Construction confidence drops as demand fades away and tender competition intensifies

Weaker construction activity in the first quarter of this year saw tendering competition intensify‚ weighing on confidence‚ and the industry expects continued moderation this year and 2017 on the back of lower public sector spend and persistently weak growth in private sector capital expenditure‚ the FNB/BER Civil Confidence Index released on Wednesday showed.

Demand in the construction sector is one of the crucial indicators of economic growth as companies and government tend to invest more on building and roads when the economy grows and less when it falls.

Confidence in the construction sector is at a four-year low as the benchmark industry index drops 14 points reflecting a declining demand. The index showed that more than 70% of respondents are dissatisfied with prevailing business conditions. After improving marginally to 42 points in fourth quarter of last year it registered 28 points in the first quarter of this year.

This is the lowest value since the end of 2011.

“The lower confidence is explained by a noticeable weakening in construction activity‚” said Jason Muscat‚ Senior industry analyst at FNB.

The percentage of respondents that rated insufficient demand for new construction work as a business constraint jumped to 85‚ a four-year high.

“Although the national budget speech was tabled towards the end of the survey period‚ the high rating of the lack of new demand as a constraint could already be reflecting the downbeat near-term outlook for public sector (including government and state owned enterprises) capital expenditure. This is especially relevant given that the public sector remains the construction industry’s single biggest client‚” said Muscat.

According to the South African Reserve Bank (SARB)‚ growth in the real value of construction works rose 4% year-on-year in the fourth quarter of last year from 3.7% in the third quarter.

“The current survey results suggest that‚ following the mild uptick in fourth quarter of 2015‚ growth in construction works likely eased in the first quarter of 2016‚” added Muscat.

Construction activity was largely supported by capital outlays by provinces and municipalities while capital expenditure by private enterprises‚ particularly in the mining sector‚ remained weak.

“As a consequence of the lower growth in construction activity‚ tendering competition intensified for those projects that are available‚” Muscat noted. The percentage of respondents that indicated tendering competition as keener rose noticeably in first quarter of this year‚ to a five-year high.

Despite the lower activity and higher competition‚ overall profitability remained relatively stable.

Survey respondents expect an improvement in construction activity next quarter‚ however‚ other data suggests that the remainder of this year may see construction work slow further‚ particularly given soft demand.

– TMG Digital/BDlive