Residential Building on the up (The Bugle)

Residential building activity has been through a tough few years recently. The most recent information released by StatsSA indicates that 2013 is off to a good start with the January 2013 year-on-year square metreage of residential buildings completed rising by 10.4%. As monthly figures can be volatile, the three-month moving average is a better indicator of a trend and this figure for the three months to end January also indicates a healthy 9.9% year-on-year growth. A full recovery in this building segment is some way off but there are signs that we are moving in the right direction, which will be good news for all those contractors and suppliers to the residential property market. 

To get an understanding of how much pressure the residential building market has been under two important statistics can be considered: Square metres of residential building plans passed and square metres of residential buildings completed.  In 2012 the total building plans passed was 5,8m square metres. This was a decline of 7.9% on the 2011 figure of 6,3m square metres. However the 4^th quarter of 2012 indicated an improvement of 13.3% on the previous quarter and this is a positive sign for the near future as building plans passed is a good leading indicator of actual building activity and buildings completed. The actual square metreage of residential buildings completed in 2012 was 3,5m, a large decline of 25.4% on the 4,7m recorded for 2011. The figure for 2010 was 4,8m, which was a 28.3% decline in completions from the previous year. This type of consistent decline in residential completions translates into a shrinking industry of contractors and suppliers that service this market. Their margins would have been squeezed to almost nothing at which stage many make the decision to close shop rather that keep on building only to pay staff wages and keep the operation open in anticipation of better times ahead. The positive news is that the fourth quarter 2012 completions figure was a positive 5% on the previous quarter. 

The cost of a newly built home relative to the cost of buying an existing property is a key statistic produced by FNB and published as their Full Title Property Replacement Cost Gap. Very rarely will this figure ever be zero. It happened briefly in 2007, which underpinned the peak of the building boom at that stage making it very easy for developers of new homes to compete on price with existing stock. The most recently released figure for the 4^th quarter 2012 shows the replacement cost gap at 21.0%, which is down from 23% in the previous quarter and an improvement on the early-2012 peak of 26.1%. This is encouraging news for developers even though a price differential of 21% between old and new remains significant, this price advantage is declining.

The average size of residential units passed and completed is currently 111 square metres, down from the 141 square metre peak of 2006. FNB reports that this declining trend in size is expected to continue, as densification of our urban areas becomes inevitable. The current composition of buildings completed indicates an almost identical split between the “Flats & Townhouses” and “Dwelling houses greater than 80 square metres” categories. The strong growth in the flats & townhouses component by 34.5% as a year-on-year figure as at January 2013 provides further evidence of renewed developer activity in the residential market.

(Author: Andreas Wassenaar, Published in The Bugle 10 April 2013)