Construction challenges in South Africa (International construction market survey 2018)

The South African property market is oversupplied leading to more competition for fewer projects in the construction industry. Nationally vacancies in the office market exceed ten percent and the developer-led retail market continues to slow. Meanwhile, market insiders suggest that the residential market will be more resilient than in the recent past but will remain relatively flat.

The figures do not look that bright. South African Property Owners Association (SAPOA) recorded the national vacancy rate at 11.2 percent in the final quarter of 2017, with rental growth at 2 percent. The economics consultancy Medium Term Forecasting Associates projected an average 6.1 percent increase year on year in construction tender pricing. Meanwhile, SAPOA research indicated a fourth consecutive quarter of slowing growth in respect of trading performance in the retail sector.

This highlights the difficulty in reaching the sort of numbers on viability for developers that would attract capital to new projects.

Tendering is currently very keen in the commercial construction market, due to a downward trend in active new projects since 2015 and the number of planned projects stalling over several months at feasibility stage. Many professional practices in South African have reported a tough trading environment with projects being shelved by developers in the past year.

The picture isn’t universally poor, some locations are bucking the trend. Cape Town recorded the lowest office vacancy rate of the major centres, while Sandton, within the Johannesburg Municipality, now accounts for roughly a third of national office development.

Factors that are depressing activity in the market include political uncertainty with the ruling political party and other parties promoting land expropriation without compensation. This understandably unsettles the entire real estate sector.

As always with the South African story it is not all bad news. The appointment of the business-minded Cyril Ramaphosa as the country’s new president has created cautiously optimistic sentiment amongst the South African public, property investors and foreign investors alike. The clampdown on fraud and corruption at all levels over the past several months has also contributed to positive sentiment. However, uncertainty regarding our political stability remains.

While few developers are rushing to break ground on major new developments, due to oversupply in the market, there is an element of positivity among larger developers that was absent in 2017.

This content is part of the International construction market survey 2018

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Keith Skinner
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