Bumping into its limits
Developers, builders, agents and buyers face supply constraints and frustration

Late last year, a developer couldn't believe what his tile supplier was telling him: that prices were up 30% on the year before and that he'd have to wait a month for his order. His townhouse project had to be put on hold.

The supplier confided to his client that falling international prices and a strong rand had in fact reduced his own landed prices by up to 30%.

"How can you charge so much, then?" complained the developer.

"Because we can," came the reply.

A builder eager to finish for the December holidays was dismayed to find his electrical subcontractor hadn't arrived. He was even more dismayed when his workers said the "subby" had pitched up but had been accosted at the gate by a builder who offered him 50% more for the day.

SA's property boom seems likely to continue - "all the way to the soccer World Cup in 2010 and beyond" - according to Durban estate agent Keith Wakefield. But it's already hitting some bone-jarring speed bumps.

Shortages of building materials and skills are just some of the restraints calculated to frustrate developers trying to meet huge demand for almost any kind of property in SA.

The high office vacancies of just a few months ago seem to be disappearing fast, despite this subsector being at the start of its boom cycle.

"A client asked us to find 2 500 m? of offices between Rosebank and Bryanston the other day," says Marc Wainer, co-owner of Madison, which manages some of the biggest listed property owners, Redefine, ApexHi and Hyprop. "The best I could do was 300 m?."

SA's builders have more work than they can handle. The bigger ones don't look at contracts of less than R100m.

"But, then," says Bart Dorrestein, the former builder who is now the developer of Sandton's glitzy Michelangelo Towers, "they add 25% to their P&Gs [preliminary and general charges above their building price] to cover inefficiencies, because they struggle to get skilled labour, on top of their profit."

Wainer says building costs have risen to about R10 000/m? for A-grade offices, which translates to a minimum rent of R110/m? net - well above the top current net rents. Developers will hold back on new projects until rents - including those in the currently depressed residential sector - and prices catch up to building costs.

Property owners, commercial and residential, are also holding their properties back from the market, or asking prices buyers can't yet accept. So agents will struggle to achieve last year's turnover.

Any sales taking place are at investment yields close to those in Europe. Capegate shopping centre in Bellville is said to have been bought at a yield of 6,8% by unlisted property fund Attfund, but the FM was unable to confirm this.

New development is also being restricted by municipalities that can't rezone new land fast enough for demand. "It's a big issue," says Rabie Developers' Johnny Rabie, one of SA's biggest developers. "We're all really stretched."

Absa economist Ridle Markus says the gap between supply and demand will continue for some time. Though there are indications that the housing market is cooling, demand will continue to find support from current interest-rate levels and lower debt-servicing costs. He expects interest rates to remain unchanged in 2006.

But demand should continue in residential property, with household debt at 63% of annual household income; in retail property, with major shopping and retail centres reporting Christmas sales at 25% above last year; and in industrial and office property, where demand seems insatiable.

Says Property Partners' Stuart Chait: "Certain elements in the property and building industry are run by monopolies and it will take state intervention to solve the price and supply problem."

Pam Golding Properties chief operating officer Ronald Ennik sees the price gap between buyers and sellers continuing through 2006. He is one of the few commentators expecting an interest rate rise this year, which could cool demand.

Rabie takes another view: "Rising costs and skills shortages mean fewer developments. High economic growth with, perhaps, falling interest rates means more demand. I think we could see a big second wave in the residential property boom by the end of the year."

Article by: Xolile Bhengu - www.eprop.co.za