Building costs drive office-building values and rentals

04-10-2005

Every now and again one hears of how cheap South African properties are relative to those of other countries. This “discount” is then used to motivate an imminent rise in South African prices or rentals. The underlying reason for the difference is, of course, differences in building costs, says Erwin Rode.

Building costs − through the substitution principle − are the long-term driver of property values and rentals. After all, why would one buy a property at R120 if you can have it built for R100 (including the stand price)? Thus prices and rentals will oscillate around the long-term trend line of building costs.

“The biggest building-construction inputs are labour and materials. As South African labour is generally in large supply, our wages are lower than those of developed countries, thereby resulting in lower building costs,” says Rode.

Lower wages also indirectly result in lower building costs via their effect on material prices. This will apply to major inputs such as bricks and cement, which as a result of their weight (and hence cost of shipping); are generally not traded between countries.

“This explains why commentators who compare prices and rentals between SA and other countries are, most of the time, dead wrong.”