Building confidence increased in fourth quarter

The confidence of residential contractors increased from 20 to 22, but that of non-residential contractors declined from 21 to 14. The latest results provide more evidence that the building sector is slowly beginning to recover, though the recovery is not spread uniformly across all sectors making up the building sector and continues to be characterised by short-lived flare-ups in activity.

Although this is the highest confidence level in a year, the latest reading indicates that on average still 7 out of 10 respondents in different sectors of the building industry continued to rate prevailing business conditions as unsatisfactory.

Industry overview

The FNB/BER building confidence index can vary between zero (indicating an extreme lack of confidence) and 100 (indicating extreme confidence). It reveals the percentage of respondents that are satisfied with prevailing business conditions in six sectors, namely architects, quantity surveyors, main contractors, sub-contractors (plumbers, electricians, carpenters and shop fitters), manufacturers of building materials (cement, bricks and glass) and retailers of building material and hardware.

In contrast to the RMB/BER BCI, which includes only main contractors, the FNB/BER building confidence index covers the whole pipeline, from planning (represented by the architects and quantity surveyors), renovation, additions, the informal sector (represented by building material merchants) and production (manufacturers of building materials) to the actual construction of buildings by main and sub-contractors.

In 4Q 2011 the composite building confidence index increased due to a jump of 32 index points (from 17 in 3Q 2011 to 49 in 4Q 2011) in the confidence of building material merchants and an increase of 8 index points (from 4 to 12) in the confidence of building material manufacturers. The confidence of architects, main contractors and sub-contractors barely moved whilst quantity surveyors registered the only decline.

At 49, the confidence of building material merchants is just below the 53 registered a year ago. The rebound in the volume of sales came as a welcome relief after poor sales in 2Q 2011 and 3Q 2011. "The higher sales can be attributed to the need to do maintenance and renovations of existing buildings after a long delay." The surviving retailers also benefit from the fact that some of their competitors went out of business over the last year or so (though this happens every time at this stage of the cycle).

According to the BER manufacturing survey, building material manufacturers experienced the highest rate of increase in the volume of sales since the recession in 2008. Their ability to raise selling prices to make up for higher cost outlays remained limited. As a result, profit growth and confidence remained low.

The overall confidence of main contractors declined by one index point to 19 in 4Q 011. Whereas the confidence of residential contractors increased from 20 to 22, that of non-residential contractors declined from 21 to 14. This has come as a bit of a surprise, as in recent times the non-residential sector has outperformed the residential sector.

Residential work has been limited by an oversupply in the high-end market (i.e. houses of R500 000 and more) and tight credit conditions.

In contrast, non-residential work has been sustained by some private sector work (such as the refitting of older office blocks to upgrade them and the building of shopping centres in non-metropolitan areas) and some government work (such as the school and hospital building programme of some provinces).

The survey now finds in 4Q 2011 that residential building activity showed some lift, while non-residential building activity pulled back unexpectedly.

A single data point, however, does not indicate a reversal of the earlier trend. The 4Q 2011 development may be due to a unique combination of factors, such as the simultaneous completion of a number of projects before new ones started. We need to see in early 2012 whether the earlier trend has changed, if at all.

Tendering competition in the residential sector eased, but remained unchanged at a fierce level in the case of the non-residential sector.

The profitability of residential contractors improved, but that of non-residential contractors came under renewed pressure.

The fortunes of sub-contractors are closely tied to that of main contractors. The confidence of residential sub-contractors increased from 35 to 39, while that of non-residential sub-contractors edged lower from 33 to 32.

Architects unchanged

The confidence of architects remained unchanged at 21 and that of quantity surveyors declined by 7 index points to a still relatively high 36. Encouraging is that both professions saw more projects progressing from sketch plan and working drawing stage to contracts awarded. Bar postponements, this recovery in contracts awarded bodes well for the building industry, particularly the non-residential sector, which is the main user of these professional services.

In conclusion, the rise in the composite FNB/BER building confidence index provides more evidence that the building sector is slowly beginning to recover. The recovery is not spread uniformly across all sectors making up the building sector and continues to be characterised by short-lived flare ups in activity.

In 4Q 2011, retailers and manufacturers of building materials saw a faster rise in sales. Residential activity picked up, but non-residential activity faltered. Architects and quantity surveyors saw contracts awarded rise, which bodes well for the future.

For more information, go to www.fnb.co.za/economics.