Building material costs have risen sharply again in the second quarter of 2007 — industry experts said demand for commercial space was outstripping supply — and developers are having difficulty bringing new projects on stream.

Construction IndustryBuilding costs in the second quarter of 2007 rose by 29%. The index reflects the average building cost per square metre priced by building contractors.

It contains a combination of input costs and pricing which varies due to market conditions.

Retail property showed an increase in building costs of 39.5% in the second quarter — the latest available figures; office space by 26.2% and industrial space 13.9%.

Large construction companies are operating at full capacity with the World Cup stadiums, the Gautrain and the Coega development zone taking up all their activities. Some impact from higher interest rates is also filtering through and a shortage of materials is likely to continue for some years.

While the cost of materials is rising — cement is now being imported — contractors and service providers are increasing their rates at well above inflation levels and there is likely to be renewed pressure on building costs.

“With costs escalating at present rates, rentals for existing properties will be rising as they come up for renewal, said Craig Hallowes, the Association of Property Unit Trusts spokesperson. “We can’t bring a new office block on line in Sandton for under R120/m². Although I don’t think that we are yet at the point where rentals will be running at replacement cost, if the rent is currently R70/m² or R80/m², then I think that you can expect a 20% rise when renegotiation takes place. ”

In the past it would take about 12 months to construct an office block when property was available and rezoning took place quickly, but municipal councils have tightened up on rezoning applications.

In the case of retail developments, a larger number of sub-contractors are being used for items such as glass and aluminium and these specialists are in short supply.

In a twist to the rising building material costs, the Competition Commission has indicated that it will look at the building and construction sectors to assess if there are any anti-competitive practices — as well as bid-rigging, where rival companies decide beforehand which of them will win a tender.


Tuesday, 15 May 2007 02:00

Beyond the infrastructure challenge

There are some broader implications of South Africa’s groaning infrastructure for investors in general and Property Unit Trusts (PUTs) in particular

Hardly a week goes by without an article being written about industrial land and property prices shooting the lights out, with terms such as “sky-high” and “top dollar” being bandied about. The situation has been described as a “crisis”

Wednesday, 28 February 2007 02:00

Budget Offers Some Good News For Put Investors

The Budget presented by the Minister of Finance Trevor Manuel to parliament on 21 February has some very positive implications for the listed property market.

Monday, 26 February 2007 02:00

Consolidation in the Listed Property Sector

What does the future hold for PUTs?

Monday, 19 February 2007 02:00

The Manco Debate

An important debate is taking place in listed property circles regarding the use of external management companies for day-to-day operations, acquisitions and disposals.

Wednesday, 29 November 2006 02:00

REITs and PUTs

There has recently been a fair amount of media coverage regarding the conversion of Property Unit Trusts (PUTs) to Real Estate Investment Trusts (REITs), but perhaps the issue could use some more clarity.

Tuesday, 07 November 2006 02:00

Real Estate Funds - Funds of Property Funds

The third quarter of 2006 saw a rebound in performance of the Real Estate segment of collective investment schemes (previously called unit trusts) after a large dip in the second quarter ending June. On average, these funds saw a return of 8.3% for the third quarter ending September, after a somewhat dismal loss of 15.9% in the second quarter, according to official returns of the Association of Collective Investments (ACI) prepared by Hugo Lambrechts.

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