By John Loos, Property Strategist, FNB Commercial Property Finance
StatsSA’s residential building numbers for 2021’s first quarter showed growth in units completed but growth in plans passed remained negative. A growth rate in building activity is still anticipated this year due to 2020’s low base but this may not necessarily mean a strong 2021 level of building.
The recent release of StatsSA’s March 2021 building statistics completed the building picture for 2021’s first quarter with some expecting more new building activity in the pipeline than what the numbers have suggested. The home buying surge came in response to 2020’s aggressive interest rate cut by SARB, but overall building activity numbers suggest that the residential development sector may not produce ‘fireworks’ during 2021.
The number of residential units’ plans passed declined year-on-year (y/y) by -16.57% following the negative y/y growth rate which clawed its way back from a -73% y/y drop during the national lockdown of 2020’s second quarter to near 0% by the final quarter of the year.
Residential units that were completed went into a mild positive y/y growth territory of +9.02% in 2021’s first quarter but a renewed decline in plans passed in the first quarter suggests that we should not expect strong levels of completions in the near term.
Other metrics of new building activity make the picture look better than the growth rates in the total number of units. Square meterage of plans passed were positive due to an increase in the average unit size of these plans.
The more cyclical part of the market is seeing building levels respond to an increase in home demand due to the interest rate cuts last year i.e., the total number of units excluding the freestanding (or ‘dwelling houses’ as StatsSA calls them) homes smaller than 80m2. This small freestanding home category represents the most affordable end of the market and it is not as strongly influenced by economic and interest rate cycles.
Excluding the above, first quarter numbers point to an 18.1% y/y growth rate in the number of units’ plans passed and a significant increase of 37.2% in the number of units completed. This includes an increase in units’ plans passed in the ‘flats and townhouses’ category to the tune of +14.4% (with units completed a massive +80.4%) and a +25.5% increase in the number of ‘dwelling houses’ larger than 80m2 but, units completed are still -14.5% down.
The decline in the total number of units plans passed was due to a sharp -74.2% drop in the ‘dwelling houses’ smaller than 80m2 category and a -40.9% drop in units completed. This category is largely in the affordable housing market with an average value on plans passed of R366 000 per unit.
SARB, when compiling its ‘Composite Leading Indicator’ excludes the ‘dwelling houses less than 80m2’ category which it deems to be a less reliable business cycle indicator. The other two categories are typically correlated with the business cycle.
The cyclical categories of residential building activity have been responding to last year’s interest rate cuts and the uptick in home demand.
This shift in the building activity away from the most affordable category towards the two higher valued segments, ‘flats and townhouses’ with an average value at R826 000 per unit for plans passed and “dwelling houses larger than 80m2” at R2.141 million per unit, appears driven by market activity which is at its strongest in the ‘middle segment’ of the housing market.
According to the FNB Estate Agent Survey, the agents’ ‘Market Activity Rating’ by area value band was at its strongest (7.2 on a scale of 1 to 10) in what it classifies as the ‘middle income segment’, i.e., where homes are valued on average between R1.6 million and R2.6 million. By comparison, the most affordable segment, with an average home value below R750 000, recorded a lower 6.51 rating with the market’s strength appearing to taper towards the more affordable end of the market.
The long trend of densification is set to continue in 2021
The first quarter 2021 data effectively points to the long trend towards greater living density in South Africa’s urban areas continuing, with the ‘flats and townhouses’ category’s plans passed accounting for 58.2% share of total plans passed, up from a 42.8% share in 2020.
While the larger ‘dwelling houses larger than 80m2’ category has also increased its share of plans passed slightly in 2021 to date, this increase is seen short term and unlikely to become a trend in the financially pressured economy, given the relatively high average value. Densification is more likely to continue, with an increasing share of the smaller ‘flats and townhouses’ category.
The shift away from the smallest and most affordable of StatsSA’s three building categories has translated into an increase in the average size of units’ plans passed recently.
From 118.7m2 per unit as of 2020’s first quarter, the average size of units’ building plans passed rose to 148.5m2 as of 2021’s first quarter which were driven by the shift in growth away from the “smaller than 80m2’ free standing units.
FNB does not expect this rise to be sustained for much longer due to it driven by growth in plans in the larger free standing homes category, which they believe will be short lived due to affordability limitations.
While the average value of units completed was still on the decline during 2021’s first quarter, the average value of units’ plans passed had risen by a strong 36.2% y/y, also reflective of the shift in building (in part) away from the most affordable building category.
Outlook
A massive y/y growth surge in building plans past and completed in the coming months is almost certain, due to the extremely low base created by 2020 hard lockdowns that took place in the second quarter of 2020.
During this time there was little activity recorded at all, so y/y growth in plans passed, and completions during the coming months, could reach percentages in the hundreds and possibly even thousands but these would merely reflect 2020’s extremely low base effect.
After last year’s total decline of -46.7% in the number of residential units completed, FNB projects a strong growth rate of +80% for the 2021. However, this will not translate into strong levels of completions by historic standards, being insufficient to bring the number of completions back to pre-Covid-19 (2019) levels.
This expectation of only ‘partial recovery’ back to pre-Covid-19 levels and it is based on still-significant underlying weaknesses in the economy and the residential market.
The housing market’s underlying ‘fundamentals’ may not be as strong as they appear.
Recent home buying demand has been strong, and the homeowner market appears to have been moving back into demand-supply balance, with some possible shortages of stock in places.
This is best reflected in the FNB Estate Agent Survey’s estimated average time of homes on the market prior to sale, which has shortened from seventeen weeks and six days at mid-2018 to only eight weeks and two days by 2021’s first quarter.
This strengthening in the market appears largely to have been led by last year’s 300 basis points’ worth of interest rate cuts by SARB, driving the cost of mortgage borrowing down sharply.
However, the household sector’s financial situation remains fragile. ‘Real household sector disposable income growth’ had been slowing for years as the economy stagnated from around 2012, taking a big knock during the 2020 ‘national lockdown’ recession. Its worst quarter of decline was the -15.8% y/y drop during 2020’s second quarter and by the final quarter, it was still showing a decline of -4.8%.
The household sector is a severely pressurised environment with interest rates partly masking the pressure.
Where interest rates become less of an influence, i.e., in the rental market, the picture looks significantly weaker than that of the home buying market. While the percentage of rental tenants in good standing with their landlords (regarding rental payments) had partly recovered (following 2020’s second quarter national lockdown dip) to 77.61% by the end of 2020, this level was still weak compared to the high of 85.95% reached at a stage of 2014, according to TPN data.
Not only did departures from the rental to the buying market leave a hole in the rental market, but financial pressure amongst tenants has likely also led to a lack of new household formation (young labour force entrants delaying their departure from their parents’ home) and an increase in household ‘shutdowns’ i.e., tenants ending leases and returning to live with their parents or children.
The result has been a sharp rise in the average estimated residential vacancy rate, to 12.91% by the end of 2020, from a far lower 7.47% at the start of 2020 just prior to lockdowns and recession.
Viewing the rental market, the residential supply situation appears far stronger than in the home buying market which is not conducive to strong levels of new development activity. In addition, an expected lack of further interest rate cutting by the SARB is likely to lead to some tapering off home buying demand in the near term.
While the development sector will be looking for opportunities, especially to repurpose much vacant office space into residential apartments in and around certain major business nodes such as those in Northern Johannesburg, the scope for such development may prove to be limited in a financially constrained environment, with residential rental vacancies already significant.
A strong building completions growth rate in 2021 is expected to reflect 2020’s low base effect, rather than a move back to strong actual levels of activity.
