BUILDING: Building Sector Needs 'Intensive Care'
Recent Western Cape Business News
THE building industry, according to Erwin Rode, the Bellville-based property economist, is about to enter intensive-care mode. Growth in the real value of new non-residential buildings put in place decelerated to a single-digit rate of 8% in the fourth quarter of 2008. Not too bad if one considers the woes of the residential sector, where, unsurprisingly, the real value of new residential buildings put in place contracted by almost 8% over the same period.
“Another straw in the wind is cement sales,” says Rode. “This is always a fairly good indicator of building-construction activity. These figures have been declining since the beginning of 2007.”
On the back of the weak building activity, building-cost inflation has also waned. In the first quarter of 2009, the BER BCI’s measure of building-cost inflation - a good indicator of the health of the building industry because it includes non-residential contractors’ profit margins – is expected to have contracted, albeit slightly, by 0,7%. This is because contractors are now being forced to trim their profit margins due to keener tendering competition on the back of fewer new projects.
There’s still no magic on the flat rental front, with rental growth generally fizzling out across all of the major metropolises. In the first quarter of 2009, rental growth in Johannesburg slowed to 6%. In the other metropolises such as Durban (9%), Port Elizabeth (7%), Cape Town (6%) and Pretoria (5%), rental growth was also curbed somewhat by rising vacancies. Given consumer inflation of 8.4% for the first quarter of 2009, this means real rental growth declined across all of the regions.
More good news is that capitalization rates - the non-listed property sector’s equivalent of the forward earnings yield of shares - seem to be topping. This, one would presume, was in response to lower interest rates. However, poorer prospects for real rental growth – especially on the retail and industrial property front - might yet put the brakes on investors’ willingness to continue to trade property at lower capitalization rates.
Office rentals have, thus far, remained fairly resistant to the scourge of the economic slowdown.
In the first quarter of 2009, impressive rental growth of 19% was still recorded in Pretoria and Durban decentralized, while in Cape Town and Johannesburg decentralized rentals were up by 14% and 8% respectively. In the CBDs, Johannesburg produced the best performance with nominal rentals growing by a notable 24%. Rentals in Durban CBD were up by 20% while 4% growth was achieved in both the Pretoria and Cape Town CBDs. On the industrial front, sharp contractions in retail sales and manufacturing output continue to suggest weaker demand for industrial space. ‘Unsurprisingly,’ says Rode, ‘rental growth across all major industrial conurbations has now been curbed to single digits.’ The strongest growth was recorded in the Central Witwaters-rand, where rentals grew by 8%; this was followed by Durban (6%), the Cape Peninsula (4%) and Port Elizabeth (1%). Nonetheless, these growth rates were still good enough to beat the expected growth in building costs (-0,7%), thereby resulting in real rental growth.
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