WHILE land prices are surging and land value as a percentage of development cost is on the rise, they are still low compared with those in developed countries.
Last week, in one of the most expensive land sales on record in Johannesburg, a developer acquired about 2,83ha of land in the Sandton central business district for more than R140m. But property experts say this sort of price, as a percentage of development cost, is not high by international standards.
The sale, brokered by Firzt Realty Company, included the individual purchase of 50 sectional title residential units on the land. The yet-to-be-named developer plans a mixed-use development including retail, office and residential components.
Dave Russell, a director at office and industrial brokers Baker Street Properties in Cape Town, says that in SA the land component makes up 10%-15% of the cost of a new development. In London, the land value component is closer to 50% of the development cost.
“That is because of land scarcity in London and, of course, the restrictions England has on greenfield developments.
“England is a small island, and from a residential perspective the existing supply of residential housing units does not meet the demand.
“Because of greenfield restrictions, developers are forced to pursue brownfield alternatives,” says Russell.
Greenfield developments refer to virgin sites where there has been no prior development while brownfield developments include land that has been developed in one form or another.
“In international terms, SA is still relatively cheap,” says Russell. “We have to get out now and again, and see the real world out there.”
Like Johannesburg, Cape Town is also experiencing a trend of rising land values.
“Cape Town is now really at the beginning of a major correction in land value.
“There is a shortage of land in Cape Town because of the sea and the mountain.” The natural beauty is partly the reason for its limited supply of land.
Russell says that “right across the board”, residential, commercial and industrial land in Cape Town has shown “massive increases in value” directly related to a shortage of supply.
Property economist Francois Viruly, of Viruly Consulting, says that in general land prices rose in the past year.
It is not uncommon to see the land price making up more than 20% of the development cost.
But Marc Wainer, executive director of Madison, which asset-manages three major listed property companies, says that if land prices and building costs escalate and selling prices do not, then new developments will not be viable.
Wainer says land prices as a proportion of the development cost are still low.
In Australia, for instance, the land price as a percentage of development cost is about 40%, while in Canada it is about 20%.
But Wainer says the building costs in these countries are lower than in SA, as is the rate of increase of building costs.
He says SA is faced with increasing land prices, increasing building costs and a tapering off of demand in the residential property market to a point where prices are “virtually static”.
With building costs increasing 25% a year and land costs going up 10%-20%, “you are going to have to charge substantially more for new development than the market is prepared to pay”, says Wainer.
Barak Geffen, an executive director of Sotheby’s International Realty in SA, says that for residential property, UK city centres are six times more expensive than upmarket areas such as Bantry Bay in Western Cape in terms of cost per square metre.
Geffen says that for comparable luxury real estate, France is five times as expensive as SA, while Germany is about three to four times as expensive.
Ireland is about five times more expensive, and Greece is eight times more expensive.
