The FNB/BER Building Confidence Index increased from 38 recorded points in the third quarter to 40 points in the last quarter of 2016. This is the best level in 12 months and confidence was higher in all but 2 of the sub-sectors, namely retailers and manufactures of building material.
However, even though confidence improved, the current level of the index indicates that the majority (sixty per cent) of respondents are dissatisfied with prevailing business conditions.
The confidence of main contractors increased for the second consecutive quarter, to 48 index points, from 44 in 3Q2016. Furthermore, the confidence of both non-residential and residential main contractors rose in the quarter.
“Although both segments registered higher confidence, the underlying performance of the residential market remains noticeably better than that of the non-residential market”, said John Loos, Property Economist at FNB.
“The non-residential sector continues to struggle with weak growth in building activity and deteriorating profitability. In contrast, residential main contractors reported an improvement in building activity (relative to 3Q2016) and profitability.”
Loos further said that: “The improvement in residential building activity is welcomed, especially given how poorly this segment has performed for much of this year relative to 2015.”
Adding to the optimism is a further uptick in activity at the start of the building pipeline. The confidence of architects and quantity surveyors increased by 6 and 8 index points to 49 and 58 respectively. The rise in quantity surveyor confidence was underpinned by a solid improvement in activity.
The activity of architects however, was largely unchanged from last quarter. “The continued improvement in especially quantity surveyor activity is encouraging, particularly as an indicator of building activity to come,” added Loos.
While some sub-sectors fared well this quarter, others struggled, marring the overall outlook for the building sector. Confidence of building material manufactures shed 11 index points to register a level of 10. This is the lowest since 2Q2014. Profitability came under pressure during the quarter with purchase prices continuing to rise while manufacturers dramatically cut their own domestic selling prices. “On the upside, the lower domestic selling prices helped boost domestic sales”, said Loos.
Hardware retailer’s confidence slipped 2 index points to 29 in 4Q2016. This marks the lowest confidence since 3Q2012. “Confidence declined despite higher sales as a slow rise in selling prices weighed on profitability”, remarked Loos.
Sub-contractor confidence gained 3 points to register an index value of 43 in 4Q2016.
Barring the improvement in residential building, quantity surveyors activity and domestic demand for hardware, other encouraging trends emerged this quarter. Firstly, employment in the sector improved.
“Higher employment usually only occurs when a sustained improvement in the sector is anticipated, not merely for once off spikes in activity”, stated Loos. Secondly, in addition to the rise in residential activity, the higher domestic sales growth for manufacturers and retailers suggest an improvement in domestic demand, albeit that it remains weak.
In conclusion: After moving sideways for much of the year, building activity improved somewhat, led by residential main contractors. Also adding to the growth in the sector is the rise in quantity surveyor activity and improved domestic demand for hardware.
However, continued pressure on non-residential building activity and profitability in certain sub-sectors prevented the confidence index from improving more meaningfully. In addition, the outlook remains uncertain. Loos stated that “while these results are encouraging, weakness in the broader macroeconomic, especially the consumer environment could hamper further improvement in the sector over the short to medium term.”