Property developers under siege

 By: Chris Nthite

Posted: 2005/02/02 Wed 18:45  | © Moneyweb 1997-2005

Despite continued strong demand for new housing units, scores of developers can be expected to fall into serious financial difficulties this year because of the 20%+ increase in building costs, huge land-holding costs and the spike in land prices.

Jo Pelser, MD of Sable Homes, predicts that their (developers) biggest problem will be failing to allow enough time and money to deal with the complicated and drawn-out process of getting a development off the ground, so to speak.

Max Kretzmer, MD of Griffin Developments, also concurs that the complicated process of obtaining approval for developments has pushed land-holding costs up. Kretzmer also argues that the scarcity of land has resulted in higher land prices

Pelser explains that this land holding period can last between18 months and two years; and requires that the developer have the reserves to meet huge land-holding costs.

Particularly vulnerable in this regard, says Pelser, are new developers who have entered the market in the past two years, who may well have “missed the boat” by the time they have secured the necessary approvals to proceed with their projects.

”Also at risk are those who try to recoup their pre-launch expenses by raising prices in their developments once they do come on to the market,” warns Pelser. “This will inevitably make them less competitive, especially if one also factors in the increases in the costs of building materials and labour that will surely have occurred during the holding period.”

Pelser says few developers could have anticipated the “very steep increases” in building costs over the past two years and already “we are seeing projects that have been approved being cancelled because these increases have made them unviable.”

Pelser also notes that banks are already tightening up their conditions for lending to developers ? demanding that the developers take higher equity stakes in their own projects and extensive proofs of previous experience and success.

He explains that “over-enthusiasm” during the development boom of the early 90s left many banks holding half-finished developments or trying to recover unpaid development loans.

"And their current caution should certainly not be ignored by consumers, who should take it as a signal to be very particular themselves in checking the status of projects and the credentials of developers before handing over their money."

The implications of all these, according to Kretzmer, is that owing to lower returns for developers, rental prices will go up. “The other implication is that smaller players will disappear.” Independent property economist, Francois Viruly, who says the implications of the depressed margins for developers will result in the smaller players being squeezed out of the market, shares this view. “What we will see is that only the big players will remain in the market.”

But Erwin Rode, another independent property economist, expressed surprise at the notion that the developers’ profit margins may come under pressure. “The margins of developers can only come under pressure when land prices are rising faster than house prices and at the moment that’s not the case.”

According to Rode, the scenario of depressed profits for developers may be a reality next year when house prices start levelling off.