In a constrained economy like that of South Africa, the possibility of new construction projects is limited. This, along with the rapidly increasing cost of living as a result of the increasing cost of fuel, the inflation rate, and the VAT hike of 2018, has put pressure on consumer spending. That’s the bad news. Here’s the good news.
Despite this, some property industry experts forecast a higher growth in 2019 than we had in 2018. They indicate that we are in a buyers’ market, which may continue through most of 2019. This is great for property developers looking to meet the needs of those entering the lower end of the property markets, with affordability considerations making sectional title properties the preferred entry point for first-time and cost-conscious buyers. Most of the property sales activity in the past year has been reported to be in the R300,000 to R1.5 million range.
Sacrificing space for price is on the rise, hence the continuing shift from freehold to sectional title and estate living. Developers have been responding to the growing demand for sectional title properties in what appears to be a longer-term trend. As we see new hope for the real estate industry, property developers need to be fit and ready to embrace this new burst of activity and market trends.
Another trend is the continued rise in mixed-use developments, and the emergence of mixed-use suburbs. Mixed-use developments, such as Melrose Arch in Johannesburg and Century City in Cape Town, feature mainly in key urban growth nodes in metropolitan areas where you can live, work and play. The need for a live-work-play lifestyle is growing, in part because of major cities’ increased traffic congestion. Instead of spending hours in traffic, people are willing to sacrifice larger plots or gardens to live closer to work opportunities.
Property developers now have the challenge of bringing these specialised developments to successful completion. Developers needed to take out different insurances to cover construction work, project liabilities and – once buyers or tenants move in – the structures themselves.
Real Estate Scheme Development Insurance
Not a new product at Santam, but one that has been gaining a lot of traction in the market, is the Real Estate Scheme Development Insurance, which is currently the only one on the market. This market-leading product was developed to ease the negotiation of some of the insurance hurdles that developers faced during their construction-to-occupation period.
It consists of construction cover (as the project is ongoing), as well as completed but vacant building cover until the project is completed and occupied. ‘We remove any of the gaps to get different insurance covers for the different stages of construction,’ noted Karl Bishop, head of Santam Real Estate. ‘This product eliminates multiple claims, removing a number of hurdles and challenges in the long process of bringing specialised developments to completion.’
The Real Estate Scheme Development Insurance is complemented by the Equity Guarantee for Property Developers.
Equity Guarantee for Property Developers
In essence, the Equity Guarantee for Property Developers provides financiers with the security of knowing that their loans will be backed by insurance against delivery risks like abnormal cost overruns and non-completion, and that the property will be income-generating at the end of the development period. Real Estate Scheme Development Insurance provides cover against construction risks and partly completed structures, even before final occupation. By combining these products, Santam insures the equity, the construction work and the completed structure, offering developers peace of mind in the real estate chain, as well as the benefits of price and a seamless service from sign-up to claims process.
Developers may be able to raise the bulk of the funding they require from their financiers, but they typically have to fund the balance themselves via an equity contribution. The Equity Guarantee for Property Developers guarantees the equity contribution (or a portion thereof), so the development loan is backed by A-rated security, which makes it possible for the bank to release a higher level of funding. This, in turn, speeds up the development and releases a significant amount of working capital (cash) for the developer.
The biggest risk to Santam is the failure of the developer during the construction period as there are always risks like timing and cost overruns. This is why Santam takes a very active role upfront, and why there’s always a three-way conversation – between the developers, the financiers and Santam.
Into the future
Santam is currently also developing a product for the needs of lesser-known and smaller developers. This is significant because of the country’s growing housing needs – especially in the retirement housing market, which is also a growing trend for penny-wise retirees, and at the lower end of the general housing market. A similar insurance product for these sectors will facilitate the supply of housing at these levels.
By underwriting both equity and project risks, this product will increase access to funding for small developers, which will help to create much-needed housing for an as yet undersupplied market.
Santam is an authorised financial service provider (licence number 3416)