FNB building confidence index drops sharply 1Q2008

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 4 and March 3 2008.

The index declined relatively sharply from a level of 86 in 4Q2007 to 66 in 1Q2008.

FNB Chief Economist Cees Bruggemans said that the deterioration in the index was the result of the business confidence of all sub–categories comprising the index declining during the first quarter of 2008. The most notable declines observed were as follows (4Q2007 vs.1Q2008): retailers of building materials (from 100 to 48), manufacturers (from 92 to 54), wholesalers (from 79 to 52) and building contractors (from 83 to 68).

The business confidence of residential building contractors dropped from 76 in 4Q2007 to 60 in 1Q2008.

According to Bruggemans the first quarter growth in building activity in this sector of the building industry disappointed. For example, whereas a net 21% of respondents expected a weakening in the first quarter of 2008, the latest survey results revealed that in fact a net 39% experienced a decline in workloads.

The tightening in demand conditions and increasing tendering competition currently being experienced in the residential sector continues to exert downward pressure on profit margins. It was therefore not surprising that a net 46% of respondents to the survey indicated that the growth in profitability of companies was below that of the same quarter a year ago.

With the demand for residential buildings waning, the reduction in workloads forced respondents to further reduce the number of people employed. Nevertheless, the availability of skilled labour remains a noteworthy constraint hampering the building operations of respondents.

Turning to business prospects for the second quarter of 2008, Bruggemans noted that the broad consensus gleaned from the survey results was that business conditions are likely to remain unfavourable in the residential sector of the building industry.

John Loos FNB Property Strategist observed that rather unexpectedly the business confidence of non-residential building contractors declined relatively sharply from an index value of 92 in 4Q2007 to 78 in 1Q2008.

Respondents to the survey reported that business conditions turned out well below expectations. Whereas a net 2% of respondents expected an improvement in the growth in building activity at the time of the previous survey, first quarter 2008 results revealed that a net 20% of non-residential contractor participants experienced a decline in activity.

In view of the weaker demand conditions experienced, competition in tendering edged up sharply. As a direct result, margins came under pressure and the growth in profitability of non-residential contractor respondents deteriorated notably. This trend is expected to continue in the coming quarter.

The slowdown in activity levels led to a moderation in employment levels in the sector. Nevertheless, the availability of adequately skilled and productive artisans and foreman remained a serious constraint hampering the activities of respondents to the survey.

Regarding the prospects for 2Q2008, Loos indicated that the survey participants do not expect a reversal in current business conditions and they anticipate that the profitability of companies could deteriorate further.