Research

Building confidence rises in 2021 but the sector still faces challenges

Siphamandla Mkhwanazi, FNB Senior Economist.
Siphamandla Mkhwanazi, FNB Senior Economist.

During 2021’ second quarter, the FNB/BER Building Confidence Index was at its highest level (39) since 2018’s first quarter but more than 60% of those interviewed are still dissatisfied with current business conditions.

There is a key distinction between when the index was last at this level and now” notes Siphamandla Mkhwanazi, Property economist at FNB. “In 2018’s first quarter, confidence among the various sub-sectors were at that level. Now, confidence is being lifted by building material manufacturers and hardware retailers. In contrast, the confidence of what can be considered the mainstream building sector is still very depressed”.

The confidence of main contractors gained two points to 22 in 2021’s second quarter. In terms of activity, the improvement was more pronounced, as expected. “The index measuring activity was noticeably better this quarter and understandably so. The question asks respondents to compare activity relative to 2020’s second quarter, a period when most building work was halted. As such, the improved activity is largely due to extremely low base effects and not suggestive of a vastly improved level of activity in the building sector,” cautioned Mkhwanazi.

Also highlighting the continued downbeat conditions in the sector was overall profitability, which remained weak, even relative to 2020’s second quarter. According to Mkhwanazi, “internationally we have seen building input prices rise dramatically over the past few months as global demand far outstrips supply. At the same time, domestic building demand remains too weak for contractors to fully pass these prices on to clients. As such, some contractors have had to resort to ‘suicide pricing’ to secure contracts”.

On a sub-sector level, the trends remained broadly like those reported in previous quarters. The residential sector is faring better than the non-residential sector in terms of confidence and activity.

Sub-contractor confidence gained 10 points to register a level of 29 in 2021’s second quarter. Activity was somewhat better than for main contractors, likely pointing to a stronger uptick in smaller rather than bigger projects. With respect to the building pipeline, activity remains low, but stable. The confidence of architects and quantity surveyors was up by only two and nine points to 23 and 26, respectively.

The results from the building pipeline provide no indication that better demand for building work is in the offing. This further emphasises the likely temporary nature of the rise in main contractor activity seen this quarter,” remarked Mkhwanazi.

The resilience in demand for retail hardware continues to surprise. According to those interviewed, sales volumes remain well supported and, as a result, hardware retailer confidence regained its losses during 2021’s first quarter to register a level of 65. This is the highest level of the index since late 2007.

Retail sales have consistently outperformed in recent months, supporting hardware retailer confidence, but also the composite confidence index. However, the caveat is that this represents a small subset of the building sector, namely the DIY and informal markets”.

At 67, sentiment is also the highest of the sub-sectors surveyed. A strong rebound in domestic demand, reflected in both sales and prices, underpins the positive sentiment and expectations for 2021’s third quarter are upbeat.

Even though the FNB/BER Building Confidence Index rose to 39 in 2021’s second quarter, from 27 in 2021’s first quarter, underlying conditions in the sector are not universally better.

The rise in confidence came from hardware retailers and building material manufacturers while the confidence of main contractors is still quite depressed. The rise in building activity this quarter should be viewed considering the low base in 2020’s second quarter.

The higher composite confidence index, and main contractor activity, hides how difficult conditions in the sector still are. If one were to recalculate the index without building material manufacturers and hardware retailers, confidence is at a lowly 25. As things stand, we are set to see the building sector once again far underperform the rest of the economy this year,” concludes Mkhwanazi.