After having risen to 29 in the fourth quarter of 2020, the First National Bank (FNB)/Bureau for Economic Research (BER) Building Confidence Index shed two points to 27 in the first quarter of this year, showing that more than 70% of respondents are dissatisfied with prevailing business conditions.

Main contractor confidence edged one index point lower to 20 during the first quarter of the year; whereas subcontractor confidence fell by 11 index points to 19, erasing almost all the gains of the fourth quarter of 2020.

This drop in confidence was underpinned by a deterioration in building activity growth.

FNB property economist Siphamandla Mkhwanazi says that, by looking closer at the results, it becomes clear that the divergent performance of the residential and nonresidential sector seen last quarter persisted.

“Although it declined to 27, from 33 in the fourth quarter of 2020, so itself still-struggling residential builder confidence in the first quarter of 2021 was noticeably higher than nonresidential contractors.”

According to the index, this disparate performance is also observed in the level of activity which continued to contract more significantly for nonresidential contractors. This resulted in a rise in tendering price competition to its highest on record.

He says there are many factors working against nonresidential building demand, including an oversupply of office and retail space, which was exacerbated by the Covid-19 pandemic. “Discouragingly, this oversupply is very likely to persist through 2021 at least.”

In addition and further adding to the woes, main contractors are increasingly concerned about the shortage of building material supplies, notes FNB and the BER.

Weak demand in the nonresidential sector also weighed on upstream activity, with Mkhwanazi stating that architects, in particular, have struggled this quarter with low activity. “This is, however, not only owing to the state of building demand, but also [as a result of] the slow pace of municipal approvals.”

In contrast, quantity surveyors saw a rise in activity, thereby lifting confidence to 17 in the first quarter of this year.

The confidence of building material manufacturers gained five points to 36 in the first quarter of the year.

Further supporting confidence was a continued rise in production and domestic sales. Mkhwanazi says it is unlikely that the increased demand experienced by building material manufacturers comes from main building contractors given their results this quarter, and is more plausibly the result of strong retail hardware sales, albeit slowing, and potentially also from the civil construction sector.

In addition, the rise in production could also be owing to firms trying to make up for lost production in 2020, he suggests.

Hardware sales growth slipped somewhat in the first quarter, but remained reasonably robust. As such, the business confidence of hardware retailers declined to its long-term average of 49 in the first quarter of the year, from 64 in the fourth quarter of 2020.

However, he cautions that most of the positive effect of working from home and increased disposable income (for those that managed to keep their jobs through 2020 and did not take a pay cut) on hardware sales is likely gone.

“Going forward, growth may come under pressure here too”.

Meanwhile, Mkhwanazi says nonresidential building demand will only improve once the economy reopens fully and South Africa makes greater strides toward population immunity against Covid-19.

“However, even then, the oversupply of existing stock, especially in the office segment, will take a very long time to correct. In the meantime, other parts of the building supply chain will continue to be negatively affected.”