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Crisis in Western Cape’s construction industry

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Challenges in the development pipeline are aggravating the difficulties experienced by the construction industry

There is a crisis playing out in the Western Cape’s construction industry, and it is not just due to the weak economic climate.

Of course, the economy is playing a huge role in the decline of new, completed homes in the province, but this is not where the crux of the problem lies, says Deon van Zyl, chairman of the Western Cape Property Development Forum. The real crisis is in the development pipeline process.
Although finding exact construction data is “difficult” – due to the fact that local authorities tend to report on planning and building applications and not on the construction process, plus the fact that various industry bodies do not present formal data – Van Zyl says residential construction is slowing.
Recently obtained occupancy data from the City of Cape Town shows a 49% drop in the number of occupancy certificates and a drop of 60% in square metre completion from 2017 to 2018. But at the same time, Van Zyl says land-use application officials argue they are “extremely busy”.
“Although the typical response to this data would be to argue that this reflects a decline in the economy, any person with a reasonable understanding of the development pipeline would recognise the real crisis. If the construction industry is slowing down on the one hand and the planning industry is very busy on the other, there is clearly a problem or bottleneck in the statutory process that precedes construction.”
He says this means it is time to investigate the full production line and to report data on each step of the process. On a national scale, the residential construction sector does not appear to be faring better, with the economic climate continuing to erode hope for growth in coming months.
Like many other sectors in the property industry, the outlook for residential building contractors this year is bleak, says FNB property economist John Loos. 
New statistics show fixed investment in residential building is “weak”, declining by almost 7% in the last three months of 2018. Going forward, at least in the short-term, the situation does not look set to improve.
Loos’s analysis of the data points to “a possible weakening in residential building activity” in the coming months. This is disappointing considering there was mild strengthening in last year but, unfortunately, by late 2018, renewed pressure from a weak economy was again evident, he says.
“Examining the data on a quarterly basis, we could see renewed signs of weakness emerging as the year drew to a close, suggesting a weak 2019 awaiting.”
The number of residential building plans passed by the country’s municipalities dropped by almost 29% in the final quarter of last year. Loos says this “probably indicates a decline in completions to come in the near term”.
Agreeing there is probably decreased activity levels in the residential building sector at the moment, Allen Bodill, executive director of the Master Builders Association of Western Cape, says areas like the Western Cape are faring better than other regions. “The Western Cape’s situation is slightly better due to the tendency among people from other regions to build holiday/retirement homes here and purchase student accommodation for their children.” 

Affordability a major problem
TOUGH TIMES More housing is needed at the lower end of the market, but available stock is not always affordable. Picture: Supplied

Residential construction may be declining, but there is still a “real need” for homes across all market segments, believes Deon van Zyl of the WCPDF.
“There is a desperate shortage of housing at the lower end of the market and supply and demand factors are pushing prices higher on available stock. The status quo, in fact, promotes gentrification. “Add to this our transportation crisis which, I believe, supports price escalation in well-located areas.”
There is also a problem with affordability, he says, explaining that if the market cannot pay the price, the industry will not develop. “Construction is not the complicated part at the moment. For a developer to get development rights on a development is the single most unknown factor, and, therefore, the most risky in the development production line. And if new stock is not produced, the escalation of existing stock will make property even less affordable.
“We need to address this if we are serious about making property affordable to a wider market,” Van Zyl says
Big homes sprouted in 2018, but small will return 
SPACE TO GROW New homes built last year are bigger than in previous years. Picture: Paul Brennan
 
Stats SA records show that more than 130 000 new homes to the value of R44.4 billion were built in South Africa last year – and the average size is bigger than before. But this growth in house size trends is not expected to last, says FNB’s John Loos.
Examining the data, he says the average size of a completed unit as at the first three months of 2013, was 107.4m², having declined from a high of 141m² in 2006. From 2013 the average size started to rise, and went back to above 140m², averaging 142.9m² by the end of 2018.
“This renewed increase in average size of unit can possibly be seen as the lagged impact of the economic recovery following the 2008/9 financial crisis-related recession.”
He says while South Africans are reluctant to reduce their under-roof living space, they are happier to go for less open space, with more flats and townhouses being built.
Looking at current new construction in the Western Cape, Deon van Zyl of the Western Cape Property Development Forum says residential development is underpinned by market affordability, and with the economy struggling to lift its nose above the 1% growth mark and with public servant salary escalation outperforming private sector salaries, there is logic in developing for this market of salaried employees.
“We are seeing strong activity in the sub-R2 million market segment. The recent run in the CBD and Atlantic seaboard markets illustrate activity in the higher market segments. “Interestingly, some private developers are actively investigating the gap market.”
The challenge, he says, remains the costs of land and construction. There is also the ongoing challenge of obtaining development approval, which has a major inflationary impact on development. Estates in the Boland/Winelands areas are also popular at the moment, says Allen Bodill of the Master Builders Association of Western Cape.
“There is still decent land value there, compared with areas closer to the Cape Town CBD. Security and open spaces are making these areas an attractive prospect for families as well.”
He says student accommodation, in the form of multi-storey buildings close to the University of Cape Town, is also on the increase. As land close to the Cape Town CBD is still perceived as expensive, single dwellings are being demolished to make way for multi-storey apartment developments.
Buildings completed in the Western Cape in 2018
◆Houses under 80m²: 4 095 – average value R268 834.
◆Houses more than 80m2: 3 644 – average value R1.55m.
◆Flats and townhouses: 5 805 – average value R857 695.
◆Total value: R12.08bn.
Thousands of construction plans passed in SA last year
NOT GOING UP Fewer building plans were passed in South Africa last year than in 2017. Picture: Supplied


Stats SA data shows the following size and value of building plans passed in 2018:
Western Cape
Houses under 80m²: 6 070 – average value R265 866
Houses over 80m²: 5 313 – average value R1.6million
Flats and townhouses: 10 539 – average value R741 106
Total value: R18.14 billion.
Eastern Cape
Houses under 80m²: 1 132 – average value R297 257
Houses over 80m²:1 303 – average value R1.35m
Flats and townhouses: 1 552 – average value R424 874.
Total value: R2.78bn.
Northern Cape
Houses under 80m²: 21 – average value R454 095
Houses over 80m²: 153 – average value R1.53m
Flats and townhouses: 75 – average value R666 306
Total value: R305m.
Free State
Houses under 80m²: 256 – average value R402 035
Houses over 80m²: 709 – average value R1.35m
Flats and townhouses: 468 – average value R839 333
Total value: R1.55bn.
Kwazulu-Natal
Houses under 80m²: 158 – average value R485 291
Houses over 80m²: 1 127 – average value R3.02m;
Flats and townhouses: 3 197 – average value R1.58m.
Total value: R9.64bn
North West
Houses under 80m²: 942 – average value R154 696
Houses over 80m²: 692 – average value R1.41m
Flats and townhouses: 1 031 – average value R512 957
Total value: R1.7bn
Gauteng
Houses under 80m²: 7 562 – average value R264 283
Houses over 80m²: 4 354 – average value R2.4m
Flats and townhouses: 9 130 – average value R884 300
Total value: R20.5bn
Mpumalanga
Houses under 80m²: 299 – average value R302 381
Houses over 80m²: 896 – average value R1.46m
Flats and townhouses: 149 – average value R577 624
Total value: R1.73bn
Limpopo
Houses under 80m²: 233 – average value R297 257
Houses over 80m²: 502 – average value R1.35m
Flats and townhouses: 188 – average value R424 874
Total value: R1.03bn
Sectional title scores success
SMALL IS BIG More flats and townhouses will be built this year as home sizes shrink. Picture: Mac Kenzie

Statistics relating to the number of plans passed last year points to an increase in flats and townhouses, says FNB’s John Loos, and this leads to the expectation that homes will be smaller. 
In Cape Town, sectional title is already dominating, says Brendan Miller, chief executive of Lew Geffen Sotheby’s International Realty on the Atlantic Seaboard and the City Bowl.
“The sectional title market fared considerably better than the housing market during a tough 2018 and we expect the trend to continue this year.”
Sectional title and security or gated developments have made up a significant portion of the growth in developments, with recent reports from Lightstone confirming this, says Geoffrey Jäck, managing director of building refurbishment company Indawo. He says this is especially true in the Western Cape.
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