Mariam Isa
21 August 2008
Johannesburg — BUILDING plan statistics show that investment in residential properties remained under severe strain in the second quarter of this year, while strength in the commercial sector may have also begun to wane.
This follows news of a slowdown in SA's booming construction sector over the same period, as rising debt costs and a slowdown in domestic demand takes the edge off the double-digit pace of growth seen since the start of 2004.
Private sector building plans passed by municipalities dived by 18,3% in the second quarter of this year, sinking to R10,07bn from R12,33bn in the first quarter, Statistics SA said yesterday.
Residential buildings were hardest hit, sinking by 21,9% at constant prices, while the component for additions and alternations slid 20,5%. Plans passed for non residential buildings fell 6,4% versus the first quarter of this year.
"Clearly, residential investment is the weak link in construction and the data might overstate the weakening of the sector because of their volatility," said Citigroup economist Jean-Francois Mercier.
"But it's a sign that we have probably not seen the full impact of the downswing in residential investment and also a warning bell about non residential investment, which though dynamic, is not as strong as a year or two ago."
Economists approach the building plan figures cautiously because of their volatility and base their conclusions on three-month rolling averages, which they calculate independently.
But the data are still seen as an important leading indicator for the property market, which has been knocked by the cumulative five-percentage-point increase in lending rates seen since mid-2006.
Property experts argue that office and industrial property remain attractive because of positive fundamentals, while house prices have fallen in real terms this year, ending a seven-year boom. The value of total building plans passed in the first half of this year fell by 10% to R20,95bn compared with the same period last year, the data showed.
Residential building plans dived by nearly 19%, but still accounted for about half the total.
Nonresidential plans rose by 9,6% compared with the first half of last year, while additions and alterations fell by 5,1%. "In terms of nonresidential buildings, there remain good investment opportunities as long as the investor has done a proper analysis," said Efficient Research economist Fanie Joubert.
Official data earlier this week showed that construction grew by 10,6% in the second quarter, down from 14,9% in the first and its slowest pace since the end of 2005. Since 2003, growth in the sector has outstripped others in the economy, but it still accounts for only 3,6% of gross domestic product.
Mercier said that while the government's huge infrastructure spending programme would buoy construction, its pace of growth might subside to single digits in the second half of this year.
"Construction is a fairly cyclical sector. It will remain more dynamic then the rest of the economy ... but at the end of the day higher interest rates should also have a dampening impact," he said.
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