Gradual lifting in building activity expected

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Building activity has been lifting for some time, with more to come in 2015, even if very gradual (atypical for the early stage of a building cycle revival, due mostly today to structural drawbacks), and led by residential activity as non-residential has lost some of its early vigour.

If there has been any lift in real building activity, after six depression years since 2007, it hasn't been very noticeable in residential square metres or buildings completed, where a sideways drift with of late a modestly rising bias has been the main impression.

This may be due to some crucial information having been gradually lost in transition, with a degree of undercounting seeping in as more areas have perhaps become less easy for building controllers (inspectors) to sign off.

Planning process

Meanwhile, upfront in the planning process, where stamped approval is necessary and fees need to be paid and collected, greater eagerness may remain evident in reporting building plans. In a previous lost decade (1986-1993) there were two occurrences where real building plans passed lifted off, but buildings completed data didn't, with ere long the building plans passed data easing off again.

Over the past three years such a gap has again opened up between lifting building plans passed and drifting buildings completed data, with as yet no inkling of an early reconvergence via a relapse in plans passed.

The lifting building plans passed data appears to offer us the real trend of the moment, while the trailing buildings completed (and square metres build) have some explaining to do.

Regarding real estate transactions, transfer fee collections (even when deflated by inflation) have been rising quite significantly these past two years, suggesting modest growth in property sales in especially higher priced residential areas.

This should not come as a surprise, after years of house price deflation in real terms, accumulating pent-up demand, and recovering bonuses and wealth effects in higher income categories.

Secondary market

Despite real transfer fee collections still being nearly 50% below 2007 boom peak levels, there has been cyclical liveliness in the secondary property market. We also know that although bank mortgages outstanding have consistently been growing only by 2%-3% annually since 2009, banks have tended to relent the monies being repaid.

The bigger change, however, may be anecdotally inferred from borrowing behaviour, where young prospective house buyers may have been saving up, and have improved their ability to put larger own equity into any transaction. This is a generational change that will only slowly phase in, but its presence is being felt.

Thus there is real demand, with interest rates still at generational lows. Given suppressed property market and building activity levels, any such demand pull would be expected to follow through into higher activity levels.

The past two years have shown this statistically in building plans passed and rising confidence expressed among building contractors and sub-contractors, as surveyed by the BER. Instead of a rapid recovery, usually the case after recession with falling interest rates giving strong encouragement, the structural drawbacks (more constrained mortgage access) this time around are only slowly giving way, offering us only an atypical slow lift-off.

Strengthening case

Still, with residential prices reportedly rising by a nominal 7%-8% annually according to bank surveys, the case is strengthening for acknowledging a slow residential property and building industry revival to be in the works, one that is likely to run for many years as structural drag effects are gradually overcome, and provided new events do not offer us a major interest rate shock shortly.

Meanwhile, on the non-residential front different dynamics appear to be in play. The mostly private office and retail shopping space markets have had modestly strong revivals since the 2009 recession trough, with ready finance available from institutional investors and individual investors wanting a presence in the property finance market.

Though the expanding economy, even at relatively low rates, with slow job growth, warranted new space additions, the main action appears to have been geographical shifts in markets (new retail shopping malls catering for more low income households gaining growing footholds) and prestige venues (offices), with Sandton, Waterfront, Durbanville, Centurion, Rosebank and Umhlanga such examples.

Both these tendencies, though, seem to have lost steam of late, as disappointing economic growth and structural saturation made themselves felt. Industrial and warehousing space also has had a relative good recovery since 2009, except that here, too, one notices the restrictions of electricity supply, labour disruptions and lost trade competitiveness making themselves felt in a levelling off (slowing growth) in manufacturing and other industrial activities.

Atypical behaviour

Thus, non-residential building activity is also showing atypical behaviour, not laid low by a new recession or a steeply rising interest rate cycle, but instead running out of breath, cyclically and structurally in its main components, needing a renewed growth push to revive its by now tired expansion.

With growth in the SA economy likely to be kept back by supply disappointments (electricity, labour strikes) but also by external headwinds (restrained export earnings), with a virtual absence of macro stimulants (budget, interest rates), the non-residential private building sector may continue to level off in 2015 with ongoing high vacancy rates.

One major new factor is the more than halving of global oil prices in recent months, and the major decline in SA pump prices. This could give a rejuvenating boost to some household and business spending growth this year, compensating for some of the noted headwinds in the building industry. Thus, residential revival noticeably in some of our building data since 2013 may come through more strongly in 2015 as a result.

Non-residential building activity may still disappoint, but potentially not as much as might otherwise have been the case in the absence of the energy price boosts likely to prevail this year, even after Finance Minister Nene has lifted the fuel levy in next month's Budget.