BUILDING: Less Work And Smaller Profits
Recent Western Cape Business News
NOT only is there less building work at hand, but even where there is activity to be found it is executed much less profitably as the slowdown drags on.
There is a glimmer of hope though. Those involved in the residential sector do not expect business conditions to deteriorate further in the third quarter of this year and activity in this sector could well stabilize ahead.
Non-residential building contractors confidence though is at a seven year low and they expect business conditions to deteriorate even further in the third quarter of the year.
These findings are based on the most recent opinion survey undertaken by the Bureau for Economic Research (BER) at the Stellenbosch University.
The index measures the business confidence of all the major role players and suppliers involved in the building industry including architects, quantity surveyors, contractors, sub-contractors, wholesale and retail merchants, and manufacturers of building materials.
FNB chief economist Cees Bruggemans says that an analysis of the BER survey data and supporting anecdotal evidence suggest that business conditions are comparatively tough in the building industry at present. Though there has been a 450 basis point decline in interest rates, it appears that some of this benefit has been neutralized by the tightening criteria of financial institutions. Thus the overall demand for building work remains seriously constrained.
He says respondents to the survey indicated that work volumes in particular disappointed. In this regard, a net 84% of the respondents indicated that building activity executed during the second quarter were below that of the same quarter a year ago. The sluggish state of the effective demand for residential buildings led to a tight tendering environment.
No less than 93% of the respondents indicated that the insufficient demand for building work constrained their business operations. The tough residential market conditions severely eroded the profit margins of survey respondents. This is borne out by the fact that a net 87% of participants to the survey indicated that their profit growth was below that of the same quarter a year ago.
Many consequently indicated that they reduced the number of people employed in their businesses.
Turning to the short-term prospects for the residential sector, he notes that participants expressed the view that they do not expect business conditions to deteriorate further in the third quarter and that building activity in the sector could well stabilize ahead.
But business confidence of non-residential building contractors declined comparatively sharply from the first to second quarters. A possible explanation for the weakening is that business conditions in general disappointed during the survey quarter.
The growth in work loads was below prevailing levels of the same quarter a year ago. Given the fact that 93% of the respondents indicated that the insufficient demand for building work was hampering their business operations, it was therefore not surprising that reports were received about a very competitive tendering environment when trying to procure new building work.
In view of the decline and the need to survive the current trying market conditions, participants to the survey had no other choice but to reduce overheads. Retrenchments were the order of the day.
Worse, participants to the latest survey indicated that they expect business conditions in the non-residential sector to deteriorate further during the third quarter of this year.
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