Government spending on infrastructure remains key to the outlook for the construction sector in 2010 and beyond.

Tuesday, 25 September 2007 02:00

Building cost inflation up

Commercial building cost inflation rose to 29% in the second quarter of 2007 from 16% during the first quarter of the year, the FNB Commercial Property Finance Property Building Cost Index showed on Tuesday.

Construction IndustryThe index reflects the average building cost per square metre, as priced by building contractors when winning tenders. As such, it reflects the combination of contractors' input costs, their own pricing power which varies over time due to market conditions, and the standard of the property developments in question.

While the retail and office property building costs indices have been showing increases, the industrial property sector has seen some tapering off in its inflation rate, the index showed.

The retail property sub-index showed a year-on-year building cost inflation of 39.5% for the second quarter, followed by office space with 26.2% and industrial space inflation of 13.9%.

"One should not read too much into the tapering in building cost inflation in the industrial property sector. Its index showed strong growth in 2006, running a bit counter-cyclically to the other two sub-indices, and was probably due for a breather coming off a high base," said John Loos, FNB property strategist.

He noted that the renewed surge in the index broadly tracked the producer price index for building materials, which experienced a lull in 2006 before seeing its inflation rate climbing as 2007 approached.

"The rise suggests a significant input cost push effect, especially as it comes at a time when there exist a feeling that especially office rentals still need to adjust further upwards in order to make many more projects viable, and in so doing alleviate a vacancy rate," said Loos.

 

 

Tuesday, 04 September 2007 02:00

What has happened to building costs?

The FNB CPF Commercial Property Building Cost Index, constructed by Industry insight, has seen slowing growth over the past 18 months, but this slowdown is expected to be a temporary reprieve for the construction industry.

Construction IndustryGood old scarcity is accounting for much of the pricing pressure which developers are encountering. Demand for commercial space is outstripping supply and developers are hard pressed to bring new projects on stream.

 “What we have noticed,” states Neno Haasbroek, CEO of Sycom Property Fund, “is that there has been some improvement in the pricing on smaller jobs – those in the R20m region – but for the larger projects – the R500m or R1bn developments – it is hard to find competitive pricing.” The large construction companies have their hands full with the infrastructure projects under way in South Africa and this is likely to continue over the coming years.

Some impact from the higher interest rates is filtering through, but the underlying trend of too little supply to satisfy the growing demand means that costs are expected to see building inflation turning up again.

Although the cost of materials is rising – cement, for example, is currently being imported –contractors and service providers are raising their rates at well above inflation levels. With significant expenditure on infrastructure (such as the World Cup Stadiums, Gautrain and the Coega industrial development zone) competing with commercial developers for resources, there is likely to be renewed pressure on building costs in the years ahead.

Pity the developer outside the main metropolitan areas. If there is a large project, which cannot be handled by local contractors, they will be pushed to find anyone to deal with the development. “Even if they can get a contractor,” notes Haasbroek, “the quotes are likely to be rather uncompetitive.”

For an investor in PUTs, this represents encouraging news. “With costs escalating at present rates,” says Craig Hallowes, spokesperson for the Association of Property Unit Trusts (APUT), “rentals for existing properties will be rising as they come up for renewal.”

Haasbroek gives an example: “We can’t bring a new office block on line in Sandton for under R120/m2 at present. Although I don’t think that we are yet at the point where rentals will be running at replacement cost, if the rent is currently R70/m2 or R80/m2, then I think that you can expect a 20% rise when renegotiation takes place. This is more of an issue than it has ever been before.”

In the past, the lead time to bring an office block on stream was about 12 months, while land was readily available and rezoning took place rapidly. This meant that supply could respond to increases in demand relatively rapidly. Now, however, councils have tightened up markedly on rezoning. Add to that building cost inflation and it is easy to see that supply is no longer as flexible as it was historically.

In the case of retail developments, a higher number of subcontractors are used for specialist items such as glass and aluminium. This is placing additional strain on retail developments as the specialists are notably scarce at the moment.

 

Building confidence in SA rose back to near a record peak in the second quarter of this year, reflecting a boom spurred by public spending and pent-up demand for affordable housing, an independent survey showed yesterday.

Construction IndustryThe FNB building confidence index rose to 88 points from 87 in the first quarter of this year, edging back towards a historic high of 89 posted in the fourth quarter of last year.

FNB chief economist Cees Bruggemans said improved confidence in the building industry reflected higher overall economic growth, which quickened to an average annual rate of 5% over the past three years from 3% earlier in the decade.

"We have barely started. It looks like we are in an extended growth cycle which is likely to last another 7-8 years," he said.

Release of the survey coincided with official data yesterday showing that capital spending by the government rose by 25,4% to R71,8bn in the financial year which ended in March, with expenditure on land and buildings soaring by 149% and construction up by 23,1%.

A slowdown in public sector capital expenditure is expected this year, before the pace picks up again in 2008, the figures from Statistics SA showed.

Construction is playing an increasing role in the economy, with the sector expanding a blistering 21,3% in the first quarter of this year a 17-year record.

At the same time, the government's R416bn infrastructure spending drive is having positive spin-offs, although it focuses on ports, roads, railways and soccer stadiums.

The FNB building survey showed that confidence in the nonresidential sector, which covers commercial buildings, was steady at 94 points but fell in the residential sector to 82 points from 86 in the first quarter.

This suggested business conditions there had been hit by the cumulative two percentage point increase in lending rates last year, Bruggemans said.

The Reserve Bank raised its key repo rate by half a percentage point to 9,5% again in June, and many analysts expect another hike at its meeting next month. But the residential slowdown is unlikely to last, the survey carried out by the Bureau for Economic Research showed.

"Regarding the business outlook for the third quarter, residential contractors said they expected business conditions to remain more or less stable, but an improvement in the tempo of building activity is expected," FNB said.

Bruggemans said there was "enormous pent-up demand" for affordable housing units worth R170000-R250000 from the expanding black middle class.

FNB commercial property strategist John Loos said builders in the nonresidential sector were "very optimistic" and "upbeat" about short-term prospects but they also indicated that shortages of skilled labour and inadequate supplies of materials were "seriously constraining" operations.

 

Commercial building cost inflation slowed to 16% year-on-year by the first quarter of the year, from a peak of 37% in the third quarter of 2005, the FNB Commercial Property Finance Residential Building Cost Index showed on Thursday.

Construction IndustryThe index reflects the average building cost per square metre, as priced by building contractors when winning tenders.

As such, it reflects the combination of contractors' input costs, their own pricing power which varies over time due to market conditions, and the standard of the property developments in question.

The mild decline in building cost inflation in the commercial property sector should perhaps not be too surprising. Interest rates have been rising, and according to the Investment Property Databank (IPD), 2006 saw a mild decline in total commercial property returns from a peak of 30.1% in 2005 to 26.7%, said John Loos, FNB's property strategist.

"This may well have exerted some mild downward pressure on the growth in pricing power of contractors," he said.

Moving into the sub-sectors of commercial property, the relative building cost inflation rates of the industrial, office and retail property sectors at present appear somewhat related to the relative strength of these property sub-sectors, he said.

Industrial property, the place where all the action is, showed first quarter year-on-year building cost inflation of 40.8%.

This sector has shown a steady surge in building completions in recent times, has very low vacancy rates and according to the IPD showed the highest total return of the sub-sectors in 2006 to the tune of 31.1%.

The sector overtook the retail property sector as the star performer back in 2005, Loos said.

Retail building cost inflation has tapered off for some time, but still showed a respectable 17% year-on-year inflation rate in the first quarter.

"This sub-sector is believed to be leading the commercial property cycle, and although total returns for retail property were estimated at a still-healthy 27.4%, it is believed that there will be further decline this year and next on the back of a slowing consumer demand growth rate," according to Loos.

He noted that office space building cost inflation slowed to a mere 1.1% year-on-year in the first quarter.

"The office sector is the laggard in the commercial property cycle, and continues to surprise on the downside. Vacancy rates have been declining for some years, and on a national basis (The South African Property Owners Association) estimates of A and B-grade office vacancies are just above 5%," he said.

However, returns are the lowest of the 3 major sub-sectors at 24.5% in 2006, and building activity has not yet surged, as one would anticipate it to do in the near future, Loos said.

 

 

 

 

Thursday, 19 April 2007 02:00

Slowdown dents building sector's confidence

The building confidence index has dropped by two points amid a general slowdown in construction activity, says First National Bank (FNB) chief economist Cees Bruggemans.

Construction IndustryThe bank's index declined marginally to 87 points this year from 89 points last year.

Bruggemans said the decline in business confidence was due to a moderation in all building industry categories, except quantity surveyors, where confidence increased by six index points.

Residential property development was taking a hard knock while commercial property was experiencing a boom.

However, the Bureau for Economic Research's latest survey found that business confidence of nonresidential building contractors had increased marginally from 93 index points last year to 94 points this year.

John Loos, property strategist with FNB Commercial Property Finance, said the high level of retail building activity was still taking place in "lagged" response to SA's consumer boom. Low vacancy rates were driving growth in industrial and office space property categories.

According to the Investment Property Databank, overall commercial property returns were still strong at 27,4%, which created the right climate for strong investment and growth.

While the overall profitability of building contractors had improved, shortages in skilled labour and building materials were affecting output.

Bruggemans said overall business confidence in the building industry remained comparatively high, with major industry players satisfied with conditions.

He said business confidence of residential building contractors was down from 89 to 84 points, because conditions in this sector had become less favourable compared with 2005 when growth was strong.

On the supply side, developers were increasingly encountering problems in getting municipal approval, and connection to water supply and sewage disposal, as a result of strained municipal infrastructure.

 

Wednesday, 01 February 2006 02:00

Building costs threaten development

BUILDING costs are rising faster than recent figures suggest, and threaten to slow the pace of further development, First National Bank economist John Loos said yesterday.

Monday, 02 February 2004 02:00

Johannesburg CBD Parking resurges

Johannesburg's Central Business District is experiencing a major resurgence in the provision of parking facilities.

 

Trade unions criticised First National Bank (FNB) yesterday for opposing Pepkor's purchase of ailing Fashion Africa (Fashaf), which saved 1000 jobs.

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