Some initial research from Arndt et al 2020 shows construction as one of the worst affected industries in SA regarding the impact of Covid-19 (GDP at factor cost). At the time of this presentation (19 May 2020 – Level 4) there is inhibitory red tape around going back to work for contractors. There is no standard set of rules; each health and safety officer has a different viewpoint about what is applicable.
Contractors are struggling to get permits, and it is costly and time-consuming to sanitise each work site; PPE and cleaning is expensive. Projects are postponed and the construction industry is operating at 10% to 15% capacity: there is a need to speed things up. There has been no subsequent infrastructure build programme information following the mention of it in President Ramaphosa’s State of the Nation Address.
Forecast scenarios take into account the assumption that Covid-19 peaks in September 2020, that there is no major resurgence later on, and depend when parts of the industry go back, and at what capacity. Other factors include a major government infrastructure spend slump coupled with extra spend on stimulus measures, with a decrease in tax revenue and lack of demand from the private sector.
Baseline scenario 1 (most likely) – 60% probability
50% capacity until the end of June; 70% capacity until end of October; 100% capacity thereafter. The construction industry contracts by 28,2%.
Scenario 2 (more positive) – 30% probability
80% capacity until end of September; 100% capacity thereafter. The construction industry contracts by 14,5% in 2020. More positive longer run trajectory – maybe we do actually see some stimulus. This is becoming more likely as calls for end to lockdown intensify.
Scenario 3 (more negative) – 55% probability
50% capacity until September; 70% capacity until end of the year; 100% capacity thereafter. The construction industry contracts by 34,3% in 2020. More negative longer run trajectory.
Building (contracted by 28,2% in 2020) vs civil (contracted by 19,0% in 2020) construction have different dynamics and civil construction is dependent on government spend; government can play a counter-cyclical role. We were seeing promising signs of early recovery, pre-Covid-19, at the end of 2019: big road and water projects were coming out to tender. Contractors were becoming more positive around tender activity.
Convergence between civil and building confidence
While civil confidence has been at an all-time low, there has been some recovery in the last two quarters. The opposite has happened to building confidence. Civil engineering confidence bounced back in the first quarter of 2020, more confident about the state of the civil sector: from -100 in the last few quarters to -65 in 2020 Q1.
We did see a cut to the infrastructure budget at the beginning of the year which talks to the counter-cyclical role of government, but the money is mostly still there. R130 billion of the R500 billion stimulus is going to be reprioritised from somewhere. Transport and water infrastructure spend is still expected to grow at above inflation rates after the cuts. Public sector construction was the first to go back and have at least month’s head start on building, but could be subject to more red tape / bureaucracy?
However, there remains massive pressure on the fiscus in the medium to long term, with the ratings downgrade, paying back the stimulus loans and the massive slump in tax revenue. The budget deficit is expected to breach 16,5% (from 6,3% last year) and 9,0% is expected. This means less funds are available for infrastructure, significantly dampening the longer-term forecast.
This is private sector-driven and is expected to be hit much harder than civils, affected by a huge demand shock; South Africans are under massive financial pressure. There is no counter-cyclical role here.
South Africans are going to get considerably poorer, with households in the top half of income distribution to see a 25% drop in their incomes. Poorer households already receive most of their income from grants.
Pre-Covid-19, the building industry was already entering a recession. The lowest square metre (SQM) approved over a 12-month period since the mid-1990s was at the end of February 2020. Before Covid-19, 13,46 million SQM was approved until February 2020 and 13,49 million was approved at the worst point after the financial crisis in 2008/09.
The residential market will take in excess of 3,5 years to recover (John Loos) and rental deflation this year and next of -3% to -4% is expected. There is indication of a slump in share prices of listed property.
The conundrum is that of end-May, commercial property construction is only expected to go back to work at Level 3, but most activity is in the metropolitan areas which may remain at Level 4 indefinitely.
The demise of the office
Covid-19 is said to hasten the end of the formal office as demand for office space is expected to drop even further in the longer run. The pandemic has provided an opportunity for business to experiment with having their staff work from home, and many people are realising that an office might not be as necessary as before.
Industrial and warehousing is expected to be the worst affected by some because of close links to the manufacturing industry, which can often be seen as the best proxy for GDP growth (or lack thereof in this instance). Online sales in SA are growing during the pandemic but may still be too small to counterbalance.
Shopping centres: many tenants can’t pay rent, and have asked for leniency from landlords. With weaker economic fundamentals going forward, demand for goods and services that malls provide will fall significantly.