Abacus DIVISIONS January 2012 News !
Now is the time to build – but be careful of builder who may go bust – Abacus DIVISIONS
There is an uptick in activity in the commercial property market as developers take advantage of building prices that are currently 10-20% lower than prices charged by builders in 2009, said Org Geldenhuys, managing director of property development and marketing company, Abacus DIVISIONS.
“We are seeing an increasing number of property developers buying stands and building properties due to the low cost of building. If you were thinking of building now is the time to do it – without a doubt. But developers must ensure that they choose a builder who is financially sound and will not go bust before completing the project – as a large number of builders are currently under financial pressure.”
Geldenhuys said there are only seven stands left to be purchased at the R2 billion office park development, Route 21 Corporate Park, in Irene. “We are definitely seeing activity when it comes to the purchase of plots,” he said.
Bertus Pieters, the quantity surveyor for Abacus DIVISIONS, said up to 20% of builders are currently “battling financially”, adding that the extent of the danger is hard to quantify as builders are unlikely to “announce that they are experiencing financial difficulties”.
”Current market conditions, however, are definitely putting a financial strain on builders in general. While this is good for property developers, who can now seize the opportunity of lower prices, developers must proceed with caution.”
‘Many builders are handling projects at cost price just so that they can pay basic overhead costs such as the salaries of their staff so as not to lose them. The property market is cyclical and if builders lose good staff in a downturn, it will be exceedingly costly to replace them when there is an upturn.” Pieters said that when quoting for projects builders are often now not factoring in the capital or replacement costs of their equipment and are simply “factoring in basic running expenses”. “There is a lot of pressure out there at the moment and the more astute property developer – with some spare cash – can certainly reap the benefits.”
Commenting further, Geldenhuys noted that commercial property rentals were still under pressure and this opportunity to build at significantly reduced costs “will mostly benefit the owner/occupier, or developers with a long term view on property investments”. “Even if you can build more cheaply now rentals are still showing strain. So if you are developing a property to rent, the returns might not be that handsome. Caution has to be applied by investors in this instance as there are still a number of cheap rentals working their way out of the market – which is having a negative affect on rentals.”
Geldenhuys said a number of property developers had offered discounted rentals to tenants during the recession in order to fill space and to try and “alleviate cash flow problems”. This had a negative affect on the commercial property market, although he did point out that discounted rates are normally found at older and lower grade buildings, or developments. Grade A developments and newer green buildings – such as the ones found in Route 21 Corporate Park – are still commanding decent rentals.
“Opportunities certainly abound, but investors must still proceed with caution.”