Construciton tendering activity down 3% in the first quarter of 2009

Tendering activity fell 3% in the first quarter of 2009, compared to an annual year on year decrease of 10,0% in the last quarter of 2008, according to Industry Insight's construction tender indices.  The civil industry was the only sub segment in the construction sector that experienced an up tick in the 1^st quarter of 2009 (up 7,7%)  while tendering activity in the building industry fell by 24,8% y/y (excluding tendering on school upgrades and additions).  Tendering activity continued to fall in residential projects, down 40% y/y in the 1^st quarter, with a 21,6% drop reported in activity in non-residential developments.

Tendering activity has a direct bearing on industry confidence levels, which has already started to deteriorate as fewer and fewer projects come on stream. The FNB/BER confidence index reported a 57% drop in building confidence and a 24% drop in civil confidence between the 1^st quarter of 2009 and the 1^st quarter of 2008. Conditions are worsened by price volatility, with cement prices already having increased by more than 15% this year. However, contractors find themselves in the precarious position where a shortage of work results in fierce competition and more aggressive price cuts in order to win contracts. This combined with price volatility from supplier's leaves very little room for errors.  Data available to subscribers only

Industry in Crisis

Latest statistics by Stats SA shows an industry in crisis. No amount of government or state owned enterprises expenditure can protect the building industry against the onslaught that waits in 2009. The private sector is a key client to the construction industry contributing around 50% to total investment on an annual basis. In the building industry it is the single most important client, responsible for close to 80% of total expenditure. And the private sector is no longer investing in buildings. Thanks to greedy capitalistic principles which supported the endeavors of equity investors, oil prices skyrocketed to $147/barrel in 2008, catapulting the consumer market into financial turmoil as lending rates across the globe were increased to protect local currencies. This seriously - in our view - questions the entire principle of inflation targeting, where lending rates were increased to lower consumer spending, although consumer spending was not responsible for spiralling inflation? This is a debate that can continue at quantum but does little to protect the building industry, faced with probably it's toughest period in history.  Forget about the Asian crisis in 1998 when interest rates hit 25% - the current turmoil is much, much worse, even though interest rates peaked at 15,5%. House prices as one example are at their highest levels ever, while debt levels rose to over 75% of household income, with literally zero savings. Sadly the consumer and now the building industry bears the brunt of higher interest rates in 2008, yet must continue to fit the bill for exorbitant administered prices (those prices under government control) as well as pay for rising food prices. Truth is limited resources are simply not keeping pace with the growing demand of our ever growing population, but with a little forward planning much of this could have been prevented. Full article available to subscribers.

Critical Success Factor Index predicts tough times ahead for building industry

Industry Insight's critical success factor index (CSFI), is a composite index measuring both the affordability and business market sentiment levels that directly impact on the feasibility to invest in building construction. It measures the outlook for building investment and not infrastructure or civil investment as the latter is determined rather by government efficiency and planning (budgeting) and is not as sensitive to changes in monetary policy and economic climate conditions as the private sector.

The index has shown a significant increase up to mid 2006 (peaking at an index value of 166.0) where after it has gradually moderated to a low of 107 by September 2008 (3^rd quarter 2008). The index value in the fourth quarter of 2008 rose mildly (by 1,3%) to 108.6, mainly due to an improvement in the affordability index as lending rates dropped marginally in December 2008. The household debt ratio however continued to increase reaching 76.4% by December 2008, while market sentiment worsened to a level of 33, the lowest rate since March 2001. Thus while the CSFI may have improved, it is still a long way from a permanent improvement, that would imply an improved investment outlook. The decline in lending rates will however, support an improved outlook if accompanied by an improved market sentiment and an improvement in household debt. Full article available to subscribers

Rentals on the rise as housing stock depletes

The Industry Insight rental index measures the average rental for a 2 bed, 1 to 2 bath, unfurnished apartment in key metropolitan areas, to monitor changes in rental yields affected by the availability of housing stock and general housing affordability. Compared to the September 2008 survey, rentals increased by 17,9% from an unweighted average of R4 144 to R4 889. Key metropolitan areas that reported the strongest increase include Cape Town Parklands and Durban, while a  more moderate increase was reported in the Southern Parts of Johannesburg. The highest rentals are charged in Sandton and increased by 21% since September 2008.

Cement sales improve in March 2009, but industry not out the woods

Cement sales rose 2,5% in March 2009, compared to the same month in 2008, a welcoming increase compared to 19% drop in February 2009.  Sales were up in most of the provinces during March 2009, except for Western Cape and Gauteng where sales fell by 21% and 3,6% respectively. However, on a cumulative year on year basis, sales are still down 8%, with the sharpest decrease reported in the Western Cape, where sales plummeted by 29% in the first three months of 2009. Sales in Gauteng are mirroring the difficult times in the building industry with a 13,5% decrease in cement sales.  Mpumalanga and Limpopo seems to be weathering the storm, for now, with a 8,9% and a 13,1% increase reported in the first quarter. National and provincial statistics available to subscribers only.

ABSA's house price index predicts negative real growth of between 8% and 9% in 2009

The average nominal price of  middle segment housing dropped by 0,4% year on year in March 2009 to around R961 800, after declining by 0,2% y/y in February. In real terms middle segment house prices were down by 8.2% in March. The prices of small houses fell by 0,6% in March and medium size houses by 1,8% y/y. The prices of large houses declined by 3,2%, hardest hit by the current downturn. ABSA is positive that the Reserve Bank will continue monetary policy easing during the course of the year, although households are expected to remain under pressure for some time. ABSA predicts house prices to  drop by a nominal 3% to 4% and a real 8% to 9% during 2009.

Poor outlook for further industrial development as manufacturing production shrinks by 14%

The slowdown in manufacturing production, according to Stats SA's latest release, holds no good news for further industrial space development. Based on a year on year comparison, manufacturing has slowed by 14,9% to an index value of 96.5 in February 2009 compared to a value of 113.5 in February 2008. This is the lowest level since February 2004 when it was 94.7.  By comparison, plans approved for the construction of new industrial space has slowed by 4,7% year on year. This sector has been in a decline since the beginning of 2008.

NEIGHBOURS AND PROPERTY VALUES - YOUR RIGHTS, AND A WARNING (Herold Gie Attorneys)

Can you stop the municipality from approving your neighbour's building plans if you are able to show that the proposed construction will reduce the value of your house?

The answer is "Yes", but with a very important limitation. Be warned that a recent case before the Supreme Court of Appeal highlights the need, before buying a property, to value it on the basis that your neighbours might in future develop their properties to the full potential allowed in the area.

In this case, a house owner complained that a proposed 2½ storey addition to the house next door would be "unsightly, objectionable and out-of-keeping with the architecture of the suburb", would violate his privacy, would prejudice his access to warmth and sunlight, and would "cause a substantial derogation in the value" of his property.

Retail sector offers diminishing construction opportunities in Kwazulu Natal

The building industry, driven predominantly by private sector spending, has deteriorated in Kwazulu Natal since the second half of 2008. Square metres completed has fallen by 2,1% in the twelve months to January 2009. The outlook is not promising for 2009, given the slow pace by which plans are currently being approved for new construction. Housing construction is set to decrease with a 3,6% drop in the number of square metres approved. In the month of January 2009, only 46000 sqm were approved for housing, down 50% compared to January 2008.  Housing is a critical sector for Kwazulu Natal and contributed close to 50% of the total number of square metres approved over the last twelve months.   Full article available to subscribers only

Residential Market must brace itself for severe downturn in 2009

The South African residential market must brace itself for the sharpest ever drop in new housing developments as the number of square metres approved over a twelve month period fell by 3,3 million square metres, the highest ever since recorded history (1993). This is significantly worse than the 1,1 million square metre drop caused by the 1998 Asian Crisis when interest rates rose to 25%, resulting in a 12% drop in housing investment during 1999.  Full article available to subscribers only.