Rate hikes may stunt building sector growth

A faster than expected rise in interest rates together with consumer pressure could curtail growth in the building sector, which continues to have an uncertain outlook. This is according to John Loos, property economist at First National Bank, who was commenting on the latest FNB/BER Building Confidence Index.

In a statement on Wednesday, FNB said that after losing 9 points in the third quarter of 2015, the index regained some ground by rising 4 points to 48 in the fourth quarter. It added that although confidence remained below the crucial benchmark of 50 out of 100 points, the underlying activity indicators - particularly that of residential contractors and hardware merchants - suggest that growth in the sector regained some momentum.

According to the index, close to half of respondents are satisfied with prevailing business conditions. The confidence of main contractors fell to 39 index points, from 45 in the third quarter. The drop was largely due to a sharp deterioration in the confidence of non-residential contractors.

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“According to the survey, non-residential building activity fell sharply during the quarter, leading to an uptick in competition. Although there are areas where non-residential building activity remains robust, in general underlying conditions have worsened noticeably over the last 12 months,” said Loos. 

However, residential main contractor confidence remained largely unchanged. This is despite an improvement in the underlying indicators, with a marked uptick in building activity in particular.

“The residential building sector has outperformed the non-residential market in terms of building activity over the past few quarters; however, this quarter the gap is much more noticeable,” said Loos. “Although still subdued, the pace of growth in residential building activity definitely accelerated in the fourth quarter.”

The same trend was evident among building sub-contractors, where residential sub-contractors are performing better than their non-residential counterparts in terms of activity and profitability. In all, building sub-contractor confidence shed 5 points to register an index level of 51.

The confidence of hardware retailers gained 24 points to register an index level of 61. “Hardware retailer sales likely benefited from the rise in residential building activity during the quarter. However, continued informal building activity as well as the building renovations market may also have lifted sales,” said Loos. 

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The rise in hardware sales and the improvement in residential building is yet to meaningfully filter through to building material manufacturers. Although production and manufacturing sales increased, it was still at relatively weak levels. As a result confidence, although 5 points higher, remained low at 31 index points.

Among architects and quantity surveyors confidence edged higher by 1 and 5 index points respectively, but the underlying activity indicators remained largely unchanged at relatively low levels. “The muted growth in architect and quantity surveyor activity, along with an environment of higher interest rates, may cause the current improvement in residential building to stall and further depress the non-residential market,” said Loos.

- Source: Fin24