Building confidence shows slight uptick

Cape Town - Although the FNB/BER Building Confidence Index has shown a slight increase, more than 60% of respondents are dissatisfied with prevailing business conditions.

After falling to 34 in the second quarter of 2016, the index lifted by 4 points to 38 in the third quarter. This returns it to the level recorded in the first quarter, with all the sub-sectors - excluding building sub-contractors - registering higher confidence in the quarter.

Main contractor confidence rose to its highest level in more than a year to 44 in 3Q2016, from 38 in 2Q2016. “Confidence moved higher primarily due to an increase in profitability,” said FNB property economist John Loos.

The  profitability boost came about through less keen tendering price competition, as building activity was largely unchanged from 2Q2016. But there are encouraging signs for the near-term outlook, as according to Loos “a decreasing number of respondents indicated that the lack of demand for new work is constraining business operations”.

With many of the results for the residential market standing at, or close to, their long-term averages, the non-residential market is looking increasingly weak. “One could argue that the residential market is now registering normal growth in building activity and profitability,” said Loos. Residential main contractor confidence jumped 10 index points during the quarter to 49. The confidence of non-residential main contractors edged lower to 32 index points, from 34 in 2Q2016.

The confidence of manufacturers of building material rose by 3 index points to 21 in 3Q2016. The underlying information suggests this figure could have been higher, with production volumes and domestic orders faring well. However, excess capacity remains a concern.

In contrast, hardware retail sales remained weak which, along with subdued growth in selling prices, weighed on profitability. As a result, the confidence of building material retailers stayed low at 31 index points.

Quantity surveyor confidence jumped by 15 index points to 50 in 3Q2016, mainly on the back of a noticeable improvement in activity. A further improvement is expected for 4Q2016. Architect activity was also better, but only marginally. As a result, confidence showed a modest 1 index point rise to 43.

“Activity at the start of the building pipeline especially that of quantity surveyors, recovered somewhat following a weak 2Q2016. This suggests a possible near-term improvement in building activity,” said Loos.

Activity among building sub-contractors slowed sharply in 3Q2016. This is likely a lagged effect from the weaker building sector at the start of the year. Confidence, however, remained unchanged at 40 index points.

The survey also showed tendering price competition eased noticeably across the board this quarter, boosting profitability. However, actual building activity was somewhat weaker compared to 2Q2016. “The weak activity was offset by higher profitability. As a result, confidence in the building sector edged up slightly,” explained Loos.

Looking ahead, despite factors arguing in favour of a near-term rise in building work, downside risks could derail what would likely only be a marginal improvement at best.

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