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Developers take heed on oversupply of flats

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Developers will survive if they provide homes with prices fitting comfortably into buyers’ budgets

Property developers who have taken advantage of the growing desire for apartment living might have to rethink their strategies to survive rising vacancy rates and possible over-supply.

The latest Rode Review reveals the vacancy rate for apartments has risen sharply since the third quarter of 2018 to reach 7% in the first three months of this year.

Furthermore, the square meterage of the flats and townhouses completed nationally grew by 58% year-on-year in the 12 months to January, according to Stats SA. On a provincial level, Rode & Associates’ head of research, Kobus Lamprecht, says flats and town houses completed more than doubled in Gauteng and rose by 21% in the Western Cape. This, he says, partly explains why vacancy rates are so high.

“As the development opportunities in the commercial and industrial segment began to evaporate over the past few years, residential developments were the last resort – until now. Developers are facing tough times.”

Lamprecht says the stock of new housing for rent nationally has increased notably and pushed the rental market into over-supply. This, plus the growing vacancy rates for apartments, could spell trouble for developers focusing on such units. Investors in this market will also have to be “more careful” about the timing, price segment and location of their investments, he says.

In the Western Cape, there seems to be a developer over-supply in certain portions of the residential market in specific nodes, says Miguel Rodrigues, a director at Rabie Property group.

In its own developments, the group has witnessed a “slowing down” of investments this year. However, this is believed to be an indication of a “cautious investment approach” rather than the products on offer.

“Over the years, we have witnessed various growth cycles and are optimistic it will rectify in the short to medium term.” The question of whether or not there is an over-supply must also be contextualised in terms of the market’s ability, or willingness, to pay, says Deon van Zyl, chairperson of the Western Cape Property Development Forum.

Simply put, he says, there is no over-supply in the province. In terms of the ratio of stock to market needs, there are not enough apartments in well-located economic and lifestyle nodes.

But, is the market able to pay the price of new stock, or the seller’s expectation of price? “Looking at the drop in rental rates in the CBD, Atlantic and western seaboard and many areas of Cape Town, it is clear this is now correcting and there are major price adjustments playing out as we speak.”

Van Zyl says the challenge for the development industry is to find ways to bring profitable stock to the market in price brackets the current market can afford. 

However, the lack of suitable development land and cost of construction are driving up production costs. “A challenge for any developer in Cape Town is to change the development rights to that required for the development and obtain services capacities within a reasonable time.

Cutting risk of over-supply 

To balance demand for apartments with the risk of over-supply, Miguel Rodrigues of Rabie Property Group says it focuses on delivering homes competitively priced and located within nodes that offer “tremendous benefits in addition to the quality, size and location of the living spaces”.

“Convenience, safety, sufficient parking, proximity to work, schools and retail are all factors to consider when comparing residences. Our current developments are all within precincts or estates that allow central management of facilities, roads and security. Offering a variety of products, from luxury apartments to mid-market family homes, has worked well for us.”

Rodrigues says there is a trend to downsize and relocate to complexes or apartments where monthly overheads are reduced.

The free market is the best checks and balance system, says Deon van Zyl of the Western Cape Property Developers’ Forum, because it has a self-regulating mechanism of correcting prices with market needs.

The question, however, is how the private sector can provide products within market-related affordability requirements. 

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