Developments

Planning the next move

As South Africans enter the next level of lockdown, property developers weigh in on government’s controversial decision to only allow commencement of construction in level 2

WORDS: CARLA REDELINGHUYS IMAGES: SUPPLIED & SHUTTERSTOCK

As South Africans enter the next level of lockdown, property developers weigh in on government’s controversial decision to only allow commencement of construction in level 2.

MSP Developments
Werner Scheffer, project liaison manager

Will the consequences of the adverse market and economic conditions push prospective buyers into the rental market?

In uncertain economic times, a portion of people might opt to rent first, to see what the market will be doing in the immediate future. This group of people will most definitely stimulate the rental market – the traditional supply vs demand principal.

And as stock levels become scarcer, monthly rentals will increase (upward pressure on rentals). This in turn will result in healthy rental returns for investors, and attract more potential buy-to-let investors into the market. The property market also needs this kind of stimulation as the rental market was already experiencing pressure prior to the Covid-19 crisis. The rental market also plays an integral part in the industry.

BLOK
Jacques van Embden, MD

What measures do you think might help bring the property market back to where it was pre-lockdown?

Property is a long-term investment and to make long-term investments you require confidence in the future. Success in this sector will come if Government continues the well-communicated work done to date and the confident steady hand that Government has in steering us through this crisis needs to continue as we emerge into rebuilding the economy and all industries negatively affected by Covid-19.

There will certainly be bumps and challenges on the road ahead but the initial indications from our country’s leadership have sparked renewed hope in how we can successfully get through this crisis.

For the development industry specifically, planning departments and government functions that impact our sector, need to deliver efficiently. This will streamline the development life cycle and bring down cost of developing and increase confidence for developers and investors to commit to projects.

Craft Homes
Reinier van Loggerenberg, managing director

Will the recent consecutive reduction in the interest rate be enough to stimulate the property market?

There are two views on this subject:

1. The 2% reduction in the interest rate has the potential to increase a bond with roughly R200,000 pending the client’s individual affordability, of course. Therefore the number of purchasers that previously fell short on their requested bonds, will now be introduced into the formal housing market.

2. Bond repayment, especially in the more affordable market, is becoming more and more competitive compared to the rental charged by landlords. This will stimulate purchasers appetite to rather own their own property.

Horizon Capital
DAVID SEDGWICK’S LETTER TO GOVERNMENT

Currently construction of commercial projects, which makes up a very large component of the industry and economy as outlined in the Government’s own analysis, can only recommence under level 3. This is unjustified, unreasonable and will undoubtedly cause further harm to an industry and sector already on its knees. We are all familiar with the vast number of liquidations and business rescue applications of major construction firms, from large listed players such as Group 5 and Basil Read to other unlisted players such as NMC and many more.

Most construction companies have a “no-work-no-pay” policy and are mass employers of labour which justifies the importance of getting this sector up and running. It is crucial for the sustainability of the industry and the protection of the livelihoods of these workers, not only now, but beyond Covid-19.

If the industry is not allowed to operate under level 4, we fear that there may in fact be no jobs to go back to eventually when we get to level 3 and level 2.

David Sedgwick, managing director

Do you think reintroducing Section 18B of the VAT act will help stimulate the residential property market?

Section 18B of the VAT act was introduced in 2012 to provide temporary relief to residential property developers, thereby allowing them to rent out unsold stock for a period of 36 months before such a decision being declared a “change of intention” and thus the output VAT being payable by the developer.

This relief ceased in January 2018, the consequence being that if a developer rents out unsold stock to even temporarily assist with their cash flow, they must account for the output VAT. This creates a massive cashflow burden for the developer and one which in all likelihood cannot be afforded given that they are pushed into renting out their unsold stock for the very purpose of not having spare cash flow.

Therefore, the reintroduction of section 18B wouldn’t necessarily stimulate the residential property market, but it would definitely aide developers who are sitting with unsold units in their developments from potentially going bankrupt.

Will the recent consecutive reduction in the interest rate be enough to stimulate the property market?

Consumer sentiment was extremely cautious and hesitant before Covid-19. Following on from the recent revelations about South Africa’s epidemic trajectory and that this epidemic is going to be with us for a long time to come, the general sense is that people will continue to be cautious by avoiding taking on large amounts of debt until they have peace of mind and job security.

The timeline on this is hard to pin, but the South African economy is extremely weak at the moment and it may well be 12 to 18 months at least before confidence returns.

With that being said, SARB’s further 1% drop in the borrowing rate should be supportive to the property industry in aiding affordability. I do think it will ultimately stimulate the industry, but it’s more a function of having a combination of low interest rates and high confidence, which is a while off. We’re expecting a further cut of 50 bps at the next meeting.

David Sedgwick’s response to Minister Ebrahim Patel’s decision

Minister Ebrahim Patel has completely lost the plot with his ill-considered and irrational decision not to allow the commercial construction industry to start up under level 4. It’s with great disappointment that Patel missed a glaring opportunity to get workers back to work and protect the very livelihoods of the citizens he thinks he’s protecting.

There were numerous submissions from industry bodies, political parties and private companies setting out a detailed, responsible and internationally-accepted proposal to allow the commercial construction industry to get back to work. These guidelines were devised by international best practise and consistent with other countries’ measures taken to allow the construction industry to operate even under lockdown conditions.

As contained in a number of these submissions, it is unfathomable how mining (open-cast and underground) can be allowed to resume, and in some instances all the way up to 100% capacity, while commercial construction remains shut. It’s difficult to see how any logic was applied to this decision, where under alert level 4, all manufacturing can start up to some extent, while construction workers starve and watch as their jobs evaporate.

The other great uncertainty that all firms are grappling with is how long exactly will level 4 last and can they hold out for level 3 and 2, which may be months away given the accelerating spread of covid-19 under the very strictest lockdown measures.

Covid-19 is something that’s going to be around for a long time to come and we have to accept that and deal with it responsibly. Our workers don’t have the luxury of staying in lockdown with a fiscal stimulus package in excess of $2.5 trillion behind them, as is the case in the United Sates. If the government wants to save lives, never mind livelihoods, the economy needs to be opened up based on an appropriate risk mitigation approach. If an industry can comply with global best practise and shows its ability to safely implement mitigation measures such as screening, social distancing and stringent hygiene practices, it should be allowed to operate.

The Minister showed that he’s operating off a dart board as opposed to a well-thought-through risk assessment model.

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