HomeBusiness DigestInflation slows building of residential properties - report

Inflation slows building of residential properties – report

Eric Chiriga

CONSTRUCTION costs continue to soar due to galloping inflation, making it very difficult to build residential properties to meet growing demand, a property

consultancy said in its quarterly report.

CB Richard Ellis said in its report for the first quarter of 2006 that the cost of building a house in the high density suburbs now stood at between $50 million and $65 million per square metre.

The report said the cost of building a house in the medium density areas is now ranged from $90 million to $110 million per square metre while constructing a house in the low density suburbs now costs between $125 million and $130 million per square metre.

“The fact that there are only a few residential developments is largely due to the ever increasing costs of construction,” the report said.

It said investment activity in the office market had been stagnant throughout the year 2005 due to the high costs.

Building costs for properties in the office market continued to escalate rapidly, rising from $17,5 million per square metre in January 2005 to between $70 million and $100 million per square metre as by December 2005.

The report added that it was becoming increasingly difficult for property owners in the property market to maintain properties as the total cost of acquiring lifts for a ten storey building currently stands at around $18 billion to $20 billion.

The report said although real estate performed satisfactorily in the current economic crisis, significant investors remained reluctant to venture into the property industry.

It said in the short to medium term there is likely to be very few, if any, new developments in the industry due to the harsh macro-economic environment.

The prevailing economic environment, characterised by high inflation, high interest rates, acute foreign currency shortages and a distorted exchange rate had resulted in reluctance by institutional investors and other property developers to carry out any commercial or industrial developments.

“The prevailing economic environment has resulted in the escalation of operational costs of buildings,” CB Richard Ellis said in the report.

The report said that the operational costs shot up by over 1 100% last year, far higher than the average rental increase of 400%.

“Although most leases are based on the net leasing concept, where the tenant pays for all the operational costs, property owners have not been able to increase rentals at the same pace as that of inflation,” said the report.

The government is planning to introduce a policy that will exempt new property investors from rent control by the Rent Board for the first ten years, in a bid to lure investors into the sluggish property industry.

The government-appointed Rent Board has become the major obstacle to investment in the property sector, as it imposes rentals barely enough for the investors to realise meaningful returns on their investments.

“Building costs are rising faster than the income being received by institutional investors,” the report said.

“It has become too risky for the institutions to undertake new building projects.” the report further stated.

It said loan qualifications had significantly diminished especially for individual borrowers due to high prices of house, high construction costs, high cost of borrowing and high costs of living.

If an individual intends to buy a middle income house worth $10 billion at an interest of 150%, they would have to earn a salary of $5 billion in order to make a monthly mortgage repayment of $1,25 billion.Mortgage rates have been volatile since last year, adjusting in response to the bank lending rates.

The report revealed that the three mortgage lenders namely Cabs, FBC and Beverly last year advanced a total of around $476 billion to a total of 1 275 residential property applicants.

However, the report revealed that the galloping inflation, currently at 1 193%, had reduced the effective demand for mortgage loans.

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