Outlook for building sector remains downbeat

© Wittaya Puangkingkaew – 123RF.com

The current level indicates that close to 60% of respondents are dissatisfied with prevailing business conditions. The index fell for the third straight quarter to 44 points, from 53 in 2Q2015.

Main contractor confidence lost three index points to 45 during the quarter. The lower confidence was not supported by the underlying indices, particularly building activity and profitability. "After deteriorating rather sharply in 2Q2015, building activity improved somewhat in 3Q2015," said John Loos, property economist for FNB.

The rise in building activity came mainly from the non-residential market while activity in the residential market stabilised.

"The fundamentals do not support the uptick in non-residential building activity," said Loos. "Office vacancy rates remain high and the demand for retail space is dwindling as consumer spending comes under increased pressure. This makes it difficult to see a sustained improvement in non-residential building activity."

Hardware retailers

The biggest fall in confidence was recorded among hardware retailers. After rising to 91 in 1Q2015, the confidence of hardware retailers dropped to 66 in 2Q2015 and 37 in 3Q2015.

"Hardware retailers have far outperformed other retailers since the start of the year. However, it seems the weak consumer environment is also starting to affect hardware retailers." noted Loos. "It is unlikely that hardware retail sales will continue to grow at the same pace in 2H2015 as it did in 1H2015".

Similarly, weak domestic sales and production weighed on the confidence of manufacturers of building materials which fell to 26 in 3Q2015. After gaining some momentum in 2Q2015, the confidence of architects declined to 54 in 3Q2015. In contrast, quantity surveyor confidence edged up to 47.

"In the case of quantity surveyors, confidence was likely boosted by the expectation that work will pick up in 4Q2015," said Loos. Both architect and quantity surveyor activity was lower during the quarter.

Higher confidence

Sub-contractor confidence was higher at 56 points in 3Q2015, from 51 in 2Q2015. This marks the fourth consecutive quarter that confidence has been above 50 (in other words the majority of respondents were satisfied with prevailing business conditions).

Confidence was higher despite lower activity, although profitability did not deteriorate. According to Loos, the expectation that activity and profitability will be higher in 4Q2015 likely boosted confidence.

A sharp fall in the confidence of retailers and manufacturers of building material weighed on overall building confidence in 3Q2015. However, the fall in confidence of these two sectors had more to do with slowing domestic demand in general than further weakness in the building sector. This is confirmed by the stabilisation of building activity of main contractors.

Overall outlook

Overall, growth in the building sector remained flat in 3Q2015, compared to the moderation in 2Q2015. The outlook for the sector remains rather downbeat. Slowing activity among architects and quantity surveyors suggests that the building pipeline is becoming smaller.

In addition, the improvement in non-residential building activity this quarter - which was largely responsible for the improvement in main contractor activity - does not seem sustainable given the underlying fundamentals.