Building confidence takes a big knock

THE FNB Building Confidence Index (FNB BCI) dropped from a value of 30 in the first quarter of 2010 to 24 in the second quarter.

The index measures the business confidence of all the major roleplayers and suppliers involved in the building industry, including architects, quantity surveyors, contractors, sub-contractors and retail merchants and manufacturers of building materials.

It is compiled quarterly from the building, manufacturing, and retail opinion surveys undertaken by the Bureau for Economic Research (BER) at Stellenbosch University. The BER business survey in the building industry was conducted between May 3 and June 1.

Of the six sub-components of the FNB BCI, five registered a drop and in only one case a marginal increase was recorded. Compared to the first quarter of the year the following declines took place: quantity surveyors (-2), building contractors (-6), sub-contractors (-2), manufacturers of building materials (-2), and retailers of building material (-24). In the case of architects, a small rise (+1) was recorded.

These indices clearly show that the domestic building industry remains in a firm recessionary grip.

The BER results indicate that business conditions in the residential sector remain tough, and based on building statistics published by StatsSA in respect of residential building plans passed in the first quarter of the year, the situation is unlikely to be reversed dramatically in the near term.

Notwithstanding the sharp drop in the interest rate of 550 basis points, factors such as cautiousness on the side of consumers in an uncertain domestic and global environment, buying existing homes being cheaper than building new ones, as well as still high debt levels, are constraining a meaningful recovery in the home-building industry.

In the non-residential sector, business conditions are tightening as the investment spurt in non- residential building in the private sector, which increased by around 20 percent in real terms during 2009, is coming to an end. StatsSA data shows that non-residential completions decelerated notably in the first three months of 2010.

The business confidence of residential contractors decreased from 26 in the first quarter to 21 in the second. This decline followed on a moderate revival in confidence levels over the past three quarters from a comparatively low base.

Respondents to the survey indicated that the growth in building activity remained more or less unchanged during the second quarter. Overall business conditions are tough and new work remains scarce. A net 83 percent of the respondents indicated that the lack of demand for their services was constraining their business operations.

Tendering competition escalated in the second quarter. Whereas 47 percent of participants in the survey indicated a more stringent tendering environment in the first quarter, the figure increased to 59 percent in the second quarter.

The result was that margins remained under severe pressure, adversely affecting the overall profitability of respondents. A further moderate retrenchment of labour therefore became necessary during the second quarter.

As far as the outlook for the third quarter is concerned, respondents expect a slight improvement in the overall business environment and growth in building activity.

The business confidence of non-residential building contractors dropped from an index value of 26 in the first quarter to 18 in the second. The latter index is half that recorded in the corresponding quarter a year ago.

The growth in building activity underperformed expectations during the second quarter. Compared to the first quarter, the growth in building activity remained more or less level-pegged.

However, the demand for new work has deteriorated and 89 percent of the respondents to the survey indicated that they regarded the insufficient demand for building work as a major constraint affecting the viability of their businesses.

Competition in tendering escalated during the quarter, with the net percentage experiencing a keener tendering environment rising from 67 in the first quarter to 87 in the second quarter.

The tighter tendering environment led to downward pressure on margins and 87 percent of survey respondents indicated that their growth in profitability was below that of the same quarter a year ago. Indications are that no large-scale retrenchments were undertaken during the quarter, but employment levels remained well below those of the same quarter a year ago.

In view of the survey results and the normal lagged nature of the private non-residential building cycle compared to the overall business cycle, non-residential building activity is likely to remain under pressure for some time ahead.

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