Builders face tight squeeze on profits

2009-02-24 00:00

BATTERED by sustained input cost pressures and waning demand, contractors operating in two key markets — residential and retail — are in for a painful 12 months.

FNB’s property strategist, John Loos, told The Witness that building contractors will continue to have their profits squeezed in a less-than-inspiring market mainly because of the price differential between existing homes and new homes. Not only do contractors have to absorb cost pressures, they also have to produce new houses, or “stocks”, that compete with existing house prices.

“It’s a really difficult time for them. There is a lot of oversupply in the residential market,” said Loos. “Existing houses are cheaper than new houses. The new houses are not competitive.

“It will probably be some time before the pressure on residential contractors is alleviated, because house prices are firmly in deflation, thereby sustaining a large differential between input cost inflation and house price change.

“Contractors are trying to be competitive, and they are probably cutting their margins.”

The revised residential building cost index of FNB Commercial Property Finance for the fourth quarter of 2008, released this week, shows a mild decline in residential building cost inflation.

Loos stressed that the index should be seen as reflective of the combination of contractors’ pricing power and their input costs.

The index reflects the average building cost per square metre as charged for winning tenders in the formal residential property sector.

The average building cost per square metre is R5 832 for the fourth quarter.

Year on year, building cost inflation came in at 6,5%, one percentage point down on revised third quarter data. The inflation rate has declined sharply from a high of 38,8% during the third quarter of 2006.

However, the producer price index for building materials remains high at 17,1% in December 2008.

As for commercial property, Loos said retail and, to a lesser extent, industrial have felt the pinch in recent months. However, office property has held up relatively well.

“Rampant building cost inflation in the area of office space is the key driver of the overall building cost index. It is reflective of an office property market that has lagged the cycle, and has had low vacancy rates until recently,” said Loos.

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