Construction sector looking up

The confidence level in South Africa’s construction industry plummeted to 17-year lows in 2017. In 2018, it was estimated that the industry could look forward to moderate growth. Nkosini Ngwenya finds out if this has been the case, and what the effect has been on the commercial-vehicle industry.

The construction industry suffered major setbacks in 2017 particularly in the second and third quarters, when the sector experienced its lowest confidence level since the third quarter of 2000. According to the FNB Bureau of Economic Research Civil Confidence Index, the sector index shed 13 points to register a level of 15, with confidence losing a cumulative 37 index points in 2017.

A number of factors contributed to the weakening confidence in the construction sector. One such factor was its poor growth performance in the second quarter of 2017, which was carried through to the third quarter and subsequently worsened.

Equally important, was the prevalence of colluding cartels who monopolised tender processes, while broader policy uncertainty on regulatory interventions in the construction industry also weighed in on the confidence levels in 2017, explained Jason Muscat, senior economic analyst at FNB.

However, heading into 2018, the sector was met with much excitement and optimism. Since the beginning of the year, it has experienced a steady and moderate growth performance, which is expected to continue until 2021. Moreover, plans by the government to spend more than R940 billion on infrastructure development, as outlined in the 2017 budget speech, have further boosted this wave of renewed optimism in the sector.

Similarly, the Department of Human Settlements also outlined its plans to build affordable housing projects for the country’s lower- and middle-class citizens. An estimated 1,6-million housing units are set to be constructed by 2019.

A less conspicuous factor that has also eased the strain of lower confidence levels in the construction industry has been the “Ramaphosa factor”. Since Cyril Ramaphosa was sworn in as president on February 15, South Africa’s business confidence index rose from 92,2 in 2017 to 96,4 in 2018.

All these factors have played a key role in ensuring that the construction industry continues to enjoy a sustained, steady growth in 2018. According to Tommy Strydom, CEO of Inyatsi Construction Group Holdings: “The construction industry has done well to embrace cost-saving measures in order to remain competitive in 2018. These include the better use of mobile, cloud and even augmented reality technologies that make it easier to communicate and manage sites remotely; and the efforts of industry players to meet continuing demands for green building methods and materials, and embrace modular construction methods with elements built off-site to allow for faster, more cost-effective building construction.”

“As confidence in the construction sector continues to grow, the industry is now beginning to attract the attention of seasoned global peers and institutional investors. Following a bleak decade of falling investment and declining margins, the outlook is improving,” observes Overberg Asset Management (OAM) in its weekly economic and market overview.

“Foreign appetite for South Africa’s building and construction sector is motivated by the exceptional value on offer and the opportunity for substantial earnings growth. Of all the sectors on the JSE, the building and construction sector is probably the most cyclical and most volatile. The calibre of foreign investors in the construction sector suggests significant potential and gives reason for optimism.”   

Nonetheless, some industry role players are calling for caution as the construction sector is not out of trouble as yet. This follows the recent announcement that Basil Read Construction, a major role player in the construction sector, is applying for business rescue. According to Mohau Mphomela, executive director, Master Builders Association (MBA) North, this is a clear indication that the sector is still trying to find its feet.

“The writing is on the wall unless we unite as an industry to discuss the challenges we all face and come up with solutions. There is no time to be lost. If we lose our big construction companies, we lose not only many jobs, but also our national capacity to build the infrastructure a growing economy needs,” Mphomela cautions.

Effects on the Commercial-Vehicle Industry

The construction industry relies heavily on the commercial-vehicle industry to operate. With such a mutually dependent relationship, it is worth noting the effects that the renewed wave of optimism in the construction sector has had on the commercial-vehicle industry – which also entered 2018 on a positive note, as it experienced a slight increase in sales. This can possibly be attributed to the sustained and steady growth of the construction sector in the same period.

“Despite a tough year so far, a slight growth of 1,5 percent in sales of commercial vehicles in the industry as a whole has been experienced in 2018,” notes Gert Swanepoel, MD at UD Trucks Southern Africa.

According to Rory Schulz, marketing director at UD Trucks South Africa, some inconsistency can be expected as a result of the build-up to the 2019 presidential elections. He further points out that the South African economy is struggling at the moment, but the growth of the construction industry certainly brings with it a degree of welcome relief to the commercial-vehicle industry, as it often means more business for the sector.