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.

 

 

 

 

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