Apartments - Flat plans fall flat

Buyers lose out as the residential sector takes a blow from rocketing building costs

An unprecedented jump in building costs, combined with a sudden shift in sentiment to offices, has scotched two high-profile, high-rise residential developments in Sandton.

A third has been stopped because of objections from commercial property owners.

This halves the supply of new flats and could push both rentals and sales prices up.

Shocked buyers of off-plan apartments at Sandown Isle in Rivonia Road and The Sandown off Grayston Drive discovered this week the apartments would never be built. The buyers will, however, get their deposits back.

Sandown Isle was planned at the Mercedes-Benz dealership site. The 196 units, ranging from R900 000 to R4m, were sold out shortly after the launch in November last year. Residential rights were in place and the developers were ready to proceed. But then they couldn't find a contractor who could build at the prices estimated in the original feasibility study.

Now the land will be used for a 10 000 m² commercial development.

The Sandown, a luxury high-rise planned in park-like surroundings, was also sold out before the developers realised the project wouldn't work financially.

"We knew that contractors' fees were going up and we made contingency plans," says Tim Middleton of developer Kagiso Property Holdings. "But it just wasn't enough. The rise in costs was too high."

Luckily, he adds, Kagiso maintained its office rights on the land and will go ahead with a commercial development instead. "But we're still smarting at having to cancel a project that we put a lot of passion into over the past year and a half." Middleton says the project could have been feasible at sales prices of around R25 000/m² to offset contracting fees of R10 000/m².

The difference between sales price and building fee is made up of professional fees, financing and land costs and escalations. But since The Sandown had already been sold out at between R15 000/m² and R23 000/m², the numbers simply did not stack up.

Thirty years of property decline have left SA with no major residential developers who have the financial muscle and knowledge to take on high-rise apartments. "They are just not prepared to take the risk," says a commentator.

Independent analyst Llewellyn Lewis believes developers pitched their prices too low, which is why they sold out so quickly. "Obviously, they didn't do their feasibilities properly. The consumer is well-informed."

Typical building costs for a luxury apartment block are between R3 950/m² and R5 600/m², according to the annual Davis Langdon Farrow Laing building cost report. Contractors say this is very conservative.

Group Five Building MD Paul le Sueur says R7 000/m²-R8 000/m² is a more accurate rate for an up-market apartment block. "Escalating prices caught everyone by surprise," he concedes.

One quantity surveyor admits his estimates were out by a dramatic 30%.

But in defence of the building industry, Le Sueur says a dearth of skills, full order books and rocketing materials costs have pushed prices over the edge.

"In the past year," he says, "the price of reinforced steel for high-rise apartments has gone up 57%."

What's more, apartment blocks require intense supervision and the multiplicity of owners can make for time-consuming interaction.

Le Sueur believes price ceilings are having an effect. Johannesburg peaks at a sales price of around R10 000/m², while Cape Town - especially the V&A Waterfront - can swing prices as high as R46 000/m².

Analysts agree that the building industry is making up for lost time after a long period of being depressed.

"Let's just say contractors are making hay while the sun shines," says building analyst Johan Snyman.

Official statistics from the Bureau for Economic Research show building cost increases were 15,2% for the first quarter of 2005.

"Building contractors' profit is running at about 7,2%," says Snyman.

He adds that private investment in residential property was R21bn in nominal terms for 2004 - a rise of 24,3%. An additional R5,1bn was invested in public-sector projects.

A sudden turnaround in favour of offices has also hit the market hard after several years of apartment demand. The Axis on Grayston was cancelled earlier this year because of a negative reaction to residential projects. Its 330 units were already sold out when Growthpoint Properties, owner of Investec Bank's head office across the road from the site, quashed the Axis project. Growthpoint raised its objections with the city's development tribunal, arguing that the high-rise apartments would devalue its commercial building.

The FM has learnt that though Investec was unhappy about the earlier Westpoint development, on the corner of Grayston Drive and West Road South, opposite Investec, it did not object at the time.

The developers are applying for commercial rights on the land earmarked for The Axis.

"We had to inform the buyers, refund their deposits and try to find them alternative investments," says a frustrated Jarod Kolman, who handled the marketing of The Axis on Grayston and Sandown Isle on a risk basis.

"All the professionals invested time and money in projects that have now been shelved, with no potential for realising their fees," he adds.

Perhaps the only silver lining for Sandton is that the widely predicted bubble in the apartment sector isn't likely to materialise. The 2 000 units of new supply estimated six months ago (Property October 1) is now half that.

Prices on existing flats could rocket, say quantity surveyors, as supply tightens in the node.

And, add analysts, there could be a risk of other cancellations in other nodes and sectors until the market corrects.

Article by: By Pauline Larsen - Financial Mail