The sales and market values of large tracts of vacant land have dropped off significantly since January, according to Alliance Group Chief Executive Rael Levitt. “The rapid slowdown in demand for vacant development land is due to a triple whammy of higher building costs, increased interest rates and now electricity supply constraints."

The recent news that all new construction projects countrywide that are bigger than a residential home will be blocked by Eskom for the next four to six months may sound the death knell for sales of large development land this year. “One must remember that vacant land is the most illiquid of real estate classes because no income can be derived and it’s a zero return investment until the land is developed,” says Levitt. “Developing property in a higher interest rate environment with escalating building costs is tough enough, but to be faced with the inability to deliver completed and electrified property projects is uncontrollable and will have dire results."

According to the recent announcement by Eskom new townhouse complexes, petrol stations, factories and all other construction projects where electricity provision needs to be obtained from Eskom in advance will be delayed by up to six months. Levitt says that this is already hitting vacant land values and is making investors extremely jittery. “Who would pay a high price for vacant land if you cannot get electricity supply onto it?” asks Levitt.

Vacant land sales throughout the country have been weak this year.

All new construction projects must obtain electricity certificates before construction can begin. Eskom will delay this process by provisionally not issuing any certificates. “Since the outages in January many property developers have been expecting the news that construction may be delayed by electrification supply and therefore the latest announcement by Eskom is not a bolt out of the blue and our vacant land sales throughout the country have been weak this year."

Tito Zwane, a regional manager at Eskom, in charge of consumer services, disclosed the news during a social event with Johannesburg's City Power for enterprises in the city. The delay period will be applicable to all big developments in all Eskom service areas countrywide. "We don't want to kill growth but we definitely don't have enough power for nine percent growth in Johannesburg anymore,” said Zwane. “Eskom will still have to fulfil the requirements for all projects to which it bound itself until the middle of February. All projects thereafter will fall under the new plan.”

Levitt believes that this decision will limit economic growth as well as negatively affect vacant land values. “Eskom’s announcement gives cold comfort that this will be sorted out within the four to six month time period and the latest announcement seems more an indication that they expect it to take longer than six months."

Prices are down by at least 30 percent on last year.

Levitt says that the Alliance Group has noticed a significant drop in bidding activity for large tracts of land. “We are achieving prices at least 30 percent down on what they were at the same time last year. Already last year, before the recent electricity outages and slew of bad news from Eskom, areas such as Midrand were having electricity supply constraints and we found that prices for larger tracts of land in those areas fell sharply”.

Levitt says that from January this year, his group saw significant price decreases coupled with a lot of investors trying to offload land investments. Problems with land sale values are nationwide and not restricted to specific areas. The slowdown is also not restricted to residential development land as we are finding that investors are skittish to buy unserviced vacant industrial and commercially zoned land parcels. “Obviously high value smaller stands in good residential areas are not affected, but parcels of development land are now in large supply with limited demand. Every day we are inundated with enquires from sellers who have parcels of residential development and want to get rid of them. We are now taking a very cautious approach when listing unserviced development sites and we are cautioning these sellers that their price expectations may be considerably different to what the market is prepared to pay. Since January our professional valuers have been taking a very conservative view on development land values as we do not want financiers and banks to overvalue projects and land developers in trouble. Only the very brave will pump cash into a vacant site with no clear indication about when you can erect an electrified building."