Building confidence lower in Q4, but main contractor activity encouraging

Building confidence was lower in the fourth quarter, but results, especially for main contractor activity, were encouraging.

However, while the latest results confirm that the decline in building activity has stabilised, it is prudent to be cautious about prospects for 2023.

According to the FNB/BER Building Confidence Index, which shed one point to register a level of 33 for the fourth quarter, the results for the sub-sectors were mixed, with three sectors recording sharply higher confidence while the other three saw a marked decrease in sentiment. Confidence moved largely sideways, with encouraging results for especially main contractor activity.

The index has been broadly stable, at a historically low level, for much of the year, with the sub-sectors that comprise the composite index all registering significant changes in confidence compared to the third quarter.

Building material manufacturers (+20), main contractors (+17) and quantity surveyors (+9) added to overall sentiment, while confidence among hardware retailers (-17), architects (-16) and building sub-contractors (-15) was a drag on the overall business mood.

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Business confidence of main contractors

The business confidence of main contractors rebounded to 46 in the fourth quarter after falling to 29 in the third quarter. An improvement in building activity, predominantly among residential contractors, underpinned the improved sentiment.

“The residential building sector seems to be quite resilient despite a number of headwinds, but the momentum in activity is disproportionately clustered in the Western Cape and it is unlikely that this alone with be enough to support the sector going forward,” says Siphamandla Mkhwanazi, senior economist at FNB.

“After declining for the most part of the last few years, it seems as if building activity has finally stabilised. This does not necessarily mean that an expansion in building activity is on the cards for the fourth quarter, but rather that the decline should be less pronounced than in previous quarters.”

However, non-residential contractors reported a slowdown in building activity this quarter.

“The weaker outcomes for non-residential building activity are in step with the broader commercial property fundamentals which include still-high office vacancy rates and more recently an easing in building activity in the industrial and warehouse segment.”

He says other factors lifting main contractor confidence include a slight improvement in profitability, less keen tendering price competition and a lower rating of insufficient new demand as a business constraint, pointing to reasonably upbeat prospects for building activity in 2023.

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Business confidence of architects much lower

In addition, the business confidence of architects declined to 34 from 50 in the third quarter on the back of softer activity. After improving consistently for most of the year, it is disappointing that architects reported lower activity growth this quarter. This counters the better activity reported by main contractors, Mkhwanazi says.

The fact that architects had less work available was unexpected, given the consistent improvement in the building pipeline reported by respondents for much of the year.

“The somewhat mixed building survey results this quarter highlight how uncertain prospects remain in the sector. It is prudent to remain cautious about the outlook for 2023,” said Mkhwanazi.

On the other hand, activity among quantity surveyors was up, lifting their confidence to 31. However, confidence among hardware retailers fell to 39, with sales volumes remaining on a downward trajectory, contributing to the downbeat business mood.

“The weaker retail hardware sales are largely a reflection of the pressure on consumer spending. With the Covid-19 surge in DIY as well as additions and alterations, demand is firmly over, while the weaker financial position of households, as well as a switch to spending on services, is weighing heavily on this sector.”

Mkhwanazi says lower sales and production as reported by building material manufacturers are somewhat linked to the softer retail demand, but nonetheless their confidence moved higher to 20 in the fourth quarter. The business confidence of building sub-contractors shed 15 points to record a level of 30.

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More about the index

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.

In contrast to the RMB/BER BCI, which includes only main contractors, 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.