Building faces collapse

Business conditions are tough in the building industry at present, FNB Chief Economist Cees Bruggemans said on Wednesday.

He was commenting following the release of the FNB Building Confidence Index compiled quarterly from the building, manufacturing, retail and wholesale opinion surveys undertaken by the Bureau for Economic Research (BER) at Stellenbosch University.

Though there had been a 450 basis point decline in interest rates, it appeared that some of this benefit had been neutralised by the tightening criteria of financial institutions, he added.

"Thus the overall demand for building work remains seriously constrained," Bruggemans said.

According to the FNB Building Confidence Index, building confidence showed underlying weakness in the second quarter of 2009.

The index increased marginally from a value of 28 in the first quarter of this year to 29 in the second quarter of 2009.

All sub-components of the index showed a decline during the second quarter with the exception of wholesalers of building materials (+23), manufacturers (+5) and quantity surveyors (+4).

The declines recorded in sub-components (compared to the first quarter of 2009) were architects (-3), building contractors (-10), sub-contractors (-3) and retailers/merchants (-11).

If the business confidence of wholesalers, which historically exhibited a volatile tendency was excluded, the overall index fell by 3 index points in the second quarter of 2009 compared to the first quarter.

According to Bruggemans, the business confidence of residential contractors dropped by a further 9 index points from a level of 26 in the first quarter of 2009 to 17 in the second quarter of the year.

"The decline in confidence may be explained by the fact that business conditions turned out well below expectations."

Bruggemans said that respondents to the survey indicated that work volumes in particular disappointed.

In this regard, a net 84 percent of the respondents to the survey indicated that building activity executed during the second quarter of 2009 was below that of the same quarter a year ago, he added.

The sluggish state of the effective demand for residential buildings led to a tight tendering environment.

"No less than 93 percent of the respondents indicated that the insufficient demand for building work constrained their business operations," Bruggemans noted.

The tough residential market conditions severely eroded the profit margins of survey respondents which was borne out by the fact that a net 87 percent of participants to the survey indicated that their profit growth was below that of the same quarter a year ago.

Bruggemans emphasised that the slowdown in demand for residential buildings left participants to the survey with little choice but to reduce overheads aggressively.

A net 72 percent of respondents consequently indicated that they reduced the number of people employed in their businesses during the second quarter of 2009.

Turning to the short-term prospects for the residential sector, he said participants to the second quarter 2009 survey expressed the view that they did not expect business conditions to deteriorate further in the third quarter of this year and that building activity in the sector could well stabilise ahead.

John Loos, FNB Property Strategist, said business confidence of non-residential building contractors declined comparatively sharply from a level of 51 in the first quarter of 2009 to 36 in the second quarter of the year.

"A possible explanation for the weakening in business confidence was that business conditions in general disappointed during the survey quarter," he said.

Building activity slowed down further during the second quarter of this year.

A net 71 percent 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 percent 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 said.

He 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 percent of the respondents indicated the growth in profitability during the second quarter of 2009 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," Loos said.

Respondents consequently indicated that they retrenched labour during the second quarter, he added.

Loos noted that participants to the latest survey indicated they expected business conditions in the non-residential sector to deteriorate further during the third quarter of 2009.

Sapa

Article by: www.iafrica.com