Non-residential should continue to grow strongly in 2007, according to analysts. Building statistics for December 2006 - released by Stats SA in February - bring to a close a good year for the built environment and construction economy.

Overall real building activity grew by 15.2% in 2006, unsurprisingly of a similar order of magnitude to the strong +13% year on year real value added growth in the construction sector for the year.

"While 2006 saw a decisive slowing in average house price growth, the market remained fairly buoyant at the lower end of the price spectrum with overall real residential building activity growing by 10.9% on the year.

Signs of a more pronounced slowdown in residential building activity did emerge in the final quarter of 2006, however, with real seasonally adjusted completions only growing by about 5.7% on an annualised basis, and plans passed falling by 2.4% on the quarter," said the analysts.

Q1 2007 is therefore likely to see a further slowdown in real residential activity, before seeing a slight uptick in the second half of 2007 following a peak in interest rates, but it is unlikely to be enough to push residential construction growth higher than 0%-2% for the year.

"Perhaps the most reported story of the past year has been the solid performance of the non-residential building sector, which to some extent, has taken up the slack left by the cooling residential market," they add.

Growth in real activity in 2006 was 21.8%, helped by a surge in activity in Q4, with real seasonally adjusted completions increasing by just below 60% on the quarter.

"Growth of this magnitude will not be sustained into Q1 2007 and non- residential completions may even fall q/q between January and March before activity picks up strongly again for the remainder of the year on the back of high growth in plans passed toward the end of 2006, and continuing investment spending in the industrial sectors. A weaker Q1 2007 should cause real non-residential construction growth for 2007 to moderate to between 12% and 18%," said the analysts.

They add that the surprise in 2006 was the surge in demand for additions and alterations, which caused activity to increase by 27.5% in real terms on the year, accounting for a full 30% of total real building activity growth.

The most encouraging aspect of growth in demand for this type of building activity is that it encourages growth and improves turnover, cashflow and profitability among small and medium construction businesses, encouraging job creation for artisans as well as semi and unskilled labour.

"This category of building can be expected to continue thriving as new residential activity wanes. Firstly, homeowners will increasingly choose to add, alter and improve their homes with the diminution of market-related asset appreciation in order to realise desired capital gains. Secondly, rather than choosing to buy new homes, existing homeowners may settle for improvements to existing homes.

"For these reasons, growth in additions and alterations activity should remain strong in 2007, but may moderate to between 10% and 20% in the face of higher building costs," the analysts point out.

Overall real year on year building activity growth should moderate in 2007 to around 6% on the back of the slowdown in residential activity, with very strong growth in public and private infrastructure construction activity driving overall real construction sector growth for 2007 to between 8% and 11%, according to the analysts.

"What level of growth in this band the construction sector actually achieves in 2007 will depend on the extent of skills shortages and other capacity constraints, supply bottlenecks, and rising raw materials costs facing the domestic industry," they conclude.