CONSTRUCTION: No Upturn Expected
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South Africa’s construction sector - currently undergoing a major slowdown following the infrastructure and building boom of recent years – is unlikely to see an uptick in the medium term with activity expected to remain muted for at least the next 12 months.
That is the view of Eyal Shevel, Head of Corporate Ratings at Global Credit Ratings, who says due to the overspend that occurred in recent years there is now an oversupply of stock. “There was a huge over-investment in recent years to the degree that we now have sufficient retail and office space. As a result, we are now seeing vacancies increasing in the commercial property market. At GCR we have put the construction sector on Ratings Watch.”
Recent figures published by the Investment Property Databank reported that commercial property returns in South Africa stagnated in the first half of 2011, with offices posting just 0.1% capital growth. The aggregate national vacancy level stood at 6.8% at the end of June 2011, with office vacancies at 11.7%.
Shevel says that while there is still a desire by government to continue spending on large scale infrastructure projects, there is simply not the capacity to do so. “A number of huge government projects have been put on hold due to a lack of available funding. In addition, many of the Public-Private Partnerships (PPP) have also been cancelled or postponed. Companies that have spent years working on large projects are now finding that they are being reviewed. Even with the best intentions in the world, the fact is that there is simply no longer the budget to spend on these kinds of projects.”
He says the controversy over plans to introduce toll gates within major roads in Gauteng also demonstrates that there is a real sense from taxpayers that they are no longer willing to keep paying more to fund further projects that will end up taxing them again.
“For the construction industry itself, the current outlook is somewhat more positive for the medium to large sized companies, as there are still a number of smaller projects (from R500m) out for tender compared with the larger players who are looking for larger, more profitable contracts. The bigger projects are more profitable but they also pose far greater risk to not being followed through, which can result in the larger construction companies writing off a large degree of money.”
Shevel advises companies within the construction sector not to chase short term profits if it significantly changes the risk profile of the business. “Sometimes the right move is to give up certain projects in order to manage your risk effectively by maintaining margins and a decent balance sheet. A number of construction companies still have healthy cash piles from the boom and it is vital they preserve these to get them through the downturn.”
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