December 9, 2003

The less closely watched building plans passed and completions data for November suggest the building sector will make a meaningful contribution to gross domestic product (GDP) growth this year and next.

The real value of building plans passed rose by 17.8 percent, with residential and non-residential plans passed rising by 24.1 percent and 22.2 percent respectively. Plans submitted for additions and alterations were up a more subdued 3.4 percent, although it must be borne in mind that most home improvements do not require submitting plans to the municipality. As a result, there is a lot more activity than the statistics suggest 
 

Actual completions in the third quarter were less robust, up 9.2 percent in real terms. Residential completions were the star performer, rising about 43 percent over the second quarter, whereas completions of non-residential buildings fell a sharp 53.9 percent.

Additions and alterations rose 7 percent over the period.

In 2004, the residential market is set to continue its good run, outperforming commercial property market activity.

Growth in consumer-related credit extension rose 15 percent year on year in October, suggesting that the consumer is taking advantage of the recent interest rate cuts. At 53 percent, the ratio of household debt to disposable income is still well within the highs last seen in 1998.

The main driver of property market activity remains interest rates, which are expected to come down 100 basis points this week, with a further cut in February.

In addition, the government is expected to be a significant contributor with 6.4 percent of GDP in 2004/05 expected in infrastructural expenditure.

What is becoming more apparent is that the retail investor continues to walk away from the JSE Securities Exchange as a source of investment performance.
 
Residential property investment with the intention of renting out is becoming a lot more favoured. In part, this explains the surge in residential building plans and the "sold out" stickers on new developments a few days after launch.

The question is whether there is any value in listed construction and property loan and unit trust stocks, and whether the residential property market is overvalued.

Interest rates are expected to remain low and the rand is expected to remain stronger for a while.

So the response to the question would be yes. But investors, especially in the buy-to-let residential market, should be aware of the risks. As inflation remains low, rental inflation should also remain low, especially when housing supply seems to be on the increase.

By and large, South Africa's GDP growth is expected to come with very little growth in employment. As a result, consumption spending cannot be expected to increase without affecting the ability of the consumer to service and repay debt.

Most importantly, globally, the interest rate cycle is expected to turn, with the US Federal Reserve expected to hike rates next year.

On the industrial side, the pick-up in electricity consumption suggests manufacturing has hit the bottom of the cycle and there is a better take-up of vacant space.

The main factor underpinning construction and property unit and loan stocks is that they are so few and far between that investors may be willing to hang on to them for longer from a liquidity point of view. But our expectation would be they should outperform cash and bonds as the rate cycle starts to turn.

Until then, the consumer and investor remain spoilt for investment choice. Be merry and enjoy the ride.

Patrick Mathidi is the managing director-designate of Andisa Securities