19 September 2017

South Africa: Building Prospects in Doldrums Despite Slight Confidence Uptick

Sixty percent of respondents in a recent survey indicated that they are not happy with current business conditions.

After declining by 11 points in the second quarter of 2017, the FNB/BER Building Confidence Index improved by 3 index points to 35 in the third quarter of the year. The uptick was in part due to a 29-index point jump in confidence of building material manufacturers to 37, from 8 in the second quarter. This marks their highest confidence since mid-2015. Underpinning the rise in confidence was an improvement in production and export orders. However, sales remained weak."The poor performance of building materials sales reflects the poor underlying conditions in the building sector in general," said FNB property economist John Loos.

Hardware retailer confidence was also higher at 18 index points, from 13 in the second quarter.

Main contractor confidence rose eight points to 44. However, this increase was not supported by the underlying indicators. In particular, activity and overall profitability deteriorated. "The change in confidence and the indices measuring activity and profitability tell a very different story.

"If one is to look at activity and profitability, it is clear that contractors face very difficult trading conditions characterised by weak demand and stiff competition," said Loos.

Both residential and non-residential contractors reported a similar set of weakening conditions, with residential contractor activity now also showing a marked deterioration.

"In the recent past, residential building activity has acted as a buffer against very poor nonresidential building activity. This no longer seems to be the case, or at least the positive effect seems to be waning," added Loos.

Architect confidence plummets

Architect and quantity surveyor business confidence dropped to 33 and 42 index points respectively. In the case of architects, confidence is at its lowest since the end of 2012.

According to Loos, "activity for both architects and quantity surveyors was noticeably lower in the quarter. This is worrying as it suggests that the slowdown in building activity implied by this quarter's main contractor results is likely to continue into the fourth quarter, if not longer".The business confidence of sub-contractors shed 1 index point to register a value of 37 in the third quarter. Residential sub-contractor confidence was somewhat higher during the quarter due to an uptick in activity.

"Sub-contractors are typically further down the building value chain and the uptick in residential subcontractor activity is merely a lagged effect of the better activity among residential main contractors seen over the preceding few quarters," said Loos.

Despite the marginal third-quarter increase, the sector's performance is likely to be worse relative to the second quarter due to low activity. This is especially true of main contractors, where residential and non-residential respondents report growth in activity close to multi-year lows.

It is also reflected by lower domestic sales of building material manufacturers, although production boosted sentiment.

In addition, a sharp activity drop at the start of the building pipeline (architects and quantity surveyors) points to further weakness in building activity in coming quarters.

"One possible saving grace could be further interest rate cuts by the Reserve Bank, especially for the residential sector. However, this may not be the case if the broader economic performance, employment

growth and consumer confidence remain poor," said Loos.

Source: Fin24

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