FNB Building Confidence shows underlying weakness in 2Q 2009

By Cees Bruggemans, Chief Economist FNB - 17 June 2009

The FNB Building Confidence Index measures the business confidence of all the major role players and suppliers involved in the building industry including architects, quantity surveyors, contractors, sub-contractors, wholesale and retail merchants, and manufacturers of building materials.

The index is compiled quarterly from the building, manufacturing, retail and wholesale opinion surveys undertaken by the Bureau for Economic Research (BER) at Stellenbosch University. The BER business survey in the building industry was conducted between May 4 and June 2, 2009.

The index increased marginally from a value of 28 in 1Q2009 to 29 in 2Q2009. All sub-components of the index showed a decline during 2Q 2009 with the exception of wholesalers of building materials (+23), manufacturers (+5) and quantity surveyors (+4). The declines recorded were as follows (compared to 1Q2009) namely, architects (-3), building contractors (-10), sub-contractors (-3), retailers/merchants (-11). If the business confidence of wholesalers, which historically exhibits a rather volatile tendency, is excluded, the overall index fell by 3 index points in 2Q2009 compared to the level in 1Q2009 (wholesalers also excluded).

An analysis of the BER survey data and supporting anecdotal evidence suggest that business conditions are comparatively tough in the building industry at present. Though there has been a 450 basis point decline in interest rates, it appears that some of this benefit has been neutralized by the tightening criteria of financial institutions. Thus the overall demand for building work remains seriously constrained.

The business confidence of residential contractors dropped by a further 9 index points from a level of 26 in 1Q2009 to 17 in 2Q2009. The decline in confidence may be explained by the fact that business conditions turned out well below expectations.

Respondents to the survey indicated that work volumes in particular disappointed. In this regard, a net 84% of the respondents to the survey indicated that building activity executed during 2Q2009 were below that of the same quarter a year ago. The sluggish state of the effective demand for residential buildings led to a tight tendering environment. No less than 93% of the respondents indicated that the insufficient demand for building work constrained their business operations. The tough residential market conditions severely eroded the profit margins of survey respondents. This is borne out by the fact that a net 87% of participants to the survey indicated that their profit growth was below that of the same quarter a year ago.

The slowdown in demand for residential buildings left participants to the survey with little choice but to reduce overheads aggressively. A net 72% of respondents consequently indicated that they reduced the number of people employed in their businesses during 2Q2009.

Turning to the short-term prospects for the residential sector, he noted that participants to the 2Q2009 survey expressed the view that that they do not expect business conditions to deteriorate further in 3Q2009 and that building activity in the sector could well stabilize ahead.

John Loos FNB Property Strategist announced that the business confidence of non-residential building contractors declined comparatively sharply from a level of 51 in 1Q2009 to 36 in 2Q2009. A possible explanation for the weakening in business confidence was that business conditions in general disappointed during the survey quarter.

Building activity slowed down further during 2Q2009. A net 71% of survey respondents indicated that the growth in work loads was below prevailing levels of the same quarter a year ago. Given the fact that 93% of the respondents indicated that the insufficient demand for building work was hampering their business operations, it was therefore not surprising that reports were received about a very competitive tendering environment when trying to procure new building work.

Loos stressed that the worsening business conditions in this sector of the building industry forced contractors to reduce their profit margins with the result that a net 53% of the respondents indicated that the growth in profitability during 2Q2009 was below that of the same quarter a year ago. In view of the slowdown in building activity and the need to survive the current trying market conditions, participants to the survey had no other choice but to reduce overheads. Respondents consequently indicated that they retrenched labour during 2Q2009.

Loos concluded saying that participants to the latest survey indicated that they expect business conditions in the non-residential sector to deteriorate further during 3Q2009.

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Residential Contractors - Building Confidence Index

Non-Residential Contractors - Building Confidence Index