Building confidence rises in 2Q2021, but sector still faces many headwinds

After slipping to 27 in 1Q2021, the FNB/BER Building Confidence Index, increased notably to 39 in 2Q2021. Even though this is the highest level of the index since 1Q2018, at the current level, more than 60% of respondents are still dissatisfied with current business conditions. “There is a key distinction between when the index was last at this level and now. In 1Q2018, confidence among the various sub-sectors which comprise this index was at more or less that level. Now, confidence is being lifted by building material manufacturers and hardware retailers. In contrast, the confidence of what can be considered the mainstream building sector is still very depressed,” said Siphamandla Mkhwanazi, Senior Economist at FNB.

The confidence of main contractors gained two points to 22 in 2Q2021. In terms of activity, the improvement was more pronounced, as expected. “The index measuring activity was noticeably better this quarter and understandably so. The question asks respondents to compare activity relative to 2Q2020, a period when most building work was halted. As such, the improved activity is largely due to extremely low base effects and not suggestive of a vastly improved level of activity in the building sector,” cautioned Mkhwanazi.

Also highlighting the continued downbeat conditions in the sector was overall profitability, which remained weak, even relative to 2Q2020. According to Mkhwanazi, “internationally we’ve seen building input prices rise dramatically over the past few months as global demand far outstrips supply. At the same time, domestic building demand remains too weak for contractors to fully pass these prices on to clients. As such, some contractors have had to resort to ‘suicide pricing’ to secure contracts”.

On a sub-sector level, the trends remained broadly similar to those reported in previous quarters. The residential sector is faring better than the non-residential sector in terms of confidence and activity.

Sub-contractor confidence gained 10 points to register a level of 29 in 2Q2021. Activity was somewhat better than for main contractors, likely pointing to a stronger uptick in smaller rather than bigger projects.

With respect to the building pipeline, activity remains low, but stable. As such, the confidence of architects and quantity surveyors was up by only two and nine points to 23 and 26 respectively. “The results from the building pipeline provide no indication that better demand for building work is in the offing. This further emphasises the likely temporary nature of the rise in main contractor activity seen this quarter,” remarked Mkhwanazi.

The resilience in demand for retail hardware continues to surprise. According to survey respondents, sales volumes remain well supported and, as a result, hardware retailer confidence regained its losses of 1Q2021 to register a level of 65. This is the highest level of the index since 4Q2007. “Retail sales have consistently outperformed in recent months, supporting hardware retailer confidence, but also the composite confidence index. However, the caveat is that this represents a small subset of the building sector, namely the DIY and informal markets,” remarked Mkhwanazi.

The biggest change in confidence (31 points) was registered by manufacturers of building material. At 67, sentiment is also the highest of the sub-sectors surveyed. A strong rebound in domestic demand, reflected in both sales and prices, underpins the positive sentiment. Expectations for 3Q2021 are also upbeat.

In conclusion: Even though the FNB/BER Building Confidence Index rose to 39 in 2Q2021, from 27 in 1Q2021, underlying conditions in the sector are not universally better. Firstly, the rise in confidence came from hardware retailers and building material manufacturers while the confidence of main contractors in particular is still quite depressed. Secondly, the rise in building activity this quarter should be viewed in light of the low base in 2Q2020.

“The higher composite confidence index, and main contractor activity, hides how difficult conditions in the sector still are. If one were to recalculate the index without building material manufacturers and hardware retailers, confidence is at a lowly 25. As things stand, we are set to see the building sector once again far underperform the rest of the economy this year,” said Mkhwanazi.