The FNB/BER building confidence index can vary between zero (indicating an extreme lack of confidence) and 100 (indicating extreme confidence). It reveals the percentage of respondents that are satisfied with prevailing business conditions in six sectors, namely architects, quantity surveyors, main contractors, sub-contractors (plumbers, electricians, carpenters and shop fitters), manufacturers of building materials (cement, bricks and glass) and retailers of building material and hardware.
The FNB/BER Building Confidence Index covers the whole pipeline, from planning (represented by the architects and quantity surveyors), renovations, additions, owner builders, the informal sector (represented by building material and hardware retailers) and production (manufacturers of building materials) to the actual erection of buildings by main contractors and sub-contractors.
The FNB/BER Building Confidence Index fell for the second consecutive quarter by 5 points to 34. The current level of the index indicates that more than 65% of respondents are dissatisfied with prevailing business conditions. In addition, all of the six sub-sectors surveyed registered lower confidence. The largest fall in confidence – for the second consecutive quarter – was registered by retail merchants with a drop of nine index points to 30. The fall in confidence was due to a sharp deterioration in sales and consequently, profitability. “The marked slowdown in hardware sales seems to point to the end of the DIY boom which has boosted the building (and retail) sector since the latter part of 2014”, said John Loos, Property Economist at FNB.
The index measuring the confidence of main contractors shed five points to register a level of 38 in the second quarter of 2016. This is the lowest level of the index since the first quarter of 2013. However, building activity was marginally better compared to first quarter this year. Moreover, there was a distinct difference in the performance of the residential and non-residential sectors. While the confidence of both residential and non-residential contractors edged lower in, residential building activity rebounded nicely. In contrast, the slowdown in non-residential activity reported in the first quarter intensified. According to Loos, “The difference in performance of residential and non-residential building activity confirms our view that the non-residential market is under significant pressure while there is still some life in the residential market.”
Furthermore, there was a stark difference in the performance on a provincial basis. The Western Cape fared significantly better than the rest of the country both in terms of confidence and building activity during the quarter. “This is likely due to increasing inward migration to the Western Cape by residents from other provinces”, noted Loos.
Keener tendering competition along with deterioration in overall profitability during the quarter likely explains the fall in confidence.
Confidence of manufacturers of building material edged lower to 18 index points. However, the underlying data suggests a significant improvement in domestic sales and production in the quarter.
As a result of lower activity, the confidence of architects and quantity surveyors fell to 42 and 35 index points respectively. For quantity surveyors, this marks the lowest confidence since the fourth quarter of 2012. “These figures suggest that the marginal improvement in building activity registered during the quarter may not be sustained over the short to medium term”, commented Loos.
Sub-contractor confidence was also lower at 40 index points, from 43 in the first quarter of 2016.
In conclusion, although confidence was lower during the quarter, higher activity by residential contractors and increased sales and production by manufacturers of building materials suggests that activity in the sector was in slightly better shape in the second quarter than at the start of the year.
The outlook is marred by a moderation in activity at the start of the building pipeline and persistently poor growth in non-residential building activity. In addition, the weak retail environment suggests that a key support to the sector in 2015 is no longer there. “As mentioned in previous statements, developments in the broader economy such as higher interest rates, rising household indebtedness and soft domestic demand will also weigh on the building sector”, added Loos.