By Matt Ross
While economic growth is fueling expansion of construction and development sectors in parts of Asia and the Middle East, South Africa’s construction industry remains under pressure. This in turn is putting severe pressure on local property developers, who are being forced to reinvent themselves to survive.
South Africa’s construction downturn not only mirrors the country’s floundering economy but has also had a detrimental impact on property and infrastructural development across the country.
According to the Construction Education & Training Authority (CETA) in a joint communiqué with the Parliamentary Monitoring Group, the construction sector’s decline stems from the 2009 construction boom in South Africa (prior to the World Cup), when the sector was valued at R300 billion. Having endured ongoing contraction over the past decade, exacerbated further by contract price adjustment provision (CPAP) as a result of production cost hikes, the sector’s value has dropped to R200 billion in 2019.
National debt coupled with a pronounced fall in government infrastructure projects has also taken a significant toll. In the latter half of 2018, Basil Read was placed in business rescue, while construction giant Group Five experienced a similar fate in the first quarter of 2019, owing to mounting debt.
“When Group Five went into business rescue, work on site ground to a halt and it seemed highly unlikely that we’d be able to deliver the completed scheme on time” said Nicholas Stopforth, Managing Director of Amdec Property Developments. “We realised that an immediate and rapid strategic realignment within our company was necessary if we were going to weather this storm”.
With jobs, supplier contracts, reputation and its overall investment on the line, the privately-owned property group opted to vertically integrate its resources and assume direct control of the construction management process. This involved changing up and broadening the scope of internal employee positions and absorbing key Group Five personnel. In so doing, the Amdec Group was able to circumvent disaster, resuming construction at One on Whiteley within just two weeks of Group Five’s collapse.
“We took on around 35 Group Five employees who would otherwise have been jobless, and secured around 80 direct contracts with subcontractors,” continued Stopforth. “While several other developers have yet to recover from the events surrounding Group Five, we were able to turn a potentially catastrophic situation into an opportunity. Vertical restructuring has not only bolstered the proficiency of our core teams, it has also gone a long way towards future-proofing our business model.”
With the City of Cape Town’s recent approval of Harbour Arch – the Amdec Group’s R14 billion mixed-use development on the Cape Town foreshore – this restructuring couldn’t have come a moment too soon. Stopforth acknowledges that sector downturns are typically cyclical, but cautions that lower volumes, additional pricing pressures and the heightened risk involved in competing for dwindling resources, will see margins within the construction industry remain paper-thin with cash flow continuing to suffer.
“The construction and property development sectors are not out of the woods yet, as each directly impacts the other. While we’re seeing favorable take-up of residential and commercial space at both Melrose Arch and Harbour Arch, it’s vital that we remain agile in times of such market volatility and economic turmoil,” said Stopforth.
“Given the challenges we faced, it is gratifying to see the completed development, and meet with satisfied residents who have moved in and are enjoying the convenience of living within one of South Africa’s pre-eminent new-urban precincts,” said Stopforth.
Residential apartments at Melrose Arch have always been in strong demand, generating rental returns and capital growth that are amongst the highest in Johannesburg. A handful of late release studio, one-, and two- bedroom apartments remain available, priced from R2.15million.
“As an industry, we can’t simply rest on our laurels and wait for the next construction boom to be presented to us. The current lack of foreign investment calls for lateral and innovative thinking, without which South Africa’s medium- to long-term construction outlook will continue to look grim,” he concluded.