No or slow growth is expected in the local building industry over the next few years.
The general South African building and construction market is currently moving ahead on a stable straight line and it depends on where companies are situated, how they are affected by the ups and downs.
Over the past few years, Gauteng, for example, was booming with a lot of projects around the Gautrain railway, and while this continues, it now also seems as though activity is picking up in the Cape provinces. Companies may have vastly different experiences of the trading environment, just depending on the state of business in each province.
This is according to Elsie Snyman, chief executive officer of Industry Insight, who explains that the market never really recovered from the dip it took after the robust growth experience in the build-up to the 2010 World Cup. “Investment in buildings started shrinking in 2008, but the real game changer was 2010, when investment plummeted by 11,8% year on year. The sad reality is that since then investment has not shown any real growth in real terms, averaging an increase of just 0,2% between 2011 and 2013.”
She points out that the growth of non-residential buildings such as commercial and retail has carried the market over the last few years with institutional investors’ spend. “It is, after all, a good time to invest in construction if you can afford it, because investors can now get materials at a lower cost, land is cheaper and since there is more competition amongst contractors and manufacturers, they are willing to negotiate better prices.
“However, investor confidence is declining since the economy is not picking up and private spending is not increasing. It is now starting to influence the non-residential market as well, with a definite drop in pipeline activity and more projects being placed on hold as compared to previous years.”
Statistics South Africa’s statistical release, P5041.1 – Selected building statistics of the private sector as reported by local government institutions, contains information derived from the building statistics survey covering a sample of local government institutions involved in the approval of building plans and in the final inspection of buildings completed for the private sector.
Key findings of the release published in October 2014 show that the value of recorded building plans passed (at current prices) increased by 8,8% (R5 064,7 million) during January to August 2014 compared with January to August 2013 (see Table A). Residential buildings (15,8% or R4 065,0 million) were the largest contributor to the total increase.
Although 2014 has seen a bit of an upturn in the residential sector, Snyman notes that one has to take into account that it came from a very low level, so it might seem better than what it actually is. Also, a big part is made up of big housing projects that will be implemented over longer periods.
According to the FNB/BER Building Confidence Index issued by First National Bank in September 2014, the improved residential building activity has boosted confidence in the building sector though and saw it climb slightly to 45 points in the third quarter of the year. Confidence of main contractors rose to 53 index points, its highest level since 1Q2008.
“This is encouraging as the residential building sector has been under significant pressure since the end of the housing boom in the mid-2000s,” says John Loos, property economist at FNB.
The P5041.1 report further shows that five provinces reported year-on-year increases in the value of building plans passed during January to August 2014 (see Table B). The increase in the value of building plans passed was dominated by the Western Cape (contributing 5,3 percentage points or R3 061,4 million) and KwaZulu-Natal (contributing 2,9 percentage points or R1 657,8 million).
The value of buildings reported as completed during January to August 2014 decreased by 8,4% (-R2 919,1 million) compared with the same period in 2013. Additions and alterations (-27% or -R2 322,2 million) were the largest negative contributor to the total decrease.
“Even though the outlook isn’t too positive, I don’t foresee a drastic decrease, but rather more stabilising, as what was happening for the past seven or so years, where the line is basically just moving sideways. There isn’t really anything that will end this slump, but also nothing that will push the market off the wall completely,” Snyman states.
Looking at companies’ financial statements, she says it seems like most are starting to get used to the new growth levels and contractors don’t chase those high profit margins of the past. If they can make between 2% and 4%, they are happy.
“At the end of the day, as long as we can maintain the current levels and manage expectations appropriately, we can be optimistic. It is a long-term situation, so we are looking at three, four, five years of low growth and I think if we achieve 1% or 2%, we can be very thankful,” Snyman concludes.
Full thanks and acknowledgement are given to Industry Insight, Statistics South Africa and the FNB/BER Building Confidence Index for the information used in the article.