The rise is on the back of higher confidence amongst building contractors, manufacturers of building materials and quantity surveyors.

• The confidence of both residential and non-residential contractors rose during the quarter.
• The latest survey results suggest, especially activity levels, that the building sector has bottomed and is indeed recovering, albeit slowly.
• The fragility of the recovery can be seen in the decline in confidence of some of the sub-components, possibly hampering the pace of this recovery.

The FNB/BER building confidence index increased from 29 in 4Q2011 to 34 in 1Q2012. This is the highest reading since 4Q2010 when the index spiked to 38. However, this time around the higher confidence is supported by meaningful increases in activity and profitability, making us believe that the building cycle has bottomed and is now slowly recovering.
 
However, the average of 34 still indicates that on average more than 6 out of 10 respondents in different sectors of the building industry rate prevailing business conditions as unsatisfactory.
 
The FNB/BER building confidence index can vary between zero (indicating an extreme lack of confidence) and 100 (indicating extreme confidence). It reveals the percentage of respondents that are satisfied with prevailing business conditions in six sectors, namely architects, quantity surveyors, main contractors, sub-contractors (plumbers, electricians, carpenters and shop fitters), manufacturers of building materials (cement, bricks and glass) and retailers of building material and hardware.
 
In contrast to the RMB/BER BCI, which includes only main contractors, the FNB/BER building confidence index covers the whole pipeline, from planning (represented by the architects and quantity surveyors), renovation, additions, the informal sector (represented by building material merchants) and production (manufacturers of building materials) to the actual construction of buildings by main and sub-contractors.
 
The performance of the sub-sectors within the composite building confidence index showed mixed results during 1Q2012. The confidence of building material manufacturers rose significantly by 25 index points to 37. Confidence amongst building contractors and quantity surveyors also moved higher from 19 to 31 and 36 to 47 points respectively. Meanwhile, the confidence of architects, sub-contractors and building merchants declined.
 
At 37, the confidence of building material manufacturers is at its highest level since 1Q2008. This also marks the second consecutive rise in confidence (after moving from 4 in Q32011 to 12 in 4Q2011). Domestic sales and production volumes retreated but are expected to rebound again next quarter.
 
The confidence of building merchants fell to 40, from 49 index points in 4Q2011. The decline in confidence coincides with an easing in sales volumes and overall profitability during the quarter.
 
The most notable feature of the 1Q2012 results is the rise in overall confidence of main contractors, which jumped from 19 to 31 index points. Underlying this was the meaningful 24 index point jump (from 14 in 4Q2011 to 38 during 1Q2012) in non-residential contractor confidence.
 
Residential contractor confidence registered a more moderate improvement, rising to 28 from 22 index points in 4Q2011.
 
Whereas last quarter we saw residential confidence outperform non-residential confidence – a normal feature of a building recovery - this quarter’s results returns us to the atypical scenario seen during most of last year where the non-residential sector outperformed the residential sector.
 
Building work for both residential and non-residential contractors is starting to show a more consistent increase, albeit off low levels. However, there was a significant improvement in non-residential building work executed compared to residential work and this in part could explain the much higher confidence of non-residential contractors.
 
High levels of consumer debt and tight credit conditions continue to weigh on residential building activity with very moderate relief coming from the affordable and low cost housing markets. At the same time, non-residential contractors continue to benefit from the building of shopping centres and government led work such as the building of hospitals and schools.
 
Overall profitability for both residential and non-residential contractors also improved. “The rise in building work has provided some scope to relieve margin pressure, especially because many contractors had delayed price increases previously, in order to remain competitive”.
 
Sub-contractor confidence, which is closely linked to that of main contractors, shed 7 points to register a value of 29, the first time since 1Q2007 that sub-contractor confidence was below that of main contractors. The “early” recovery in the additions and alterations market - which saw clients opting to expand/improve on existing space rather than to build from scratch - initially helped buoy sub-contractor confidence. This trend seems to be turning with increasing amounts on new building work coming on board.
 
The confidence of residential sub-contractors registered an index value of 33, from 39 in 4Q2011. Confidence of non-residential sub-contractors also dropped 6 points (from 32 in 4Q2011 to 26 in 1Q2012).
 
The two sectors which give an indication of the robustness of the building pipeline provided mixed results during 1Q2012. The confidence of architects fell to 17 from 21 index points while that of quantity surveyors rose from 36 to 47 points (close to the crucial 50 index point mark). Even in terms of activity there was divergence, with architects experiencing renewed pressure in the number of projects commissioned at sketch plan phase and in the number of contracts awarded. Quantity surveyors saw the exact opposite trend.
 
In conclusion: The results of the 1Q2012 composite FNB/BER building confidence index provide further proof that the building sector is indeed recovering, albeit slowly.
 
This recovery is increasingly being characterised by a very moderate rise in building activity and profitability, especially amongst main contractors, the biggest component of building.
 
However, the fragility of the recovery can be seen in the confidence of building merchants, sub-contractors and architects, all of which declined during the quarter. This is further highlighted by the slowdown in sales seen by retailers and manufacturers of building materials.

FNB