­down in res­i­den­tial build­ing ac­tiv­ity it ap­pears con­sumers aren’t yet able to ne­go­ti­ate dis­counted build­ing rates with con­trac­tors. In­dus­try In­sight econ­o­mist An­ner­ine Lam­precht says in the­ory when de­mand wanes con­trac­tors should be­come more com­pet­i­tive about ten­der prices. But the ever-ris­ing cost of build­ing ma­te­ri­als is leav­ing lit­tle room for the in­dus­try to cut mar­gins.

How­ever, Lam­precht notes con­trac­tors are no longer push­ing through ten­der price in­creases of up to 30%, as seen over 2006/2007. In­dus­try In­sight fig­ures show res­i­den­tial build­ing cost inflation (cost to client) mod­er­ated to 10,1% in third quar­ter 2008 year-on-year. That brought SA’s av­er­age build­ing rate to R5 822/sq m in the third quar­ter, based on res­i­den­tial con­tracts awarded.

John Chap­man, a di­rec­tor of prop­erty de­vel­oper Ra­bie Group, con­firms the in­dus­try cur­rently doesn’t have much lee­way for price cuts on new res­i­den­tial prop­er­ties. He says while the cost of some build­ing ma­te­ri­als, such as steel and bricks, has re­cently come down those sav­ings have been negated by in­creases in other ma­te­rial costs, in­clud­ing con­crete. Labour costs have also in­creased in line with inflation at around 10% to 11%.

How­ever, Chap­man says while prices of new homes may not be drop­ping like those of many sec­ond­hand ones de­vel­op­ers may well avert price in­creases to re­main com­pet­i­tive. “Con­sumers will prob­a­bly be able to pick up a new house in 2009 at the same price they would have paid a year ago.” Chap­man says the great­est chal­lenge fac­ing the new hous­ing mar­ket is the lack of liq­uid­ity among SA’s banks, which are no longer able to fi­nance new buy­ers based on the old lead­ing cri­te­ria. “The banks are all re­quir­ing 20% to 30% de­posits from new buy­ers. And while the re­duced prime rate has been passed on to ex­ist­ing mort­gage hold­ers, new buy­ers are be­ing charged prime plus, with the banks seek­ing to cover the higher cost of their money.”

Lat­est Absa fig­ures show con­sumers are cur­rently pay­ing 20% more on av­er­age for a newly built home than for an ex­ist­ing one.

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