Trouble for construction in South Africa
Although sentiment may be improving in the building sector, most of those in the sector are still dissatisfied with the prevailing business conditions.
The FNB/BER Building Confidence Index grew by six points from 28 points in Q2 2023 to 34 in Q3 2023.
The index goes between zero (indicating an extreme lack of confidence) and 100 (indicating extreme confidence), and the current index level means that over 65% of respondents are dissatisfied with prevailing business conditions.
The following changes in confidence were recorded compared to Q2 2023:
- building material manufacturers (+13),
- quantity surveyors (+13),
- architects (+7),
- building sub-contractors (+7),
- main contractors (-2) and
- hardware retailers (-2).
In addition, the core building confidence index – excluding building material manufacturers and hardware retailers – rose to 39 in Q3 2023, which, along with Q1 2023, is the highest reading since Q2 2018.
FNB said that the most notable jump in the quarter was seen in the improved sentiment in the non-residential builders – this includes main and sub-contractors – jumping from 42 in Q2 2023 to 52 in Q3 2023
This improved business mood was underpinned by continued activity growth and a marked improvement in profitability.
“The non-residential property market remains weak, characterised by, among other things, still high national office vacancy rates and constraints on the manufacturing and retail sectors, which drive demand for industrial and shopping space,” said Siphamandla Mkhwanazi, Senior Economist at FNB.
“Despite this, new building activity is robust, and order books are looking more promising. Several factors, including possible ongoing retrofitting of office space post-COVID and to deal with the energy crisis, semigration of firms to the Western Cape, and low technical base effects are contributing to this resurgence in non-residential building activity.”
FNB said that residential building activity also improved. However, business confidence dropped to its lowest level this year, while the rating of the lack of new demand as a business constraint (a proxy for order books) stayed high.
“With the exception of some regions, mainly in the Western Cape, the residential property sector is struggling due to weak demand amid restrictive monetary policy. As a result, while there is work currently, the appetite for new residential buildings is starting to diminish somewhat,” Mkhwanazi said.
Moreover, the activity at the start of the building pipeline was somewhat weaker in Q3 2023.
Nevertheless, the confidence of architects and quantity surveyors also grew to 30 and 39 index points, respectively. Sentiment amongst quantity surveyors has been lifted by expectations of improved activity in the next quarter.
Although it increased for a second consecutive quarter, building material manufacturer confidence remained incredibly low at 26, as domestic sales and orders remained weak, That said, an improvement in production boosted confidence.
In addition, the confidence of hardware retailers declined to 20 in Q3 2023, as sentiment continued to decline after reaching 56 in Q3 2022. This is due to a continued decline in sales, even if sales orders were somewhat improved.
“The results from the hardware retailers are consistent with what listed companies are sharing regarding the state of the sector. Consumers are under significant strain due to a number of factors. As a result, there is household substitution towards essentials, with hardware retailers disproportionately affected,” said Mkhwanazi.
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