Cheaper housing takes up the mid-market slack

Building material retailers should benefit from growth in the affordable housing segment as middle- to upper-income residential developments slow, analysts say.

The lower end of the market, which is less exposed to credit, seems to have scope for growth as the middle-income sector finds itself constrained by debt.

Also, building cost s are rising at a slower pace and finance options are opening for those who previously would not have been approved credit.

RMB Asset Management analyst Evan Walker says the lower end of the market is likely to grow over the next two to three years as middle- to upper-income groups are limited by overextended credit.

Debt levels when compared with income were at a record 77,6%, according to figures from the Reserve Bank.

Walker says the amount of spare cash accessible in bonds to support renovations and alterations is limited. Also, the National Credit Act makes it prohibitive to extend a bond.

The Reserve Bank and Credit Suisse Standard Securities indicate less cash is being accessed from bonds than two years ago. Statistics SA figures show that the number of plans being passed, an indicator of forthcoming mortgage advances, is slowing and moving into negative territory.

Walker says companies such as Iliad might be benefiting from plans for renovation that were passed 12 months ago, but this source of revenue is likely to dwindle as the number of plans passed slowed .

Iliad CEO Ralph Patmore says tendering for projects is becoming tougher and retailers have higher stock levels as demand drops.

However, investment in nonresidential construction seems to be improving. The total building industry is worth about R100bn, evenly split between residential, nonresidential and alterations.

Distributors benefit from about R32bn, giving Iliad a 10%-15% market share, Patmore says.

There is room for growth in the affordable housing segment, which was undersupplied, he says. Affordable housing is showing signs of improvement with the number of plans passed increasing.

In the long term, as more land becomes available and financing options open up for lower earners, the bottom end of the market is expected to provide sustainable growth to companies that sell to this market, such as Cashbuild, says Walker.

Absa Asset Management Private Clients analyst Chris Gilmour says the lower end of the market is achieving greater access to forms of finance that allow buying or renovating.

Pension-backed loans are a mechanism, although not new, that allow lower earners to present banks with collateral.

In addition, there is still demand from the government for affordable housing.

Affordable hardware supplier Hardware Warehouse aims to benefit from government housing, hoping to add R100m to revenue in two years.

CEO Shaun Miller says the company wants to be part of the renewed vigour with which the government is tackling the housing shortage. It has formed alliances with contractors that had been awarded tenders to develop the houses.

He says the government will spend about R1bn on low-cost housing in about 18 months. The company hopes to garner about 10% of the spend in the regions where it traded.

Cashbuild, which aims to be SA’s cheapest supplier of quality building materials, is also expecting to grow through refurbishments, says Gilmour.

Article by: By Nicola Mawson - www.businessday.co.za