After falling to 34 in 2Q2016, the FNB/BER Building Confidence Index increased by 4 points to 38 in 3Q2016. This returns the index to the level recorded in 1Q2016. Furthermore, excluding building sub-contractors, all the sub-sectors registered higher confidence in the quarter.
Even though confidence improved, the current level of the index indicates that more than sixty per cent of respondents are dissatisfied with prevailing business conditions.
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”, remarked John Loos, Property Economist at FNB. The improved profitability was as a result of less keen tendering price competition as building activity was largely unchanged from 2Q2016. Loos noted that, “the reduction in tendering competition could be due to higher tender activity, or less competitors, or a combination of these two factors”. Although activity may have remained under pressure this quarter, there are encouraging signs regarding the near-term outlook. According to Loos, “a decreasing number of respondents indicated that the lack of demand for new work is constraining business operations.”
From a sectoral perspective, it is clear that the divergent performance of the residential and non-residential sectors seen in recent quarters is becoming more pronounced. While many of the results for the residential market are 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. Consequently, 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 that confidence 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. Consequently, the confidence of building material retailers stayed low at 31 index points.
Quantity surveyor confidence jumped by 15 index points to 50 in 3Q2016. The higher confidence was 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.
In conclusion: Tendering price competition eased noticeably across the board this quarter, boosting profitability. However, actual building activity was largely changed if not somewhat weaker compared to 2Q2016. “The weak activity was offset by higher profitability. As a result, confidence in the building sector edged up slightly”, added Loos.
Looking ahead, a recovery in activity at the start of the building pipeline as well as a fall in the number of respondents stating that new demand is a business constraint argues in favour of a near-term rise in building work. That being said, a number of downside risks could derail what would likely only be a marginal improvement at best.