Financial services provider FNB and the Stellenbosch University’s Bureau of Economic Research Building Confidence Index fell back below 50 in the third quarter, after falling by nine points to 44.
The fall was led by a sharp drop in the confidence of manufacturers and hardware retailers on the back of weaker sales and profitability. In contrast, building activity of main contractors, particularly in the nonresidential sector, improved.
Building confidence was 16 points lower compared with the end of last year. The current level indicated that close to 60% of respondents were dissatisfied with prevailing business conditions.
Main contractor confidence lost three index points to 45 during the quarter. The lower confidence was not supported by the underlying indices, particularly building activity and profitability.
“The fundamentals do not support the uptick in nonresidential building activity. Office vacancy rates remain high and the demand for retail space is dwindling as consumer spending comes under increased pressure. This makes it difficult to see a sustained improvement in nonresidential building activity,” FNB property economist John Loos said.
The biggest fall in confidence was recorded among hardware retailers. After rising to 91 in the first quarter, the confidence of hardware retailers dropped to 66 in the second quarter and 37 in the third quarter.
“Hardware retailers have far outperformed other retailers since the start of the year. However, it seems the weak consumer environment is also starting to affect hardware retailers. It is unlikely that hardware retail sales will continue to grow at the same pace in the second half of the year as it did in the first half,” he added.
Similarly, weak domestic sales and production weighed on the confidence of building materials manufacturers, which fell to 26 in the third quarter.
After gaining some momentum in the second quarter, the confidence of architects declined to 54 in the third quarter.
In contrast, quantity surveyor confidence edged up to 47. “In the case of quantity surveyors, confidence was likely boosted by the expectation that work will pick up in the fourth quarter,” Loos highlighted.
Both architect and quantity surveyor activity was lower during the quarter.
Subcontractor confidence was higher at 56 points in the third quarter, from 51 in the second quarter.
This marked the fourth consecutive quarter that confidence in this subindex had been above 50. Confidence was higher despite lower activity, although profitability did not deteriorate.
“The expectation that activity and profitability will be higher in the fourth quarter likely boosted confidence,” Loos pointed out.
The outlook for the sector remains rather downbeat, with slowing activity among architects and quantity surveyors suggesting that the building pipeline was becoming smaller.
In addition, the improvement in nonresidential building activity this quarter, which was largely responsible for the improvement in main contractor activity, did not seem sustainable given the underlying fundamentals.