There is hope of a robust recovery in civil construction if the government can follow through on its ambitious plans to invest in large scale civil projects and incentivise the private sector, says construction market intelligence firm Industry Insight.
However, Industry Insight said the non-residential construction segment is expected to come under increased pressure over the next 12 to 18 months because of big cuts to public sector spending and a severe lack of demand for commercial buildings with excess supply.
In addition, there has not been any evidence of any sustainable bounce back in investment in the residential housing market this year and data from this segment has been much worse than expected, Industry Insight said in its latest SA Construction Industry Forecast Report.
The civil construction industry seems to be emerging from the ashes and has finally reached a turning point “from absolute rock bottom levels”, it said.
“This statement does however come with several caveats, as the robust tender activity we are seeing is not exactly translating into awarded contracts at the pace we would like, with extremely disappointing data so far this year.”
Industry Insight said there also remains a myriad of issues around the government’s ability to deliver on the promised large scale infrastructure investment.
“We are a lot more optimistic about the short term future of civil construction although indicators of current civil construction activity have been much worse than expected. This may mean that the growth we were forecasting will be somewhat delayed,” it said.
The government in July 2020 unveiled 50 Strategic Infrastructure Projects and 12 special projects, involving a total investment of R340 billion, as the first tranche of a massive infrastructure expenditure programme to drive the post Covid-19 economic recovery effort.
In October 2021, it unveiled the second tranche of projects, comprising a pipeline of 55 new catalytic infrastructure projects from various sectors valued at about R595 billion.
Industry Insight said tender activity has increased significantly, especially since January, and is up by almost 30% in the first eight months of this year compared to the same period in 2020, and the number of projects out to tender is now back to about 2016 levels after years of depressed tender activity.
It said tender values have kept on improving robustly over the last three quarters and there has been a 53% growth in the average value of civil projects coming out to tender, which “is excellent”.
Optimism vs data
Civil engineers are also growing more optimistic with the latest SA Forum of Civil Engineering Contractors (Safcec) state of the industry report revealing that the number of respondents satisfied with business conditions increased to 47.1% in the second quarter of 2021.
However, Industry Insight stressed that it is quite clear from its data – as well as data from Databuild, gross fixed capital formation data released by Statistics SA and opinions in the Safcec report – that “current activity levels have not yet started to improve much at all”.
“In fact, according to Databuild/Industry Insight project data, civil construction activity is actually lower than the same period in 2020, which should be a bit worrying given that this period included the months of hard lockdown where the industry was not even allowed to be on site.
“Specifically, there has been a 28.2% decrease in the real value of civil tenders awarded in 2021 so far compared to the same period last year.
“This is quite a robust decline and we are just not seeing awarded contracts data follow the big uptick in tenders going out in the industry,” it said.
Both Master Builders South Africa (MBSA) and Safcec have been complaining for several years about delays in public sector tender adjudications and contract awards.
Industry Insight said about 80% of civil projects are financed by the public sector, which has made infrastructure spending estimates one of the best leading indicators for future civil construction activity.
But it said government finances remain in an absolute state and “to our dismay” overall infrastructure spending was cut again in this year’s budget after all the promises from President Cyril Ramaphosa around incoming “massive infrastructure spending” and the increased rhetoric around making infrastructure spending the key component of the government’s stimulus and economic recovery plans going forward.
It said overall allocations were cut from R815 billion last year to just R791.2 billion this year for the next three years of the Medium-Term Expenditure Framework (MTEF) period, which amounts to a decrease of 7.2% in real terms over the MTEF period.
“This will unfortunately have a negative impact on the medium to longer term outlook for civil construction,” it said.
Non-residential sector has among the hardest hit
Industry Insight said the non-residential sector has been one of the hardest hit in the economy, with the demand for both office space and shopping centres at all-time lows.
“It has been a perfect storm for office space, with the pandemic allowing businesses to experiment with their staff working from home, many companies … continuing to let their employees work from home, and there is simply less need for bigger offices, and there are clear signs that that segment is in big trouble, with a structural shift and a permanent loss of output,” it said.
“And with the current state of the economy, consumers simply have less money to spend at shopping centres.”
The latest SA Property Owners Association (Sapoa) Office Vacancy Survey report for the third quarter of 2021 revealed that South Africa’s office vacancy rate reached an “all-time high” at the end of September, with about 15.4% of the country’s office property space now standing vacant.
More than 2.91 million square metres of the almost 18.9 million square metres of office space in South Africa’s major metropolitan hubs of greater Johannesburg, Tshwane/Pretoria, Cape Town, Durban/eThekwini and Nelson Mandela Bay is currently unoccupied, which equates to more than the office space of the Johannesburg and Cape Town core CBDs combined.
FNB’s latest commercial property brokers survey reinforces this, with 72% of respondents reporting that “supply far exceeds demand” for office space.
Industry Insight said official figures show a revised 20.1% decline in investment in the non-residential industry in 2020 year-on-year, the worst figure on record, and the recovery will unfortunately be a lot more limited than the likes of the civil construction industry.
Statistics SA data shows that there was a record 33.7% contraction in square metres of office space completed in 2020, which has been followed by a 60.9% decrease in the first seven months of this year with an average of only 15 000m2 reported as completed in this period.
Industry Insight said there isn’t going to be any major recovery in either the office space or retail segments, with Statistics SA data on square metres of building plans approved – a leading indicator of building in the pipeline – showing only a 17.2% increase in retail and 9.2% rise in office space approvals off a low base.
There has only been a 1.9% increase in the number of non-residential projects put out to tender so far in 2021 – which “does not inspire hope going forward”, it said.
Industry Insight said the residential building industry contracted by 1% on average in the five years preceding 2020 and although there has been a robust bounce back in the number of square metres completed, it is nowhere near recessionary pre-Covid-19 levels.
A total of 775 000m2 was completed in 2019 but only 480 000m2 was reported as completed over the last 12 months while approvals to date in 2021 are more than 7% lower than for the same period in 2019.