On a collision course

Posted On Monday, 24 January 2005 02:00 Published by eProp Commercial Property News
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Property developers face a crunch as building costs mount up

Pierre FourieDevelopers are feeling the pain as building costs rocket by as much as 20%-30%. Though some developers accuse builders of collusive pricing, analysts say that severe supply constraints are the real culprit.

And the busier the property market gets, the more these costs are likely to bite.

Financier Stuart Chait, CEO of Cape Town-based Property Partners, says he experienced building cost increases of 20%-30% last year, despite the country's lowest inflation rate in 40 years. Property Partners is a financier and private equity provider.

Says Chait: "We foresee the construction industry, especially in the Western Cape, trying to get away with 30%-plus in 2005 unless something is done to stop them."

He believes cartels in the Western Cape subcontracting market are fuelling price rises. "It's most apparent in demolition and earth-moving, geotechnical contracting, cement suppliers and formwork or scaffolding."

But other developers say that it's not active collusion so much as de facto monopolies that push up prices.

Developer Jack Prentice points to steel, timber and bathroom fittings that are supplied by monopolies in SA.

"The price of structural steel rose by 35% last year. We expect it to rise by another 10% this year," adds Prentice.

It's not in the interests of professional building industry members to collude, says Pierre Fourie, head of Master Builders SA (formerly Bifsa), pointing to their professional code of ethics. But he concedes that there is no mechanism for monitoring collusive behaviour.

Though rumours of price collusion abound, analysts insist that it's economic fundamentals driving the rise. A deluge of new projects is easing competitive pressure in the sector, says analyst Johan Snyman.

In 1999, he explains, about nine contractors would bid for every tender. By 2004, this had more than halved, to just four contractors competing for each new project.

And more work means builders are more upbeat. In 1999, 90% of contractors described competition for tenders as "keen". Today, that proportion has dropped to only 10%, says Snyman.

He adds that regional factors are boosting prices in different cities.

The cost of transporting Gauteng-manufactured materials to booming coastal development areas is one example. An undersupply of skilled tradespeople in certain regions is also pushing up labour costs.

Chait agrees, confirming that there's a lack of skilled labour, especially artisans like carpenters and plumbers. He says the building industry isn't doing enough to train tradespeople.

"I'm not aware of any collusion," says Snyman. That doesn't mean it's not happening, he says, but he agrees that prevailing supply and demand imbalances are enough to drive prices upwards.

An exasperated Chait says: "The property market should be driven by an increase in the value of land, not roulette-style overpricing of construction costs."

There are two ways to quantify building cost increases.

The Haylett index measures building input prices. The Bureau for Economic Research building cost index (BCI) includes labour prices and builders' profit margins.

For 2005, Snyman forecasts a 9% rise as tracked by Haylett (compared with 6,9% recorded last year) and a 12% rise in the BCI (compared with 13% in 2004). "This suggests that contractors' profit margins will continue to widen," he predicts.

Another factor driving price increases is undercapacity. A lack of capital investment in the construction sector in recent years, say analysts, means the supply crunch is likely to continue.

Fourie cites the example of ready-mix cement: "You used to be able to order ready-mix on a 24-hour turnaround. Now, you have a waiting period of 14 days."

The real test will come as commercial and industrial property take off this year. "We just need a few really big projects to get off the ground - like the Gautrain or 2010 World Cup stadiums - and we'll really feel the crunch," says Prentice.

 

Last modified on Monday, 21 October 2013 15:20

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