According to the results of the First National Bank’s (FNB) latest building confidence index, released on July 17, confidence in the construction industry has risen to within one point of its peak in the fourth quarter of 2006.
Cees Bruggemans, chief economist at FNB, said the hike in the index was proof of the strong performance of South Africa’s economy and boded well for the medium term future.
“We have barely started,” he said in a statement accompanying the report. “It looks like we are in an extended growth cycle which is likely to last another seven to eight years.”
Part of this confidence stems from the government’s plan to boost both infrastructure and housing. The same day the FNB report came out, the state released information on its capital spending programme for the financial year ending March 31, with expenditure up 25.4% to $10.2bn, with spending on construction coming in at 23.1%, according to Statistics SA.
The index nevertheless showed that there were some variables, with sentiment mixed in some sub-sectors of the building industry. The confidence rating for those in the commercial building sector remained strong at 94 points, reflecting the strength of demand for office, industrial and retail space. This confidence was sustained by a 17.5% increase in non-residential building investment for the first five months of the year, according to a Bureau of Economic Research study released in late June.
However, while confidence in the commercial construction sector advanced, there was a retreat of optimism in the residential building sector, with the index falling from 86 points in the first quarter to 82 in the second three months of the year.
Analysts suggest this weakening could be a result of interest rate increases by the Reserve Bank and a tightening of credit flow due to new legislation restricting banks from lending to clients who will be hard pressed to meet repayments.
Though the confidence levels of producers and suppliers of building materials remain unchanged, these firms have been riding the crest of South Africa’s construction boom. An example of this is the sharp rise in the demand for cement, which rose 13% over the first half of this year.
John Sheath, the marketing manager for South Africa’s Cement and Concrete Institute, said the country’s cement producers all foresaw at least 10 years of growth for the industry but that there could be pockets of shortages in some regions due to high demand.
The steel sector is another whose products are in high demand. According to Hennie de Clercq, executive director of the Southern African Institute of Steel Construction, the sector is enjoying one of the best periods of its history and is looking for South Africa’s construction boom to continue into the next decade at least.
“But there would be no growth at all in the use of structural steel if the economy was not growing and, in this regard, the confidence factor is paramount,” he said to local press on July 13. “Already the positive results of this renewed confidence are palpable as investors are increasingly ready to take a long-term view with respect to development and construction in this region,” he added.
While much of the focus on South Africa’s construction industry has been on non-residential properties, with big ticket items including stadiums and other facilities for the 2010 World Cup and the Gautrain high speed rail project, John Loos, a property strategist with FNB, predicts movement in housing construction will pick up in the new year.
“Once interest rates have sorted themselves out a bit and we hit the peak of the cycle, I think residential could still turn for the better but at the moment it’s a commercial property story,” Loos said to local press on July 17.
While confidence remains high in the construction industry, it still has to deal with a number of issues. Along with shortages of some materials such as cement and wood, the industry is suffering from a lack of skilled labour, one of the chief causes cited by respondents to the FNB survey as hindering building operations.
