Research

Building confidence rebounds in 2020’s third quarter

FNB economist, Siphamandla Mkhwanazi.
FNB economist, Siphamandla Mkhwanazi.

The FNB/BER Building Confidence Index jumped by 20 points to 24 in the third quarter of 2020. This follows its fall to an all-time low of 4 in the second quarter.

However, the current level of the index indicates that more than 75% of respondents are dissatisfied with the prevailing business conditions.

Only one of the sub-sectors surveyed registered higher confidence. The sentiment gains were led by hardware retailers (+52) and building material manufacturers (+40).

Siphamandla Mkhwanazi, Property Economist at FNB believes that given how very depressed confidence levels were in the second quarter, it is not surprising that confidence ticked up this quarter with the measures to control the spread of Covid-19 less constraining.

Hardware retailer confidence rose to ’55’ in the 2020’s third quarter from a mere ‘3’ in the second quarter. Boosting confidence was a better-than-expected improvement in sales volumes. In addition, respondents expect sales growth to continue in this upward trajectory into the fourth quarter of 2020. Contributing to the lifting confidence was a sharp rise in order volumes.

Respondents were pleasantly surprised by the extent to which the DIY and the small-scale additions and alterations market improved as more people work from home. We already saw real hardware retail sales rise 5.5% y-o-y in June. This was further supported by the lower interest rate environment and consumers saving on work-related expenses such as transport. For now, these windfalls mitigated the downward pressure on wages”.

The confidence of building material manufacturers increased from ‘0’ in the second quarter of 2020 to ’40’ in the third quarter. Supported by rising retail demand, domestic sales of building materials grew. As with retailers, sales exceeded expectations.


Main Contractors: Growth in building activity (Net balance)
Source: BER, Stellenbosch University

Main builder contractor confidence rose by ’12’ points to ’14’, returning the index to its 2020 first quarter level. Similarly, the index measuring activity growth broadly returned to its level in the first quarter.

Building demand contracted sharply on an annual basis in the first quarter of 2020. So, while activity is better in the third quarter of 2020 than the dreadful second quarter, it is still noticeably down from where it was a year ago,” remarked Mkhwanazi.

According to Statistics South Africa (Stats SA), the real value of building investment fell by 38.7% year-on-year in the second quarter of 2020 after a 10.6% decline in the first quarter.

While activity and confidence were back to their 2020 first quarter levels, profitability remained under more pressure than at the start of the year.

The cost of personal protective equipment (PPE) and Covid-19 testing on site seems to be weighing on contractors’ bottom line,” said Mkhwanazi.

The building pipeline painted a mixed picture. Architects reported the highest activity growth this year, although it is not expected to continue into the next quarter. This saw confidence edge higher to ’14’ from ’12’ in the second quarter of 2020. However, the confidence of quantity surveyors remained at ‘4’ (since the first quarter of 2020) with activity still stuck at the same very weak level since the start of this year.

Sub-contractor confidence was higher at ‘16’ in the third quarter of 2020 from ‘0’ in the second quarter of 2020.

In conclusion of the FNB/BER Building Confidence Index rising to ‘24’ in the third quarter of 2020 from ‘4’ in the second quarter, the higher confidence was largely due to a rise in optimism among hardware retailers and building material manufacturers while confidence of main contractors and sub-contractors rose to their (still subdued) 2020 first quarter level.

The opening up of hardware stores after the lockdown and the rise in work-from-home arrangements was quite a boon for the retail hardware and building materials manufacturing sector this quarter. However, it should not detract from the continued weak activity growth experienced by main building contractors. Moreover, indications from the property market – including higher office vacancy rates and rising defaults on home rental – and the building pipeline are that the building sector is likely to fare worse than the rest of the economy for some time,” concludes Mkhwanazi.


FNB/BER Composite Building Confidence Index
Source: BER, Stellenbosch University