Signs of life for one of South Africa’s most important sectors
Sentiment is improving in the building sector, even if businesses in the sector are still dissatisfied with the prevailing economic environment.
The FNB/BER Building Confidence Index, which measures sentiment in the building sector, grew by nine index points to an eight-year high of 43 in 4Q2023.
However, this means that 57% of respondents are still dissatisfied with prevailing business conditions.
From Q3 to Q4, the following changes in confidence were recorded:
- Architects (+24),
- Hardware retailers (+18),
- Building sub-contractors (+11),
- Building material manufacturers (+3),
- Quantity surveyors (-1).
- Main contractors (0)
The core building confidence index (excluding building material manufacturers and hardware retailers) also grew to 48 in 4Q2023, meaning that sentiment, using this measure, is broadly balanced.
“Also encouraging from these results is that activity this quarter was generally upbeat. This means that the better sentiment is based on stronger underlying fundamentals, namely actual work currently available,” said Siphamandla Mkhwanazi, Senior Economist at FNB.
Main contractor confidence was unchanged at 41 in 4Q2023 and has remained at a similar level for the whole year. That said, the index measuring the growth in activity decreased sharply in the quarter.
“It is unsurprising that the activity index recorded a marked decline this quarter. The building sector has registered robust growth since the middle of last year. Indeed, growth in building demand accelerated, in real terms, by an average of 6.4% year-on-year (y-o-y) in the first half of this year,” said Mkhwanazi.
“Therefore, the decline in the activity index this quarter merely means that the growth momentum is normalising after a brief growth spurt.”
Although the overall results are reasonably upbeat, the divergence between the residential and non-residential sub-segments is becoming more obvious.
The activity for residential building work still held up well, but order books worsened.
Non-residential builders are far more optimistic – confidence climbed further above the neutral 50 mark mainly due to much better overall profitability.
“Given the worsening state of the residential property sector, it is expected that residential builders are also starting to feel the strain in terms of the outlook for new work,” said Mkhwanazi.
“In contrast, the non-residential property sector is weak but improving. Non-residential builders are faring relatively better, albeit off a very low base.”
The business mood for architects increased to 54 in 4Q2023, its best level since 3Q2015, underpinned by the higher activity across the architect value chain.
The index measuring quantity surveyor activity also moved sharply higher to its best level since 3Q2007. Nevertheless, sentiment edged one point lower to 38.
“It is clear that activity at the start of the building pipeline was on a solid footing in 4Q2023. However, there is concern among respondents regarding the sustainability of this uptick and broader conditions within the sector, which in part explains the downbeat confidence of quantity surveyors relative to activity,” Mkhwanazi added.
Despite moving higher, building material manufacturer confidence is still low 29. This is due to the below-average growth in production, even if it is up from 3Q2023
Hardware retailer sales did, however, improve significantly to their best level this year.
“Within the retail sector, hardware firms have been the worst performers in terms of sales over the past few quarters as consumers sacrificed DIY and other renovation projects to maintain spending elsewhere. Some of this renovation demand seems to have returned this quarter,” said Mkhwanazi.
Building sub-contractor confidence also gained 11 points to register a level of 58 in 4Q2023.
Outlook
The results are encouraging, FNB said, given better activity when looking at the entire building sector, with the non-residential sector seeing profitability continue to trend higher.
“It is prudent, however, to highlight some concerns regarding the outlook for the building sector. Firstly, the growth momentum seems to be normalising relative to the last few quarters,” said Mkhwanazi.
“Secondly, the fundamentals in the residential property sector, especially weak house price growth, suggests that this segment may come under strain in the near future. Indeed, the deterioration in order books also points to that.”
“Thirdly, even though activity at the start of the building pipeline was noticeably higher, not all of those projects will proceed to the construction phase, especially in an environment of relatively high interest rates.
“Lastly, the overall economy is expected to post subdued growth at best next year, which will no doubt have a bearing on the potential momentum in the building sector.”
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