SA building plans passed remains under pressure

Stats SA released the building statistics yesterday, for July 2010. Overall building plans passed were down 0.8%q/q in the period May to July, with a clear weakening in July, after a slight improvement in May and June. In Q1 2010, building plans declined by 5.9%q/q, and in the first half of 2010, building plans passed were 14.3% below the level in the first half of 2009. The rate of decline in activity has eased, and confidence levels among building contractors has probably stabilised, albeit at fairly depressed levels (see chart attached).

Importantly, there is now an even more noticeable difference in the performance of residential building activity vs commercial building. While commercial building development remains under pressure (and declined further in July 2010), residential activity appears to have passed the worst, and is now showing very tentative signs of improvement (see chart attached), off a low base. In the period May to July 2010, residential building plans passed rose by an encouraging 4.7%q/q, which is in contrast with a further 3.6%q/q decline in commercial building development. In the first seven months of 2010, commercial property development is down a massive 37.3%y/y, while residential building plans passed are only down 1.5%y/y. This divergence is performance is typical for this phase of the business cycle and is reflected in other indicators of property activity.

For example, while commercial property rentals are under pressure (especially office space) and vacancies are on the rise, residential property prices have risen noticeably over the past year. The ABSA property survey shows that residential property prices have increased by an average of 8.4% in the past 12 months. In addition, residential mortgage financing activity has improved marginally in the past few months, albeit off a low base in the early part of 2009.

The current tentative improvement in residential property activity is expected to continue over the next couple of years, helped by relatively low interest rates, an improvement in consumer income, an easing of bank credit conditions and the long-term structural shortage of residential property. This does not, however, imply that SA is about to experience another boom in residential property prices. The extreme undervaluation of residential property prices, that prevailed in the 1980s and 1990s, has been closed. Rather, the unfolding economic conditions should provide ongoing, but modest, support to the residential property market in terms of both building activity and property prices.

Because commercial property is typically a later-cycle activity, the positive case for commercial property development is going to take a while longer to materialise as the sector is still in the downward phase of their business cycle, after a surge in developments from 2004 to 2008. A broad-based improvement in commercial property development is only expected in 2012/2013. Fortunately, commercial property, on the whole, has not been over-developed, and South Africa continues to have a fundamental/structural shortage of commercial property relative to the size and growth potential of the country.

*Kevin Lings is a senior economist at Stanlib.

Article by: Kevin Lings -