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Construction industry to bounce back in 2021

After being the economy’s worst-performing sector last year.
One negative is the state of the fiscus. Image: Supplied

South Africa’s construction industry is expected to bounce back in 2021 after being the sector with the poorest performance in 2020.

Construction GDP slumped by 20.3% in last year, the industry’s fourth consecutive year of decline.

David Metelerkamp, senior economist at construction market intelligence firm Industry Insight, is however anticipating “a reasonable bounce back” by the civil industry – though he believes the opportunities for an improvement in the building industry are limited.

Statistics SA data shows that the civil industry contracted by just more than 18% in 2020 while investment in the residential building industry contracted by 20.9% and the non-residential building industry by 25.3%.

Not an ‘essential service’

Industry Insight attributes the construction industry GDP being down by “a crippling 20.3%” in 2020 to the fact that, unlike other countries, the construction industry was not declared an essential service in South Africa during the hard lockdown period in April and May 2020 and the government and the private sector disinvested massively from both the building or civil infrastructure segments of the industry.

Metelerkamp says the civil industry performed slightly worse than forecast in 2020 while the performance of the residential and non-residential sectors, despite being extremely poor, was slightly better than forecast.

He says the civil and building industries are both coming off a low base and expects “an about 10% bounce back” by the civil industry in 2021 but opportunities for an improvement in the building industry to be limited and for it to achieve “low single-digit growth in 2021”.

“The data is definitely better for civil construction because there are a lot of big projects coming out for tender and there are tenders that are being awarded.

“That is the positive but the negative is the state of the fiscus, which is a big worry but probably more in the medium term. Then there is also the implementation paralysis that economists talk about in terms of implementing all of these Sips [Strategic Infrastructure Projects],” he says.

Despite slightly improved prospects for the civil industry, Metelerkmap stresses that investment in the civil industry will get “nowhere near to previous levels”.

He says about R170 billion was invested in the civil industry in 2020 and Industry Insight is only forecasting this to improve to R150 billion in 2025.

Metelerkamp says building prospects are very limited and “a big bounce back” in private sector demand for housing and shopping centres unlikely.

“We have definitely moved onto a lower growth path going forward for the next five years at least, despite building coming off a very low base.”

Solutions

Business Leadership South Africa (BLSA) – in a report released in March on solutions to boost infrastructure investment to support government’s efforts to drive economic recovery – highlighted that while business, government and their social partners have agreed that greater investment is important, the reality is that over the past five years investment volumes have been falling further from the National Development Plan’s target of 30% of GDP per year.

It said infrastructure investment has fallen sharply over the past six years from 20.3% of GDP in 2015 to 17.9% in 2019.

This decline has been particularly clear in public sector spending with both state-owned enterprises (SOEs) and main budget spending on infrastructure falling from 7.3% of GDP to 5.4% over the same period, it said.

The BLSA report identified several factors that have contributed to this trend, including skills shortages, the weak balance sheets of SOEs, excess capacity in the private sector, complex procurement regulation and poor investment-driving policies.

Industry Insight said an analysis of client investment unsurprisingly revealed that the private sector heavily disinvested in the construction sector in 2020, but SOEs also massively disinvested in the industry – which was more unexpected.

“This is disappointing given that they are generally the biggest spenders in the construction sector.

“What could be seen as more encouraging is that ‘general government’ actually increased their investment in the civil industry, for example, by 2.5% in real terms while SOEs disinvested in civil infrastructure by 27.2%.

“Nonetheless, this is a worrying trend as a lack of investment continues to damage the productive capacity of the economy, potentially shifting the economy onto an even lower expected growth path,” it said.

Interventions

The BLSA report recommended several interventions to improve the volumes of infrastructure investment.

Among other things, it called for structural reforms in energy, mining and spectrum availability to rapidly boost private sector investment, which can be achieved at no cost to the public purse; greater use of public-private partnerships (PPPs) to bring together the strengths of the sectors to deliver maximum value for investment to the public; reforms to the PPP framework, with complexity aligned to project size and risks; and for PPPs to be used more by SOEs to overcome balance sheet constraints

BLSA CEO Busi Mavuso said everyone knows that infrastructure investment is key to unlocking South Africa’s economic potential but “the reality is that we have been falling short of our own goals for greater investment”.

Mavuso said the BLSA report emphasises the need for key policy reforms to unlock infrastructure investment.

“There is a lot that business can do, from funding and building infrastructure to operating it, and we want to work with the public sector to achieve far greater investment levels.”

Metelerkamp believes more efficient spending by SOEs and government could, if achieved, be a major driver of an improved performance by the construction industry in 2021.

“Even with cuts to infrastructure spending, it will go a long way towards boosting overall output for the sector because there is so much waste, so much mismanagement and so much corruption with this sort of investment,” he says.

“The efficiency of government expenditure on infrastructure is absolutely crucial because the construction industry is a vital part of the government’s economic recovery and stimulus programme.”

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Being in the industry I thought here’s some good news at last.
Then I thought I’d better read the article again in case I missed something.
Then I decided no. Not worth it.

It has been a decade since the last building boom. It is time for an upturn, even if rather weak. Some smart money has already moved into the likes of Murray and Roberts, WBHO, Reunert etc

I agree with Duncan; many a false dawn. M&R are clinging to some value, WBHO (and Raubex) are iffy and I have lost a bundle on Esor, Stefstocks, PPC and M&R and seen G5, Aveng, Erbacon and Sanyati pretty much disappear. But strangely enough, all their executives seem to live very, very well. Must be coincidence.

Paul Kearney, you do know how it works? The few ways companies get money:

1. By having a profitable, cash flow positive business and expanding this business
2. By lending money
3. By an IPO (initial public offering)
4. By selling assets
5. By Rights Issue (issuing more shares)

At no stage does the company make money with higher share prices except where they want to issue more shares where a higher share price makes it attractive for the investor to take up his rights and if the extra money will relate into extra business or bulk up that balance sheet. How does share prices goes up and down? – By mere offer and demand. Demand will normally go up comparative to offer if:

1. Company have good balance sheet (will attract investors)
2. Company have good order book and good future prospects
3. Company pay good dividends

Let’s take Aveng for example:

1. Current balance sheet restructuring will give it access to:
1.1 Facilities with lenders to participate in new tenders
1.2 Lower the interest
1.3 Lower the cost
1.4 Make it more profitable
2. Current order book is growing by the month especially in Australia and surrounds, with higher commodity prices the same for Moolmans in South Africa
3. Starting to get cashflow positive in a very quick way with a huge upswing potential for share price
4. Governments world wide committing to huge infrastructure projects to stimulate economies

So, you comment on the above companies and you look at where the share prices once were and where it is at now, and you think AVENG is gone – can’t survive. Scratching through the surface though, you will quickly find that this is actually a gem in the making. They are well positioned in both infrastructure (South Pacific and Australasia) and in mining (Africa). They have geared their balance sheet to make it possible for them to take part in a lot of these projects. So – again, you say the company disappeared because of the share price, but actually it is set to take a boom and a very big boom as such. The negative currently: 56/57 odd billion shares in issue. The solution probably: Share consolidation or less likely, share buyback.

This is but one example that share price does not always reflect the state of a business and it cut’s both ways, where high share prices does not reflect health as well (Steinhoff).

Sorry for my long essay, but I have to convince myself everyday that my Aveng shares is gold 🙂

There won’t be much if an upturn

Really? Not in SA.

Construction industry = prostitute on steroids, when it goes well, it goes exceptionally well, if it turn south, everyone in the industry takes serious income losses. How many times I have heard of this upcoming boom.

One of the biggest problems is the short sightedness of profit margin driven works and accompanying debts.

Unlike other sectors, the business cycle of construction companies are around 36 months, this is due to the product duration and flows. Unfortunately trend works both ways when business is good and bad creating a type of hypocycloid.

simply explained the executives get quickly excited when the work come in, the hardly turn down new work and started getting leveraging their overdraft facilities, then the new work stops coming in and its a race to the bottom with tender margins, eventually profit are about 2% and full on panic sets in when project after project starts failing behind or becomes more complex than originally planned.

Part of the greater problem is that once an asset is built for the government, they either neglect it or under estimate the upkeep. The costs are then recovered from the following year’s budget and so the winddown start.

Yes please, nah not in SA or Southern African in general
Not worse in the last year, please go back a decade + + +
Not until “I never, never took/gave the money” smoke fumes are soaked in whatever non-combustible liquid
Rather > “It said infrastructure investment has fallen sharply since football World Cup award by over 90% from public and 45% from private”

”that is positive but the negative is the fiscus”,
does this mean what i think that the govt gets a co to build
BUT THEN DOES NOT PAY UP ?
If Murray and Roberts has canned infrastructural work what chance have the small pale cos got !!

What happened to President Ramaphosa’s promise of major investment in infrastructure?

What “upcoming boom” is this?
Record unemployment is a great base for construction – cos you know they’ll all be filling malls and buying houses.

Time for a reality check.

End of comments.

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