FNB/BER Civil Confidence Index has recovered to 44 points in the second quarter of 2015 (2Q2015).

A further slight drop in the FNB/BER Building Confidence Index has been reported by First National Bank, whereas the Civil Confidence Index has recovered somewhat to 44 points in the second quarter of 2015 (2Q2015).

According to John Loos, FNB’s Property Economist, activity at the start of the pipeline is gaining momentum. The volume of work of both architects and quantity surveyors was markedly higher in 2Q2015. “This bodes well for the rest of the building sector towards the end of the year and 2016,” says John. “However, it is not to say that the rise in building planning activity will automatically translate into building construction as there are a number of potential stumbling blocks in between.”

After dropping to 55 points in the first quarter of 2015 (1Q2015), the FNB/BER Building Confidence Index shed a further 2 points to register a level of 53 in 2Q2015. Even though confidence was lower, the current level indicates that more than half of the respondents are satisfied with prevailing business conditions.

The biggest fall in confidence was registered by retailers of building materials. Confidence was at 91 in 1Q2015, but in 2Q2015 it fell to 66 index points. Confidence was lower despite robust growth in sales and profitability. “Retailers of building materials have been the best-performing of the sub-segments of the building sector for more than a year, and, despite the fall in confidence, should continue to perform well this quarter,” says John.

The confidence of main contractors has shed only one point to register a level of 48 in 2Q2015. The volume of building activity for both residential and non-residential contractors was weaker during the quarter, weighing on confidence. “The results, particularly of residential main contractors, were disappointing. After ending 2014 on a relatively strong note, it is now clear that the recovery in the housing market has stalled somewhat,” remarks John. “As a result of the weaker building activity, profitability was noticeably down.”

Similarly, the business confidence of building subcontractors was down one index point to 51. Confidence among building material manufacturers rose by 13 index points to 47. The rise in confidence was largely due to an improvement in domestic sales and production. Export sales, in contrast, were much weaker. According to John, the manufacturing sector in general is facing tough trading conditions and hardware manufacturers are no different. So although confidence is up this quarter, it may not be sustained.

The FNB/BER Civil Confidence Index recovered somewhat to 44 points in 2Q2015, after having dropped to 39 points in 1Q2015. Despite the higher confidence, the current level of the index still indicates that more than half of the respondents are dissatisfied with prevailing business conditions.

According to the South African Reserve Bank, annual growth in the real value of construction work moderated to 1,0% in 1Q2015, from 3,3% in 4Q2014. “The survey results imply that the growth in construction likely remained flat in 2Q2015. It seems firms are relieved that construction activity didn’t moderate further this quarter, which likely lifted confidence,” says Jason Muscat, Senior Industry Analyst at FNB. Jason added that the outlook, however, is quite bleak with respondents remaining concerned about the subdued demand for new construction work.

Pipeline graph b

“Due to the limited availability of construction work, tendering competition intensified notably. According to respondents, tendering price competition is at its worst level since the end of 2011,” says Jason. Profitability was largely unchanged. “This is likely due to increased cost cutting, particularly labour,” notes Jason.

In conclusion, the state of the civil construction industry deteriorated in 2Q2015. Although confidence was up, the growth in construction activity was likely flat at best, following slower growth in preceding quarters. In addition, civil contractors face keener competition and weak demand for new construction.

Acknowledgement and thanks are given to South African Builder, July 2015, for the information contained in this article.