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Non-residential building sector performs ‘dismally’ in Q1

While confidence in the sector declined only marginally – FNB/BER index.
Demand for retail space is likely to bounce back more quickly than demand for office space. Image: Supplied

The non-residential building sector performed dismally in the first quarter of 2021, with the oversupply of office and retail space likely to continue for at least this calendar year.

However, confidence in the building sector declined only marginally in the first quarter of 2021 despite the poor performance by the non-residential sector, according to the latest FNB/Bureau for Economic Research (BER) building confidence index released on Monday.

The index declined by two index points on a 100-point scale to 27 in the first quarter of 2021 after rising to 29 in the fourth quarter of 2020.

The current level of the index means that more than 70% of respondents are dissatisfied with prevailing business conditions.

Confidence among main contractors dropped marginally by one index point to 20 in the first quarter, while confidence among sub-contractors declined by 11 index points to 19, to erase almost all the improvement registered in the fourth quarter of 2020.

FNB/BER said this drop in confidence was underpinned by a deterioration in building activity growth.

Read: Stats SA ‘grossly underestimating’ construction sector activity (Dec 2020)

Non-residential contractors are particularly pessimistic in this first quarter of 2021, which is a reflection of the state of their activity growth and profitability, FNB/BER said.

Continued worsening ‘a concern’

FNB senior economist Siphamandla Mkhwanazi said the continued worsening in non-residential building activity is a concern.

“Non-residential building demand will only improve once the economy reopens fully and we make greater strides toward population immunity against Covid-19,” he said.

“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,” he said.

Mkhwanazi added that it is clear from the results that the divergent performance of the residential and non-residential sectors seen in the fourth quarter of 2020 has persisted.

He said residential builder confidence was noticeably higher than that of non-residential contractors, despite declining to 27 from 33 in the fourth quarter of 2020. Non-residential contractors are still struggling.

“There are many factors working against non-residential 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,” he said.

FNB/BER Composite Building Confidence Index

Source: FNB, Bureau for Economic Research

David Metelerkamp, senior economist at construction market intelligence firm Industry Insight, was surprised the residential index remained so high.

Read: It’s now firmly a renter’s market (Mar 8)

Metelerkamp said the residential property market performed a bit better than expected towards the end of last year but there isn’t much evidence that new houses are being built and that activity has been more in the second-hand housing market.

Hard to see what will stimulate demand for offices

However, Metelerkamp said the performance of the non-residential segment was not surprising, adding that it is difficult to see what will stimulate demand in this segment at this stage, particularly as there has been a relatively permanent structural shift within the office market with many people now working from home.

Read: R1.88bn government office accommodation project goes to WBHO (Mar 5)

“A significantly higher proportion of people will be working from home than before Covid-19, which will blunt demand for office space.

“It’s going to take a huge chunk of office space away on a permanent basis, shifting that whole sub segment into a lower overall growth path,” he said.

Metelerkamp foresees demand for retail space remaining muted but this shift in demand being more temporary compared with the office market.

“Retail demand will revert to normal when the pandemic is eventually over. I don’t think that is a permanent change in consumer preferences,” he said.

Metelerkamp anticipates the oversupply of office and retail space to last for at least 18 months.

He said this does not bode well for the listed property sector, but stressed that this sector was already overvalued before Covid-19 and experienced a big correction prior to the pandemic.

Knock-on effect

FNB/BER said the weak demand in the non-residential sector also weighed on upstream activity.

Mkhwanazi said architects in particular have struggled in the first quarter of 2021 with low activity.

“This is, however, not only due to the state of building demand, but also due to the slow pace of municipal approvals,” he said.

There was however an improvement in quantity surveyor activity, which lifted confidence to 17 index points in the first quarter, while the confidence of building material manufacturers rose five index points to 36.

The confidence of hardware retailers declined to its long-term average of 49 in the first quarter from 64 in the fourth quarter of 2020.

Mkhwanazi said it is unlikely the increased demand experienced by building material manufacturers comes from main building contractors given their results this quarter, and that it is more plausible that it is due to still strong, albeit slowing, retail hardware sales, and potentially also activity from the civil construction sector.

He added that growth in hardware sales may come under pressure in the future because the most positive effect of working from home and increased disposable income on hardware sales “is likely behind us”.

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The dismal performance I get, the confidence must be that investors do not know where to put their money.

Investors remain traders so cheap is always the preferred option and excluding WBHO and those now only having an SA base and operating externally push their results few notches in the positive. So the same investors double/triple/quadruple their money so is worth the risks. Perfect example being AVENG you either sell or by for 2c, 3c and occasionally 4c for now 3 years running. Stefstocks is another similar up/down mover but latest spike as a different feel to it, decent volumes going through daily so maybe finally some good news coming in next market update and some traction gained towards shareholders finally being rewarded in the coming years.

If you change just few lead terms and entities on this article like contractors for opposition political parties and reverse the points on the index to 73% being similar vote for the current ruling party and not much else editing would be required on the main message. Good to see QS on the up, keep it boys.

End of comments.

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