Johannesburg - Even though confidence levels in the building sector show a slight increase, First National Bank (FNB) chief economist Cees Bruggemans said they are likely to wane in the future.
His comments came after FNB and the Bureau for Economic Research (BER) at Stellenbosch University released the Building Confidence Index for the third quarter of 2008.
It showed an increase from an index value of 50 in the second quarter of 2008 to 52.
The index measures the business confidence of all major role-players and suppliers in the building industry such as architects, quantity surveyors, contractors, sub-contractors, wholesale and retail merchants, and manufacturers of building materials.
"The marginal rise in the index is explained by a more than doubling in the confidence level of retailers of building materials and to a lesser extent by a six-index point increase in the confidence of quantity surveyors and a two-index point increase in the confidence of residential contractors," said Bruggemans.
However, the 52 level compares with an index value of 85 in the corresponding quarter a year ago, according to Bruggemans.
He said that it appears as if the rise in confidence of retailers is related to the successful discounting and selling of stocks, which increased involuntarily in the previous quarter.
"This was probably a once-off event and confidence is likely to wane going forward," he said.
The index showed that in the case of quantity surveyors, the 2008 third-quarter business conditions and activity levels turned out "much better than was expected" at the time of the previous survey, and consequently influenced their confidence levels.
Residential confidence perks up
According to Bruggemans, business confidence of residential contractors lifted slightly from an index value of 32 in the second quarter of 2008 to 34 in the third quarter of 2008.
"However, all other sub-components of the FNB index showed a decline in confidence during the third quarter," he said.
According to Bruggemans building activity in this segment of the industry remains most unfavourable, and no less than 87% of survey respondents indicated that insufficient demand for building work was a serious constraint which affected their businesses.
"Growth in building activity in the third quarter - although rather weak - was in line with expectations," he said.
The weak demand for residential buildings resulted in an increase in tendering competition for new projects. To be competitive, respondents to the survey had to reduce their profit margins, with the result that overall profitability took a knock, said Bruggemans.
Given the sluggishness of building demand in the residential market, respondents indicated that they further reduced the number of people in their employment, more so than expected at the time of the previous survey.
Looking ahead, Bruggemans said that the broad consensus for 2008 was that business conditions are unlikely to deteriorate further.
Competition hots up
FNB property strategist John Loos said that the business confidence of non-residential building contractors declined from an index value of 70 in the second quarter of 2008 to 66 in the third quarter of 2008.
"Business conditions turned out below expectations," said Loos.
A net 27% of respondents anticipated a moderation in building activity growth at the time of the previous survey, but an analysis of third-quarter results revealed that a net 43% eventually experienced weaker business conditions compared to the same quarter a year ago.
"The growth in building activity suffered accordingly." Loos said that in line with weaker demand, tendering competition intensified.
With non-residential building activity showing signs of weakness, survey respondents reported that they had reduced the number of people employed, well above the level expected at the time of the second quarter survey.
"Respondents do not expect a major change in business conditions during the fourth quarter of 2008," he said.
- Fin24.com