The FNB Building Confidence Index increased marginally during the second quarter of this year to an index value of 88 from 87 in the first quarter.

The FNB Building Confidence Index measures the business confidence of all the major role players and suppliers involved in the building industry such as architects, quantity surveyors, contractors, sub-contractors, wholesale and retail merchants, and manufacturers of building materials.

The index is compiled quarterly from the building, manufacturing, retail and wholesale opinion surveys undertaken by the Bureau for Economic Research (BER) at Stellenbosch University.

The increase in the index during the second quarter is the result of a relatively sharp recovery in the confidence of architects, as well as moderate rises in the case of sub-contractors and wholesalers of building materials. In the case of retailers of building materials, confidence levels remained static, while those of quantity surveyors, manufacturers of building materials and building contractors showed a slight decline.

According to FNB Chief Economist Cees Bruggemans, business confidence in the overall building industry remains on a relatively high level. The 2Q2007 index is only slightly below the peak of 89 posted in the 4Q2006. 

As far as developments in the residential sector of the building industry are concerned, Bruggemans noted that apart from possible supply side considerations, indications are that business conditions in the residential sector have been adversely affected by the 200 basis point rise in the repo rate during the course of 2006.

"Business confidence of residential contractors dropped from an index value of 86 in the 1Q2007 to 82 in the 2Q2007. A closer inspection of the survey results suggests that the further moderation in business confidence can be related to comparatively less favourable business conditions that continue to exert downward pressure on the profit margins of house builders.

"Growth in building activity turned out more or less in line with expectations expressed at the time of the previous survey and a small net percentage of respondents indicated that building activity levels were below those of the same quarter a year ago.

"It appears as if the slowdown in residential building activity has moderated somewhat during the past quarter. Competition in tendering remained fairly stable, but weaker demand conditions pressurised margins with the result that the overall profitability of respondents continued to suffer," Bruggemans said.

Regarding the business outlook for the third quarter, residential contractors participating in the survey indicated that they expect business conditions to remain more or less stable but that an improvement in the tempo of residential building activity is expected.

John Loos, FNB Commercial Property Strategist, commented that builders operating in the non-residential sector of the building industry are very optimistic at present and are upbeat about business prospects over the short term.

Loos said that the business confidence of contractors in this segment of the building industry remained constant at an index value of 94 during the 2Q2007. Growth in building activity was above expectations expressed at the time of the previous survey.

As a result of the robust growth in building activity experienced in the non-residential sector of the building industry, employment levels showed further gains during the second quarter. Given the buoyant state of non-residential building activity, respondents indicated that shortages of
skilled labour and the inadequate supply of building materials were seriously constraining their building operations.

Turning to the prospects for the third quarter of 2007, respondents to the BER Survey expressed the view that business conditions were likely to remain most favourable, but that building activity was likely to proceed at a more moderate pace in the next quarter.