Retail sales up 5,9% in March 2010

Consumers general spend more in March, during Easter weekend celebrations and school holidays. Looking back, sales rose 3,4% m/m in March 2009, and 3,9% m/m in March 2008. Sales reported this year does therefore suggest a stronger growth in trade sales, and perhaps a further sign that the economy is on a recovery road.  On a year on year basis, retail trade sales reported the first positive growth in 13 months, up 1% y/y, following a 1,3% contraction in February 2010.  Growth in retail has been less than impressive to say the least since 2007, when y/y growth averaged 7%. 

Over a running 12 month period (to smooth out some of the month to month fluctuations) sales are however still significantly lower (down 4,4%), compared to -5% in December 2009.  Just looking at the first quarter, sales ended flat in real terms. Senstivie to changes in the retail sector, the total number of square metres approved for new shopping space fell by 31% during the first quarter of 2010, while sqm completed were also down 14%. 

A recovery, albeit mild,  in the retail sector, however does not automatically imply a recovery in the construction sector. Sales at hardware stores (in current prices) were still down 6,9% y/y in March 2010, based on a running 12 month total, compared to a 4% increase in general sales, calculated on the same principle (MAT, current prices).  

Housing Construction Monitor 2010

The South African housing landscape is affected by changes in private sector housing construction and social housing developments. The last official census was compiled in 2001 where the estimated housing stock (excluding informal dwellings, caravans, tents and boats) totaled 7,147,439.  According to estimates of new housing construction and information from the Department of Human Settlements, a further 1,6 million houses were completed during 2001 and 2008, pushing the total number of houses in South Africa to an estimated 8 774 369 (up 22% since 2001).

The total nominal rand value of contracts awarded during 2008 and 2009 (compared to 2006 and 2007) fell by 33% (current prices), and has declined across most of the sub-segments, except for hostels and social housing. While the national housing backlog as grown by 15%,  it seems to have decreased in the Eastern Cape, Free State and Northern Cape. However, in Gauteng it is possible that the backlog has accelerated by 23% to nearly 800 000 houses, and by 96% to 458 000 in Kwazulu Natal.   Any successful housing strategy should therefore cater for the provision of housing for at least 500 000 people per annum or face the consequences of constant housing shortages and volatile house price inflation.

Gauteng has the highest positive rate of net migration, as more people are streaming into the province, compared to those exiting the area. Western Cape has the second highest positive net migration rate, followed by Kwazulu Natal.  The negative net migration rate in Eastern Cape was the highest, followed by Limpopo. This has serious consequences for future planning and development in the areas with regards to housing.

Growth in disposable income slowed dramatically since 2007 (2006: 6,3%; 2007 5,2%; 2008 1,3%) and turned negative at -3,9% in 2009 due to the global recession which led to many jobs lost and a severe slowdown in the economy.  The slowdown in disposable income had a direct bearing on investment in residential buildings as it caps consumer's ability to invest in property. As was the case during most of the nineties, when there was little or no growth in disposable income, investing in housing now also practically moved sideways with no growth in new housing stock.

The average nominal house price growth  for 2009 is estimated at -0,6% (Source ABSA) while real house prices fell by -7,7%.  An improvement was recorded during the first two months of 2010 as house increased by 6,6% in February pushing real house price growth out of negative territory.  The outlook for house price growth in 2010 seems much more favourable than in 2009, but is still estimated at below 10% (nominal prices).

The price differential between new and existing properties increased to 21,4% in 2009, the highest rate since 2003 (29.1%). This means that the cost to buy existing property is 21,4% lower compared to building a home, adversely affecting the feasibility of new project developments.

Investment in housing started declining on year on year basis as far back as the second quarter of 2007, which means the residential market has been in a recession for the last 10 quarters, according to the Reserve Bank. Investment fell 8,3% y/y in the 4^th quarter of 2009, following a 9,6% decline in the preceding quarter. The value of contracts awarded is also in decline, due to a drop in pipeline activity. The value of contracts awarded fell 21,9% y/y (2001 prices) during 2009.  Tendering activity has also become more intense as fewer work opportunities are available. Overall residential tendering activity fell 62% in 2009.

The number of units approved for new residential construction - a leading indicator for the next 12 to 18 months in the residential market - fell by 54% during the last two years.  During the 12 months to January 2010  (latest available data), Statistics South Africa reported that the number of square meters approved for residential construction (including renovations) fell 33,1% compared to the same period in 2009. The rate of decline has gradually worsened as the residential market fails to come out of its depressed market conditions.

There has been little change in average rental prices since the January 2010 survey, in most of the metropolitan areas. The index was however pulled down by lower rentals in areas such as East London, Pietermaritzburg, Claremont and Parkland. Stock levels were sufficient in areas such as Pietermaritzburg and Parklands, but in most other areas, stock levels are starting to dwindle. This means an improved rental outlook in the near future, as stock levels are unlikely to be increased during the next 12 months. Rentals rose on average 7,3% y/y to an average of R5 244, compared to R4 889 in April 2009. 

The budget for Human Settlements is projected to increase by an average of 3,1%  in real terms during the next three years (between 2010/11 and 2012/13) totaling R50 billion. Expenditure increased by a higher than expected annual rate of 21% in 2009/10 and is predicted to increase by 11,5% 2010/11, and by 3,3% in 2011/12 but fall by 5,3% in 2012/13 as the increase in current prices do not fully account for possible inflationary increases in building costs. 

According to information from Databuild, projects involving over 70 000 social housing units were postponed between 2008 and 2009, the most being in the Western Cape (24 533), followed by Kwazulu Natal (17 355) and 15 629 units were also postponed in the Eastern Cape. If our estimates are correct, the impact on the Eastern Cape is less severe, compared to Western Cape and Kwazulu Natal where there has been a significant increase in the housing backlog.

Investment in housing contracted much sooner and faster than expected. The South African Reserve Bank revised its five year data, which showed a sharper than expected contraction in residential spending. This means the residential market has been in a recession since 2009, and private sector spending already in 2008.  We assume a more conservative monetary policy stance, during 2010 whereby lending rates are sustained at 10%. This will stimulate economic growth, without seriously impeding export opportunities. However, we remain cautious that inflationary pressures have not completely abated and we can therefore not rule out a possible interest rate hike in 2010.  Access to finance will continue to be challenging, as financial institutions are likely to remain risk adverse. Slow house price growth has eroded investment liquidity - and this will take time to recover -  while jobs lost during 2008 and 2009 must first be absorbed again during 2010. 2010 brings with it the Soccer World Cup, but in our view the benefit in investment has already been experienced through various infrastructure projects in preparation for the Soccer World Cup, and that the actual event holds no benefit for housing construction. 

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