Wednesday, January 19

Notable upturn in confidence among the main contractors in the construction sector

Major contractor confidence in the construction industry improved significantly in the fourth quarter of 2021, driven by an increase in construction activity and profitability.

The latest report from the FNB-Bureau for Economic Research (BER) construction confidence index released on Tuesday said that much of the improvement in activity by major contractors and especially in profitability was recorded by non-residential builders, with their confidence rising to 33 index points on a 100-point scale in the fourth quarter from seven in the prior quarter.

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This is the largest quarterly improvement since the 1980s, FNB-BER said.

Confidence among residential sector contractors was unchanged.

Read: Small and Medium Businesses Build Trust at Highest Level in Three Years

Impact of riots

FNB Senior Economist Siphamandla Mkhwanazi said the bank has seen construction activity gradually improve since the first Covid-19-related lockdown, but overall profitability has so far struggled to keep pace.

“The best conditions in terms of profitability, rather than activity, raised confidence.

“There are indications from the survey that rebuilding efforts after social unrest in July continued this quarter, even accelerating somewhat.

“Given that the order books deteriorated once again, this is likely to be temporary,” he said.

Overall profitability among non-residential builders showed marked improvement after remaining weak relative to activity since last year.

Mkhwanazi said builders’ input costs have risen much more than consumer and producer inflation in recent times due to tight supplies of materials, and contractors have had trouble adjusting bid prices accordingly. , although there seems to be a breather this quarter.


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Low overall confidence

The FNB-BER general construction confidence index, which comprises six subsectors, fell one index point to 34 in the fourth quarter.

FNB-BER said that three of the subsectors posted higher confidence in the fourth quarter, but this was offset by a 34 index point deterioration in the business mood of building materials manufacturers.

He said underlying activity was vastly better, led by the non-residential construction and construction pipeline sector, which comprises architects and surveyors.

Importantly, there are signs that competition in tenders is declining, boosting profitability.

Master Builders South Africa (MBSA) CEO Roy Mnisi said members’ comments have been mixed and influenced by their location.

“There is a slight increase [in sentiment] of our members in metropolitan areas due to a large number of projects in which they are bidding both from the public and private sectors.

“But we are still seeing a serious decrease in our members in the small provinces in terms of economic spending because they are struggling a lot in those areas,” he said.

Mkhwanazi said that while the recovery in other sectors of the economy is on track after the 2020 recession, the construction sector has, as expected, lagged.

“Also, the rebound in non-residential construction activity this quarter is likely to be temporary, possibly into the next quarter.

“That said, the results of the construction project are cause to be cautiously optimistic about the prospects for the sector next year, although it is still too early to say for sure.

“Also, this trajectory could change if the macroeconomic environment underperforms,” ​​he said.

Underlying activity

Architects’ business confidence, supported by an improvement in activity, rose to 30 in the fourth quarter after falling to 18 in the previous quarter.

This was at its best since the second quarter of 2015.

Mkhwanazi said that with such a significant pickup in activity, a bigger boost in confidence would have been expected.

“However, a number of concerns, including delays in awarding tenders and a shortage of high-value projects, weighed on confidence.

“However, the results for the architects’ activity are very encouraging and suggest that there is some construction work in the pipeline, albeit in the form of many smaller projects,” he said.

Business confidence from quantitative surveyors declined to 18 index points despite higher levels of activity.

A deterioration in production and domestic and export demand, coupled with higher production costs, saw the business confidence of building materials manufacturers more than halve to 21 in the fourth quarter from 55 in the year. previous quarter.

However, hardware retailers’ sentiment remained very high at 77 index points as sales continued to improve, FNB-BER said.

“Contrary to expectations, hardware retail sales have been bullish throughout the year.

“Given the moderate growth in activity among prime contractors and subcontractors, the DIY and additions and modifications market, along with the informal construction sector, are the main drivers,” said Mkhwanazi.

Private construction activity

Construction subcontractor business confidence rose to 30 in the fourth quarter from 21 in the previous quarter.

Construction market intelligence firm Industry Insight said last month (November) that in September the private construction industry was operating at around 75% of its previous levels, which is very discouraging but very much in line with the developments in the broader economy which is also struggling to recover to pre-Covid-19 levels.

Statistics SA reported that nearly 700 billion2 of private buildings were completed in September, a 7.4% improvement over the previous month.

Industry Insight said that activity levels in this segment had increased by nearly 24% compared to September 2020, but noted that the sector was coming from a very low base in a 2020 devastated by the pandemic, and that an average of 940 000 million2 It was completed every month in 2019 before the pandemic and the subsequent economic collapse.

He said the data approved by construction plans, which is a leading indicator of construction in progress, was more encouraging compared to pre-Covid-19 levels.

Square meters of building plans approved in September increased 4.7% compared to the previous month, but have not reached pre-Covid-19 approval levels, with total square meters approved in 98% of the 2019 levels.

“The big positive from the data is that approvals for residential buildings continue to operate at higher levels than in 2019 … at 107% of average approvals, which is excellent and shows that there continues to be some pent-up demand within the residential sector. market, ”he said.

Industry Insight said the industrial space segment gave the rest of the non-residential industry some hope with 140,000m2 of space approved in September.

But it said “very gloomy” 17 000m2 of office space and 10 000m2 of commercial space was approved in the month, adding that approvals for the construction plan for commercial and office spaces remain “at impressive levels.”

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