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Dear Clients & Colleagues

Welcome to our 3rd quarterly newsletter. As always, this newsletter strives to keep you updated on mfs Developers & Quantity Surveyors CC by introducing a few projects with which we are currently busy, followed by informative news and opinions on the construction industry and property markets.

Please feel free to email  with your comments and any questions you would like to see discussed in these newsletters.
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QS…

As opposed to our usual format, where we use this newsletter to bring you an update on a single project that is nearing completion, this time we introduce you to a few projects which are at the initial cost engineering stage.

Watersedge – Big Bay

Architect – Comrie Wilkenson

A new home for a JHB family who intend to move to Cape Town. Unfortunately this project has been held up by the slow registration of the sub-divisionof the plots in a new Big Bay development. The design is simple, slick and modern (without being too high-tech), incorporating 4 bedrooms, formal & informal living areas, double volume dining room, courtyard with swimming pool and garden areas. In total, the house will measure approximately 632m2 (including courtyards, terraces, garages etc.) and priced at R5,6mil which equates to just under R9,000/m2.

Garden Apartments Development – Sea Point

Architect – Harrison-Hyde Architects
This project, which is being undertaken by a private developer and partners, has gone through a few design options in order to maximise the potential returns of the well positioned site in Sea Point. The design that best achieves this is for eight apartments over a ground floor parking garage. Each unit will have a minimum of two parking bays, storage space and optional staff quarters. The 1st floor units will each have a plunge pool and grassed garden, whilst the 2nd floor units will have a terrace and roof top garden with plunge pool. In total the building area measures 2093m2 and has been priced at R9,5mil (approximately R4,500/m2) which offers upmarket but not luxury finishes.
 

Strawberry Fields Residence – Constantia

Architect – Indigo Architects
A new residence in a Constantia residential estate for another JHB couple who are moving to Cape Town. The initial brief called for 5 bedrooms; informal & formal living rooms as well as a reasonably large terrace with swimming pool and private yoga courtyard (totalling 514m2). The initial cost estimate is R3,8mil which equates to approximately R7,400/m2.

House Park – Newlands

Architect – LFS Architects
This alterations project converts a semi-detached home set in a beautiful Newlands garden into a contemporary upmarket home with European flair. The intention is to create a new main suite by introducing a new 1st floor level to make advantage of the potential mountain views. Further additions include creating a conservatory by enclosing the courtyard with a glass atrium, as well as a new swimming pool to replace the existing one and extensions to the terrace and living areas. The total estimated cost is R2,2mil (492m2 at approximately R4,490/m2).  
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Property News…

There are two big talking points in the news recently: the recent interest rate increase and the effect of the new National Credit Act (NCA) on the market. With regards to the real effect of the NCA, only time will tell, as institutions adjust to the necessary changes and the market starts feeling the effects of these changes. In our next newsletter will bring you up to date on the effects of the new NCA, once they have filtered down to the market and can be assessed accurately.

As expected, the SA Reserve Bank opted to increase its key repo rate by 50 basis points to 9.5 percent on Thursday the 7 June 2007, which in turn led to a 0.5% increase of the prime lending rate by the major banks. The current lending rate is therefore 13%, following a succession of increases totalling 2.5% percent over the last year. The question is, what effect will this have on the property market, and therefore, the construction industry (particularly residential projects).

Jawitz Chief Executive Herschel Jawitz believes the rate increase will have a "negligible" effect on the residential property market. As stated on iafrica.com, he said "The market is in a slow-down phase after strong growth over the last few years, the current interest rate cycle will only have re-enforced the cycle as opposed to having caused it."

In the same article, Barak Geffen, of Sotheby's International Realty South Africa, stated a similar view. "So far we have seen a cumulative 2.5 percentage point increase in interest rates since last year. Also bear in mind that peoples’ salaries generally increase on a yearly basis, allowing them slightly more room to extend themselves. We therefore do not expect to see a flurry of panicked home sales. Rather, the market appears to be maturing and ‘sobering up’ to a normal reality.”

In terms of the financial affect of the rate increase, the YDL “Special Issue” newsletter, on the 8th June 2007 explains: “The average house price is R921 300 (Absa). A 100% mortgage at prime minus 1.5% over 20 years will now cost you R9 509 pm, compared to R8 289 before June 2006, when the current cycle of rate increases started. This is a meaningful difference of R1 220 pm.”

In that “Special Issue” YDL,  continue to give some sound advice to property investors: “the "Rule of 3" - Without following this as a hard and fast rule, add a 3% increase to your mortgage bond repayment to assess if you'd still be able to service the bond. Investors who did so before the last round of increases (totalling 2.5%) would now not be concerned about their cash flows.” YDL concludes  that due to the continued expected growth in the residential property market, “Provided you can manage your cash flows, now is still the time to buy, especially at the lower end of the market.”

It is the opinion of that when considering residential investment properties, this last sentence is key – “ lower end of the market”. Published figures for the property growth rates apply to the market as a whole. But a more specific look at the growth rates for the various financial categories, will show that at the middle to top end of the market the property prices are nearly at a standstill, whilst at the lower end, the emerging middle class continues to push up demand and therefore prices.

This is confirmed in the online article published by the highly regarded Rode & Associates (Rode/news/article) “This downward house-price-growth trend is confirmed by the latest Absa House Price Index, which recorded nominal month-on-month house price growth of 0,8% in May, its lowest rate since early 2002. This has prompted ABSA to predict real house-price growth to average 7,8% in 2007.”  Rode continues “The capital-growth outlook for the next year or so is a bit rosier for lower-priced suburbs, although even this segment of the market will continue experiencing a deceleration in growth.”

It is also in this market segment (under R1mil), that monthly rentals are also likely to offer best returns, initially covering approximately 50% of financing costs, compared to approximately 30 to 40% in the middle to upper market. Alternatively, consider commercial / industrial / retail property as an investment, where the lag behind the residential market, sees price growth continuing at a much higher rate than the residential market and in particular, sees office vacancies at a ten year low.  
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Kind Regards

Developers & Quantity Surveyors CC