Property Talk

The big picture, as illustrated in FNB's recent Residential Building Sector Review, is that the overall level of Residential Fixed Investment (a measure of the amount of investment in residential homes in the country) is at a low point when expressed as a percentage of our overall economic activity or GDP. Currently the 1st quarter of 2016 shows this to be a mere 1,3% of GDP, well below the peak of 2,7% reached in 2007 at the peak of the boom period when everybody was building like crazy. However considering this data since 1970 the trend line is consistently downwards indicating a lower level of investment in residential stock. One explanation is the cost constraint and the gap between the cost of new builds versus the cost of buying an existing property. FNB publish one of my favourite stats called the Full Title Property Replacement Cost Gap which measures the difference in the cost of an average new build to the cost of an average existing home, expressed as a percentage of an average existing home. Currently this figure is 25,3%, which essentially means that it is approximately 25% cheaper to buy an existing home than to build a new one. As this figure goes down, developers find it easier to build new homes and compete with existing stock. However at the current levels it does become more difficult for developers to be competitive in bringing new stock to the market.

In the first quarter of 2016, 1,112 million sqm of residential homes were completed in South Africa. This is up from the 1,034 million sqm completed in the first quarter of 2011, clearly indicating that the trend line over the past 5 years has been upwards. Nevertheless the current figure is only at 56% of the 1,983 million square metres achieved in the 1st quarter of 2007. When contractors speak of the "good old days" they are specifically referring to 2007. I recently watched the movie, The Big Short, which provides excellent insight into the property bubble in the US in 2007 and how the banks, credit rating agencies and insurance companies all colluded to perpetuate this asset market bubble until it imploded. For South Africa the introduction of the National Credit Act in 2007 actually was a positive thing and caused our residential market to have a relatively soft landing. In terms of overall plans passed the first quarter indicated negative growth of -2,4% on this measurement, up somewhat from the -3,8% recorded in the previous quarter, but still showing negative growth. It is interesting to note that last year 7,7 million sqm of residential building plans were passed, up from the 7,5 million sqm passed in 2014 and the 6,6 million passed in 2013. Last year a total of 5,1 million sqm of residential space was completed, indicating a gap of approximately 2,6 million sqm of approved plans that remain in the development pipeline. The provincial breakdown of building plans passed shows that KZN had a share of 7.1% for 2015, while the Western Cape had 26% and Gauteng 42%. These figures put into perspective the relative building activity between these three major provinces.

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