Update on the property market & the construction industry: 2010 Soccer World Cup; material availability and the economic turmoil
It goes without saying that South Africa’s soccer world cup preparations have had overruns in terms of stadium construction costs. There are various factors that contribute to these escalating overruns.
“The building costs are no doubt a result of downturn in the world economy and the rising fuel prices.” Danny Jordaan, CEO of the Local organising committee. "We don't know what the final impact of the economic downturn will be on our costs. It's unfortunately a moving target. (Mail & Guardian - 10 June 2008)
However, despite the impact of the stadiums on materials and resources (and the reported increased stadium construction costs), as 
recently noted in our last newsletter the FNB's Commercial Property Finance Residential Building Cost Index found the “cost of building a new home dropped slightly in the second quarter of the year” to 6,3% for the quarter, which is down from 8,2% in the 1st quarter of 2008. (Property 24 - 7 August 2008). But bear in mind, this does not mean the costs are coming down, just increasing at a slower rate.
The Minister of housing, Miss Lindiwe Sisulu (11 July 2008) said that on the overall construction material prices, it is highly unlikely that deflation will take place in the near future. She continued by saying, “The average building material inflation recorded was 11% in 2007, from 7% in 2006. Demand for construction materials is expected to remain strong.”
“A slowdown in residential property development”, says Inframax Director, John Weaver, “will put a much-needed brake on construction costs”, “reduce the exorbitant price of land” “and speed up the work of the surveyor-general, the deeds and transfer offices, all of which will help make development more viable.” (Cape Argus, July 13, 2008 Edition 1)
Some economists believe that the Reserve Bank’s recent decision to hold interest rates suggests that we have reached the peak of rate hikes and interest rates will start coming down as of next year. Thus the repo rate remains 12% and the banks interest rates is still 15%. This could potentially lead to another boom in the property industry in 2010. However, the recent global banking crisis may change this position rather quickly, as a number of Reserve Banks around the world simultaneously dropped there lending rates in an attempt to reduce the pressure on borrowers and avoid a market crash. Although the SA Reserve Bank chose not to follow suit, the increase in the exchange rate and the potential for meeting the inflation targets may encourage the reserve bank to drop the lending rates sooner.
Nedbank economist Nicky Weimar considers that the financial markets crisis will impact local capital projects in the second half of this year. Large capital projects, such as parastatal infrastructure projects, will however continue. It's private-capital projects that could grind to a halt, she says. "The reality is that there are few pockets of growth left in the economy, other than in the construction and the agricultural sectors." (Fin 24 -9 October 2008)
These are interesting times to say the least. While the pressure is on the property market and construction industry, for those investors with the income available, there are definitely very good opportunities to be found in the purchasing of property and construction / development projects.
