Johannesburg - Building growth in the South African residential sector has "hit a brick wall", according to an economist, as a survey released Tuesday showed that confidence in the industry decreased sharply.
"Building activity [in the residential sector] was well below expectations," said said First National Bank (FNB) economist Cees Bruggemans, commenting on FNB's quarterly building confidence index.
He said that as an example, a net 39% of respondents expected a weakening in the second quarter of 2008, but the latest survey results revealed that a net 69% experienced a decline in workloads.
"The business confidence of residential building contractors decreased sharply from an index value of 60 in the first quarter of 2008 to 32 in the second quarter of the year," he said.
Rising interest rates and building costs, tightening of credit standards by banks and the lagged impact of the introduction of the National Credit Act in 2007 were some of the possible factors inhibiting demand.
A sharp rise in tendering competition was also noticed as a result of the weakening demand.
"It was not surprising that a net 68% of respondents to the second quarter survey reported that the profitability of their businesses deteriorated notably," he said.
In view of the sharp deterioration in the tempo of residential building activity, job shedding took place, with a net 44% of the respondents reporting that the number of people employed was below that of a year ago.
Business conditions were likely to remain unfavourable for the third quarter of 2008, according to Bruggemans, but he said that the respondents to the survey expected no "major further deterioration".
FNB Property Strategist John Loos observed that the business confidence of non-residential building contractors moderated further from an index value of 78 in the first quarter of 2008 to 70 in the second quarter.
In the fourth quarter of 2007 the index stood at 92.
Respondents to the survey reported that business conditions turned out well below expectations.
"For example, whereas a net 9% of respondents expected a deterioration in the growth in building activity at the time of the previous survey, the second quarter of 2008 results indicated that a net 37% of non-residential contractor participants experienced a decline in activity," said Loos.
As with the residential building sector, Loos said that the moderation in the demand for building work translated into a relatively sharp increase in the intensity of tendering competition.
This compressed margins and resulted in deterioration in the profitability of the respondents to the survey.
"The growth in employment remained fairly stable during the survey quarter, but respondents expect job shedding to occur during the third quarter of 2008," he said.
Regarding the prospects for the third quarter, Loos said that the survey participants do not expect major changes in business conditions.
Looking at the building industry as a whole, confidence was on a downward slope.
The survey showed that confidence of all the major role players and suppliers involved in the building industry dropped from a level of 66 in the first quarter of 2008 to 50 in the second quarter of 2008.
- Fin24.com