Residential Replacement Cost Gap (The Bugle)

Summer is here! Having experienced the wettest last three months in decades we are due for a few weeks of good weather. The holiday rental properties have been booked to capacity and using this as a measure for what to expect from the season, we are in for the busiest holiday period as yet. We love the annual migration of Gauteng to the North Coast and know that owning a property along the Dolphin Coast is the obvious next step once you have experienced this amazing lifestyle. 

The beginning of December is always a very stressful time in the building industry as they desperately try to finish off outstanding work before the mass shutdown. Most gated estates do not permit building work over the end of year holiday season and by next week the industry will largely be closed for the year. To understand what is happening to the building sector in South Africa, consider the Statistics SA’s latest report, which helps you to understand why building prices are still relatively good. Total square metres of residential buildings completed in the 3^rd quarter of 2012 was 2.6% up on the prior year figure, slightly up from the 2^nd quarter’s -1.7%. It appears that around 1,2m square metres of residential building space is completed on a quarterly basis in South Africa. To try and get an understanding of the potential pipeline of future work in the industry, the total building plans passed should be considered. This was recorded as a 2.4% increase in the 3^rd quarter, which is up from the -7.2% drop of the previous quarter. Approximately 1.5m square metres of new residential building plans are passed every quarter in South Africa. This gives us a somewhat subdued but stable picture of overall building activity. The residential Replacement Cost Gap – the percentage difference between the replacement cost of a home and the existing value of the home as measured by the insurance value, remains high at 23.5% (3^rd quarter 2012 figure and slightly down from the 24.1% measured in the previous quarter). This will therefore result in a residential building sector, which will continue to battle to gain traction as it faces heavy competition from a well-supplied existing home market, making it difficult for new builds to compete price-wise. 

Building a new home is always going to be more expensive than buying an existing older home, it just depends on by how much. For new builds that come onto the market immediately on completion, the realistic selling price will typically be close to the land plus build cost. The average size of residential units completed has declined from a peak of 144 sqm. in 2006 to 114.4 sqm. by Sept. 2012. This trend to smaller homes can be expected to continue for now, as densification of South Africa’s main urban areas continues.

(Author: Andreas Wassenaar, published in The Bugle, 5th December 2012)