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Buying from a Small Developer
Property 24
30 May 2007
Small, independent developers have become a significant feature of the property market in recent years - but the phenomenon brings with it dangers as well as benefits.
"Traditionally in South Africa, development was very much the prerogative of larger companies, but while the big players are obviously still very much in the picture, recent years have also seen the emergence of numerous small independents," says Gerhard Kotzé, CEO of the ERA South Africa property group.
The trend was arguably sparked off by investors acquiring a single property, giving it a makeover and on-selling it at a profit, then repeating the process, sometimes on a growing scale. In a similar vein, many owners of large properties have sub-divided and offered the newly created stands to others to build several cluster or sectional title units.
Another variation is that of estate agencies that have become developers in their own right, on the premise that they then benefit from the entire profit chain rather than merely the sales end.
There are also many newcomers to the market - private developers who are acquiring land for their own account and then basically project managing one or more new homes from scratch, outsourcing the likes of architectural and building expertise. The results are often of a high quality because the private developer has been more attentive to detail and demanding of suppliers than usual.
Kotzé warns however, that there are some potential pitfalls for buyers. "Development is a costly process - not least because of the long delays now in getting rezoning rights and planning permissions approved, and the high holding costs associated with those delays.
"Buyers thus need to be aware of the financial standing of the developer because if it is weak, corners may well be cut on the building, resulting in an inferior product."
Meanwhile, those who are perhaps thinking of a property purchase with the intention of becoming a developer should first take into account the town planning issues, the quality of access to the property, the quality of the node or area where the development is proposed, the design of the property, costs, environmental and local issues and importantly, the track records of any suppliers they intend using.
"The sub-divisibility of a site especially has to be ascertained. In this respect, zonings or other limitations may make it difficult or impossible to realise the potential of a given site, leaving the buyer with a property that is difficult to sell and for which he may have paid a premium on the expectation of turning it to good account," says Kotzé.
"Moreover, small developers have to make allowance for planning approval delays, building supply escalations and problems with the supply of services. All of which can add to the holding costs of a development, eroding or eliminating the profit margin on the job."
Original article published at www.property24.com.
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