FNB Building Confidence drops further in 1st Quarter

JOHANNESBURG (March19) - The FNB Building Confidence Index measures the business confidence of all the major role players and suppliers involved in the building industry such as 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 February 2 and March 2, 2009.

The index dropped from an index value of 40 in 4Q2008 to 28 in 1Q2009. Compared to the same quarter a year ago the index i.e. in 1Q2008, stood at a level of 66.

All sub components of the index showed a notable decline during 1Q2009. In particular, the following sectoral declines were recorded (compared to 4Q2008) namely, architects (-1), quantity surveyors (-21), building contractors (-9), sub-contractors (-11), manufacturers (-15), retailers/merchants (-5) and wholesalers of building materials (-18).

FNB Chief Economist Cees Bruggemans says that it is clear from the survey data that the further comparatively sharp fall in the FNB Building Confidence Index is a good reflection of deteriorating business conditions over a wide front currently being experienced in the building industry. The index is also approaching the historical low level of 12 index points that was recorded in 1Q1999. The latter followed on the Asian Crisis which led to a sharp rise in domestic interest rates at the time and a subsequent contraction in building activity.

According to Bruggemans, after having remained stable at an index value of 34 for the past two quarters, the business confidence of residential contractors slipped to an index value of 26 in 1Q2009. This weakening could, amongst others, be related to the fact that business conditions turned out well below expectations.

Reports of continued weakness in residential building activity were received from survey respondents. For instance, whereas a net 48% of participants expected a moderation in building activity in 1Q2009, surveys results indicate that in fact a net 80% experienced a decline in activity growth compared to the corresponding quarter a year ago.

Bruggemans stressed that the constrained demand for building work was accompanied by intense levels of tendering competition, which led to severe margin pressure and thus the growth in company profitability. It was therefore not surprising that a net 82% of the respondents that participated in the 1Q2009 survey reported that the overall profitability of their companies was below that of the corresponding quarter a year ago. The slowdown in demand for residential buildings left participants to the survey with little choice but to reduce overheads and in this process a net 66% of respondents indicated that they reduced the number of people employed in their organisations.

Turning to prospects for 2Q2009, Bruggemans noted the broad consensus amongst participants to the 1Q2009 survey was that business conditions were likely to remain tough, but that a marginal improvement in residential building activity was expected.

John Loos FNB Property Strategist announced that the business confidence of non-residential building contractors dropped from an index value of 59 in 4Q2008 to 51 in 1Q2009.

He noted that actual building activity realised greatly disappointed during 1Q2009. For example, whereas a net 35% expected a slowdown in growth in activity compared to the same quarter a year ago, a net 72% finally experienced weaker growth in workloads during the survey quarter. In view of the foregoing development, it came as no surprise that competition in tendering intensified further during 1Q2009.

Loos observed that with the demand for non-residential buildings faltering and competition in tendering intensifying, margin pressure notably impacted adversely on the growth in profitability of the companies that participated in the 1Q2009 survey. Weaker profit margins, in conjunction with a moderation in input costs of builders are likely to lead to a slowdown in building cost increases going forward. Stemming from the moderation in workloads, respondents reduced the number of people employed during 1Q2009.

He concluded that as far as prospects for 2Q2009 were concerned, no major further deterioration in business conditions was expected.

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