Slight Gain In Building Confidence, But Deeper Decline In Civils – FNB/BER
The FNB/BER Building Confidence Index registered a gain of 4 points to 29 in 2Q2019, whilst the Civil Confidence Index remained close to an all-time low with a further – and deeper – decline in construction activity.
Although the FNB/BER Building Confidence Index dropped to an eight-year low of 25 in 1Q2019, the index rose 4 points to 29 in 2Q2019.
However, even with the improvement, the current level of the index indicates that more than 70 per cent of respondents are dissatisfied with prevailing business conditions.
During the quarter, four of the six sub-sectors registered higher confidence led by subcontractors. The confidence of architects was unchanged while that of quantity surveyors was lower.
The confidence of main contractors regained some of the losses registered in 1Q2019, rising to 30 from 23. “The somewhat higher confidence among main contractors was supported by a mild improvement in building activity. That said, activity still remains very weak,” said Siphamandla Mkhwanazi, Property Economist at FNB.
Sub-contractor activity growth also remained weak. Nonetheless, confidence doubled to 43, from 21 in 1Q2019. According to Mkhwanazi, “we could see confidence retreat once more next quarter as there is nothing in this quarter’s survey data to support their higher optimism”. Sub-contractors are later in the building pipeline than main contractors and it would be unusual, should that have been the case, to see the sub-contractor market improve without having first seen better conditions among main contractors.
Activity among quantity surveyors was also better. However, confidence dived to 16 index points in 2Q2019. “There are some signs that work for quantity surveyors increased, but profit margins became thinner. This likely weighed on confidence,” said Mkhwanazi.
The confidence of manufacturers of building material and hardware retailers was recorded at 22 and 24 index points respectively. In both cases activity (production for manufacturers and sales for retailers) deteriorated. This is in line with the still poor growth in building activity.
Overall, on an annual basis growth in building activity likely remained as weak as in 1Q2019.
In summary: “While building confidence is marginally higher, it still suggests that the vast majority of firms in the building sector are dissatisfied with current business conditions.
Moreover, activity among main and sub-contractors, which makes up the biggest share of sector activity, remains poor,” remarked Mkhwanazi.
However, the one green shoot is that architects are more or less as busy as usual (i.e. activity growth is close to its long-term average). “As we see it, a sustained improvement in the building sector will only occur if the property cycle moves away from the current environment of subdued growth in house prices and rentals (in the case of residential buildings) and high office and shopping centre vacancy rates and low rental return on investment (in the case of the non-residential sector),” Mkhwanazi argued.
On The State Of The Civil Construction Industry Mkhwanazi noted a further decline in civil construction activity 2Q2019 as the FNB/BER Civil Confidence Index gained one point following the all-time low of 10 registered in 1Q2019.
The current index level means that close to ninety per cent of respondents are dissatisfied with prevailing business conditions.
“It’s disheartening that confidence has been so low for such a prolonged period. However, the reasons for the downbeat sentiment are clear from the underlying data. These include persistently weak activity growth and paper-thin profit margins,” said Mkhwanazi.
Statistics South Africa reported a 0.9% annual decline in the real value of construction works in 1Q2019. “The 2Q2019 survey revealed that the index measuring activity growth registered its worst level since 2010. This means that the slowdown in construction activity is expected to continue, and most likely intensify, in 2Q2019.” added Mkhwanazi.
In addition to the current weak demand, new demand is not really forthcoming. Mkhwanazi pointed out that “88% of respondents consider insufficient demand for new construction work, a proxy for order books, to be a constraint on their business operations
In summary: The FNB/BER Civil Confidence Index increased to 11, from 10 in 1Q2019. The continued low confidence is justified given the persistent decline in activity and the downbeat outlook.
“The performance of the sector over the next few months will be determined by how the current fiscal constraints are addressed and whether or not this leaves room for increased public infrastructure spending. For now, the sense is that the scope for this is limited. However, there is still an opportunity for greater (policy) certainty in the mining and renewable energy sectors to boost private sector fixed investment. This could offset (in part) the effect of lower public sector capital expenditure,” said Mkhawanazi.