Developers in dire need of a cashflow shot in the arm should be accommodated with the earliest possible introduction of the proposals to adjust VAT clawbacks that have been announced by Minister Pravin Gordhan.

Gerhard Kotzé, CEO of the ERA South Africa property group, says this would go a long way towards stimulating the development market which has taken a severe beating since the global credit crunch.

Kotzé says developers currently have to deal with a VAT “trap” where, due to a technicality in the existing VAT structure, when they are unable to sell units and are forced to rent their stock, they are obliged to pay VAT on building materials and are unable to claim VAT back on the leased units.

“Now as I understand it, the intention is to help generate cashflow for developers by allowing clawbacks of their VAT for leased units and investigations are reportedly under way by Treasury to determine an equitable value and rate of clawback. And we would urge the Minister to forge ahead with these changes as soon as possible. Delays raise the suspicion that commitment is weakening.”

The latest building activity figures from Stats SA, he notes, indicate that there is ongoing weakness in residential building activity, with a 34% year-on-year decline in buildings completed.

“However the decline in building plans passed has slowed sharply from -49% yoy in August last year to around -15% yoy so there is definitely a desire among developers to get going again.

“Clearly then, now would be a good time to give things a kick-start with the rapid implementation of the VAT concessions. The changes would be felt across the board by the construction sector and developers, and would also help to create desperately needed jobs.”

Kotzé says the VAT situation is of course not the sole reason for developers’ current woes. “Previously high interest rates, restricted bank lending and of course consumer indebtedness have all contributed.

“However holding costs are a major problem for developers and the proposed VAT changes would definitely help in that respect, setting the scene for a more normalised flow of new housing stock to the market.”