One big building site

Posted On Friday, 31 March 2006 02:00 Published by eProp Commercial Property News
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SA enters decade of massive property development, but has anybody planned beyond five years?

Frank_berkeleyA decade of property development has begun and is about to turn our cities into building sites.Yet few developers seem to be planning for it.

Most of them have plans for the next few years, but no further. Neither the development industry nor the large municipalities have spelt out what must be achieved to meet rocketing demand - or how.

Developers are completing new buildings costing about R25bn/year (see graph). This is up from R5bn 10 years ago, and could double to R50bn in a few years. But commercial property and infrastructure are taking off as economic growth, confidence and urbanisation converge to fire up demand in every sector. In addition, construction works could reach R75bn by 2011.

Medium Term Forecasting's Johan Snyman points out that there are five major builders in SA and two others, "all of which are turning away work". Shortages of land, skills and infrastructure are pushing up the cost of these to international levels. Property prices and rents will follow.

"The boom has caught most developers by surprise," says Pace Real Estate MD David Green. "They are too busy dealing with current pressures to plan more than a year or two ahead."

Yet there are important issues to deal with, he says, including urban sprawl, urban boundaries, the production of development land and skills shortages.

Wits property professor Francois Viruly says demand for new office space rises in tandem with GDP growth. This means that GDP growth, averaging 5% over the next 10 years, will increase tenants' demand each year by an average of 650 000 m² - half the size of the Sandton CBD.

But there is virtually no co-ordination between developers - or between the development industry and urban planning authorities - as to how this is to be achieved.

Some municipalities have developed future planning scenarios of 10 years or more. One is Cape Town, under strategic planning and economic development chief Steve Boshoff. "But we have very little interaction with developers," he says. "More importantly, there is little communication between municipalities. We treat each other as competitors, rather than working together to attract national development and investment."

One of the biggest tasks ahead for the industry is to create enough land zoned for the right use in the right places.

"Authorities should be in a position to spell out to developers how much high- and low-income residential, offices, industrial or retail use we need in what places at a specific time," says Boshoff.

The unplanned property boom has already had consequences. Jo Pelser, head of Sable Homes, one of SA's biggest residential developers, says land he bought to last him up to 10 years has sold out in less than five. "We have one large holding left east of Pretoria."

The build-up of demand in the past 10 years has already produced some development giants. The biggest is Atterbury, which, including related unlisted Attfund, has developed over R5bn in property since 1995, most of it owned by the group.

Atterbury appears to be the only major developer planning beyond 10 years. Atterbury Cape CEO Gerhardt Jooste says the company has tied up 900 ha in "low-risk land bank deals" to ensure consistent development for the next 15 years. "For instance, we have a 10-year plan for large mixed-use developments in Stellenbosch and Jeffrey's Bay," he says. "But we also believe that market dynamics may change and we constantly focus on reading market trends and acting on them in advance."

This he describes as a "Velcro approach" to development: sticking to a policy but being agile enough quickly to "attach" in a new direction when it emerges.

Zenprop started as a property investor seven years ago, but executive director Rodney Weinstein says shortage of stock and falling investment yields, which determine property prices, forced the company first into refurbishing old "brownfield" sites and, lately, into buying land and building. Like Atterbury, the company retains the properties it builds and its portfolio is probably worth more than R4,5bn.

Nedbank property finance chief Frank Berkeley believes the big developers will just get bigger. These include the large "land bank", companies that have sizeable holdings in urban areas for development. RPP Developments, part of the Aveng group, has about 200 ha of prime land, most of it zoned. Tongaat subsidiary Moreland has about 8 000 ha of farmland north of Durban. And AECI subsidiary Heartland has prime land at factories in Johannesburg, Somerset West and Cape Town. Group Five and Investec Property Group are also significant developers.

Says Jooste: "With the overstocking of high- and middle-income residential properties, there will be a huge increase in affordable housing development. New planning guidelines that limit development beyond urban edges mean we will not be able to provide enough land stock for development.

"There will have to be a huge increase in more creative ways to supply demand through mixed-use development on brownfield sites," he adds.

RPP's Bill Fenner says the company has a five-year plan, but has looked no further. "We are well placed with zoned land and we are going all out to acquire more land," he says.

"Demand for decentralised offices is coming back and we are prepared for that. We can see that there are mixed-use opportunities, but we do not have expertise in them."

Listed funds will be the biggest single source of demand for investment properties, with their market capitalisation due to rise from R63bn to R500bn in 10 years. Norbert Sasse, CEO of Growthpoint, the biggest fund (with a market capitalisation of R9bn), says he will enter partnerships with developers, sharing the risk with them to improve initial returns.

One positive result of the shortage and rising cost of land, skills and infrastructure is that urban regeneration of inner cities, particularly Durban and Johannesburg, is providing opportunities for developers and investors who can't find them anywhere else.

 

Last modified on Thursday, 17 October 2013 20:32

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