Thursday, 08 May 2008 02:00

PPC to raise cement prices again in July

PPC, which has already increased the price of its cement 8,5% this year, said the hike of about 5% in July was meant to bring cement prices in line with March’s producer price inflation of 11,8%.

Construction IndustryThe increase will drive up construction costs generally, and the costs of the government’s infrastructure spending programme.

PPC CE John Gomersall said the increases were needed due to higher input costs, such as electricity, fuel and transport, which he said had risen well above producer inflation. He said the rise in the price of cement was a global phenomenon, and prices were being pushed by rising energy costs.

“Our electricity costs have increased 14% already; coal has gone up 30% on average; diesel is up 28% and our delivery costs have gone up 19% for the year to date.

“W e expect another increase in July to bring our overall increase for the year above 11% ,” he said. An increase in the price of cement is set to result in a further escalation in construction costs and, in particular, drive up the cost of the government’s infrastructure spending programme now worth more than R500bn, as well as projects such as the Gautrain.

Increased costs in the government’s infrastructure project will put a heavier burden on the national purse. Higher prices could also have further inflationary effects.

Higher costs are also likely to contribute to a slowdown in the residential property development sector, which is already feeling the pinch of higher interest rates and the National Credit Act.

The price of cement and other building materials have soared considerably in the past couple of years due to a boom in the construction sector, driven largely by government investment in infrastructure in preparation for the 2010 Soccer World Cup.

The increase in prices prompted the Competition Commission in October last year to look at the building materials and construction sectors with a view to investigate anticompetitive practices that might have driven up the costs of the government’s spending.

The commission has been concerned by some trends, including price increases in construction running substantially above inflation.

At the time, the commission noted building material prices were up about 80% since 2000 and across a range of items, from bricks to cement to steel.

Yesterday PPC announced healthy results for its half-year to March, despite a slight decline in regional demand for cement. Revenue grew 13% to R2,9bn, and operating profit rose 9% to R1,077bn compared with the same period last year. Headline earnings per share improved 16%, boosted partly by a reduction in the effective normal taxation and secondary tax on companies. The company declared a dividend of 45c a share.

PPC said demand for cement in southern Africa fell 1,3% for the period due to the combination of high rainfall, the Easter holidays falling in March this year and a softening of demand from the residential sector.

The residential sector had largely been hit by the combined effects of the National Credit Act and higher interest rates, while high rainfall had slowed expansion projects.

The company said the decline in residential construction was likely to limit industry regional cement demand growth this year to between 2% and 4%.

However, Gomersall said the effects of the slowdown in the residential sector had been offset by the continued increase in government and private sector infrastructure spending.

PPC’s share price gained 69c, or 1,8%, to R39,64, yesterday, valuing it at about R21bn.



Despite rand weakness, inflation moving upwards and SA’s electricity crunch, the government will forge ahead with its infrastructure development programme

Tuesday, 25 September 2007 02:00

Building cost inflation up

Commercial building cost inflation rose to 29% in the second quarter of 2007 from 16% during the first quarter of the year, the FNB Commercial Property Finance Property Building Cost Index showed on Tuesday.

Construction IndustryThe index reflects the average building cost per square metre, as priced by building contractors when winning tenders. As such, it reflects the combination of contractors' input costs, their own pricing power which varies over time due to market conditions, and the standard of the property developments in question.

While the retail and office property building costs indices have been showing increases, the industrial property sector has seen some tapering off in its inflation rate, the index showed.

The retail property sub-index showed a year-on-year building cost inflation of 39.5% for the second quarter, followed by office space with 26.2% and industrial space inflation of 13.9%.

"One should not read too much into the tapering in building cost inflation in the industrial property sector. Its index showed strong growth in 2006, running a bit counter-cyclically to the other two sub-indices, and was probably due for a breather coming off a high base," said John Loos, FNB property strategist.

He noted that the renewed surge in the index broadly tracked the producer price index for building materials, which experienced a lull in 2006 before seeing its inflation rate climbing as 2007 approached.

"The rise suggests a significant input cost push effect, especially as it comes at a time when there exist a feeling that especially office rentals still need to adjust further upwards in order to make many more projects viable, and in so doing alleviate a vacancy rate," said Loos.

 

 

Tuesday, 04 September 2007 02:00

What has happened to building costs?

The FNB CPF Commercial Property Building Cost Index, constructed by Industry insight, has seen slowing growth over the past 18 months, but this slowdown is expected to be a temporary reprieve for the construction industry.

Construction IndustryGood old scarcity is accounting for much of the pricing pressure which developers are encountering. Demand for commercial space is outstripping supply and developers are hard pressed to bring new projects on stream.

 “What we have noticed,” states Neno Haasbroek, CEO of Sycom Property Fund, “is that there has been some improvement in the pricing on smaller jobs – those in the R20m region – but for the larger projects – the R500m or R1bn developments – it is hard to find competitive pricing.” The large construction companies have their hands full with the infrastructure projects under way in South Africa and this is likely to continue over the coming years.

Some impact from the higher interest rates is filtering through, but the underlying trend of too little supply to satisfy the growing demand means that costs are expected to see building inflation turning up again.

Although the cost of materials is rising – cement, for example, is currently being imported –contractors and service providers are raising their rates at well above inflation levels. With significant expenditure on infrastructure (such as the World Cup Stadiums, Gautrain and the Coega industrial development zone) competing with commercial developers for resources, there is likely to be renewed pressure on building costs in the years ahead.

Pity the developer outside the main metropolitan areas. If there is a large project, which cannot be handled by local contractors, they will be pushed to find anyone to deal with the development. “Even if they can get a contractor,” notes Haasbroek, “the quotes are likely to be rather uncompetitive.”

For an investor in PUTs, this represents encouraging news. “With costs escalating at present rates,” says Craig Hallowes, spokesperson for the Association of Property Unit Trusts (APUT), “rentals for existing properties will be rising as they come up for renewal.”

Haasbroek gives an example: “We can’t bring a new office block on line in Sandton for under R120/m2 at present. 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. This is more of an issue than it has ever been before.”

In the past, the lead time to bring an office block on stream was about 12 months, while land was readily available and rezoning took place rapidly. This meant that supply could respond to increases in demand relatively rapidly. Now, however, councils have tightened up markedly on rezoning. Add to that building cost inflation and it is easy to see that supply is no longer as flexible as it was historically.

In the case of retail developments, a higher number of subcontractors are used for specialist items such as glass and aluminium. This is placing additional strain on retail developments as the specialists are notably scarce at the moment.

 

Commercial building cost inflation slowed to 16% year-on-year by the first quarter of the year, from a peak of 37% in the third quarter of 2005, the FNB Commercial Property Finance Residential Building Cost Index showed on Thursday.

Construction IndustryThe index reflects the average building cost per square metre, as priced by building contractors when winning tenders.

As such, it reflects the combination of contractors' input costs, their own pricing power which varies over time due to market conditions, and the standard of the property developments in question.

The mild decline in building cost inflation in the commercial property sector should perhaps not be too surprising. Interest rates have been rising, and according to the Investment Property Databank (IPD), 2006 saw a mild decline in total commercial property returns from a peak of 30.1% in 2005 to 26.7%, said John Loos, FNB's property strategist.

"This may well have exerted some mild downward pressure on the growth in pricing power of contractors," he said.

Moving into the sub-sectors of commercial property, the relative building cost inflation rates of the industrial, office and retail property sectors at present appear somewhat related to the relative strength of these property sub-sectors, he said.

Industrial property, the place where all the action is, showed first quarter year-on-year building cost inflation of 40.8%.

This sector has shown a steady surge in building completions in recent times, has very low vacancy rates and according to the IPD showed the highest total return of the sub-sectors in 2006 to the tune of 31.1%.

The sector overtook the retail property sector as the star performer back in 2005, Loos said.

Retail building cost inflation has tapered off for some time, but still showed a respectable 17% year-on-year inflation rate in the first quarter.

"This sub-sector is believed to be leading the commercial property cycle, and although total returns for retail property were estimated at a still-healthy 27.4%, it is believed that there will be further decline this year and next on the back of a slowing consumer demand growth rate," according to Loos.

He noted that office space building cost inflation slowed to a mere 1.1% year-on-year in the first quarter.

"The office sector is the laggard in the commercial property cycle, and continues to surprise on the downside. Vacancy rates have been declining for some years, and on a national basis (The South African Property Owners Association) estimates of A and B-grade office vacancies are just above 5%," he said.

However, returns are the lowest of the 3 major sub-sectors at 24.5% in 2006, and building activity has not yet surged, as one would anticipate it to do in the near future, Loos said.

 

 

 

 

Although house price inflation in South Africa declined last year, it was still significantly higher than other major residential property indices suggested

Wednesday, 10 January 2007 02:00

Absa sees lower house price growth

House price growth is expected to continue the downward trend this year to 9% before improving again next year

Cost pressures will continue to impact seriously on the construction industry until at least 2014, the South African Federation of Civil Engineering Contractors said on Friday.

Wednesday, 06 September 2006 02:00

Further weakening of the rand is expected

 

Expect the rand to remain relatively weaker in the near term on the back of increased possibility that the current account deficit to the GDP could continued to widen in Q2:06 (data will be released on September 21st). These concerns saw the rand depreciating to a seven-week low against the dollar last week on record trade deficits for July.

Wednesday, 01 February 2006 02:00

Building costs threaten development

BUILDING costs are rising faster than recent figures suggest, and threaten to slow the pace of further development, First National Bank economist John Loos said yesterday.

Page 22 of 24

Most Popular

Pam Golding Properties achieves record price of USD13.6m for sale of luxury home in Mauritius

Mar 12, 2024
Villa sold for USD13.6m Mauritius, patio & pool
The Mauritius office of Pam Golding Properties has sold a six-bedroom, luxury beachfront…

Simplified capital structure and operational performance delivers strong 1H2024 results for Fortress Real Estate Investments

Mar 12, 2024
Cornubia Ridge LP_March 2024
Fortress Real Estate Investments delivers strong 1H2024 results: Simplified capital…

Dipula and REO’s innovative approach to tenant installation for EOH grows a sustainable furniture initiative

Mar 12, 2024
Interior EOH in Montrose Place at Waterfall Park in Midrand 3
Dipula Income Fund’s new lease with EOH for the Montrose Place at Waterfall Park in…

Please publish modules in offcanvas position.