Building sector confidence plummets in first quarter, no hope for future

Confidence in the building sector has plummeted in the first quarter of 2024 from 43 to 27 and it seems that the sector also does not have much confidence for the future either. Four of the six sectors surveyed recorded a decline in sentiment of more than 20 points, although main contractor confidence ticked up marginally amid a stabilisation in activity.

After increasing to its highest level in eight years in the fourth quarter of 2023, the FNB/BER Building Confidence Index, which measures sentiment in the building sector, fell by 16 points to the joint lowest level since mid-2020.

The index can vary between zero, indicating an extreme lack of confidence and 100, indicating extreme confidence. It reveals the percentage of respondents who are satisfied with prevailing business conditions in six sectors: architects, quantity surveyors, main contractors, sub-contractors, such as plumbers, electricians, carpenters and shop fitters, manufacturers of building materials and retailers of building materials and hardware.

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Marked fall in confidence for most sub-sectors

It is alarming that most of the sub-sectors saw a marked fall in confidence. Compared to the fourth quarter of 2023, the confidence of building material manufacturers nosedived by 29 index points, building subcontractors as well as architects by 25 index points and hardware retailers by 23 index points.

The confidence of main contractors increased by 1 index point and quantity surveyors recorded an uptick in confidence of 4 index points.

Architects registered the biggest turnaround by far in the first quarter. While 54% of architects were satisfied with prevailing business conditions in the fourth quarter, this time only 29% said they are, in line with a sharp deterioration in current as well as near-term outlook for activity.

“The change in sentiment this quarter brings the level back to what it was in the third quarter of 2023. It is easy then to claim that the last quarter’s reading was an outlier. However, the trend in terms of activity was similarly volatile, suggesting that there may indeed have been a sudden and unexpected, shift in architectural work in the first quarter,” Siphamandla Mkhwanazi, senior economist at FNB, says.

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Only quantity surveyors and main contractors were a bit optimistic

On the other hand, confidence among quantity surveyors increased to 42 index points from 38 in the fourth quarter. Main contractor confidence increased marginally to 42 index points, from 41 in the fourth quarter.

Mkhwanazi says the largely stable sentiment reflects the trend regarding overall activity.

“However, looking closer an improvement in residential building activity was partially offset by a somewhat weaker non-residential building performance.”

Other indicators, such as overall profitability and tendering competition, were broadly similar to the fourth quarter, which also explains why confidence did not move much. The indices measuring the constraints to business operations worsened, specifically for insufficient demand (order books) and the shortage of skilled labour, which increased to an almost 6-year high.

“The survey among main contractors suggests that activity maintained its weak pace in the first quarter of 2024. However, the deterioration in order books and the dire situation at the start of the building value chain suggest that activity may deteriorate over the short term,” Mkhwanazi says.

Building material manufacturers, with confidence at 0 index points and hardware retailers at 15 index points also contributed to the lower overall sentiment. According to Mkhwanazi some of the listed hardware retailers released poor company results recently and the confidence reading and survey activity data align with that.

“It is safe to say that the pressure on consumers’ income had an adverse effect on the demand for hardware.”

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No growth in sub-contractor activity

Growth in activity among building sub-contractors deteriorated, likely signalling a slowdown in demand, particularly for electrical contractors that benefitted from residential and non-residential demand for energy installations. However, this does not fully explain the significant fall in sentiment to 33 index points from 58 in the fourth quarter, Mkhwanazi says.

“While the fall in sentiment was broad-based and where declines were registered, they were noticeable, it is encouraging that main contractor confidence was higher, supported by somewhat better activity.”

However, looking ahead, the building sector will likely continue to underperform given that activity at the start of the building pipeline (architect and quantity surveyor activity) fared dismally, he says.

“The increase in new building demand as a business constraint also supports the expectation that growth could be weaker going forward.”

There was a surge of building activity since the third quarter of 2022 on the back of increased private investment in energy and the lagged effect of the relatively low interest rate environment in 2021 and 2022, Mkhwanazi says.

“Growth has since cooled. Indeed, according to Statistics South Africa, the real value of investment in buildings contracted by an annual rate of close to 6% in the fourth quarter of 2023. These results suggest that a similarly weak performance is on the cards for the first quarter of 2024.”