Bugle Sales Talk Editorial

This therefore leaves 2,760,091 sqm of building area in the pipeline still to be completed. When considering the two years prior to 2014 I found similar results in that the gap between passed and completed appeared fairy large. In 2013 1,76m sqm of space remained in the pipeline and in 2012, 1,43m sqm of approved plans remained incomplete. When considering quarterly data, the last three quarters also show between 500,000 and 700,000 sqm of space per quarter remaining in the pipeline for future completion.

Given this significant gap when we come to analyse building plans passed and completed it would therefore be important not to simply relate approved plans to building activity without carefully scrutinizing the buildings completed figures. The idea that far less building work is completed than planned and passed by local authorities is of interest. We may for instance feel positive about a sudden upsurge in building plans completed, but these plans may never be translated into buildings completed if general economic conditions were to suddenly deteriorate.

The good news is that the second quarter Residential Building Statistics as reported by FNB's recently published report, shows significant growth of the number of residential units completed (up 34.8%) in comparison to the first quarter growth (9.8%). However when we consider the 2nd quarter 2015 performance of 10,627 completions relative to the boom period peak of 22,348 units completed in the 4th quarter of 2006, our building activity is only 47.6% of this. FNB propose that the reason for our relatively subdued building activity relative to the boom and even pre-boom levels has to do with affordability.

The measures of affordability typically used by economists are the: (1) installment repayment value of a 100% bond relative to average employee remuneration or (2) the average value of completed units relative to the average employee remuneration. Both these measures provide the same insight in that although affordability levels are improved from the peak (i.e. least affordable) in 2007/8, they are still far above the levels experienced 15 years ago in 2000. The building activity levels experienced during this pre-boom period were higher than today and this reflects the relative affordability of homes. The answer by developers to this affordability challenge is to build smaller flats and townhouses rather than large freehold homes.

Over the past five years the Flats and Townhouses category of the building plans passed statistics has grown from 28% to 37% for the first half of 2015. The average size of completed units seems to vary with the economic cycle. From 1999 to 2006 the average size of homes completed rose from 65.7 sqm to 141 sqm. Then as the financial crisis took hold the average size decreased to 107,4 sqm in 2013. Since then lower interest rates and an improved property market have caused the average size actually completed to edge up to 125,2 sqm.

The decision to build a new home versus buying an existing home is often assisted when considering one of my favourite statistics, the Full Title Property Replacement Cost Gap. This measures the difference between the average full title replacement cost (cost of new build) and the average existing full title property value expressed as a percentage of the existing value. Currently measured at 23,9% this means it is that much, on average, cheaper to buy an existing home than to build a new home.

For further information and an interactive analysis of this article follow my blog: andreaswassenaar.blogspot.com.

Andreas Wassenaar

Principal - Seeff Dolphin Coast

Cell: 082 837 9094

andreasw@seeff.com