Whereto for Building Contractors in 2018

    Signs of Returning Confidence Spark Optimism for Building Industry Growth in 2018 but Threats still lurk

    The South African Government may have been criticised for several years for overestimating how the County’s Economy would perform. In contrast the last two years have been a downward roller-coaster. This has been a challenge for all our readers. However, there are some indications to support the Finance Minister’s January statement that he is hopeful of a 2% improvement in 2018. This would no doubt help the Building Industry and likely Small to Medium-sized Builders would feel the benefit first. Nevertheless, one should not get too excited yet, it being just months since the economy was negative and it is not in a certain trend yet.

    2018 is likely to be bumpy and require caution.

    Whereto for Building Contractors in 2018In contrast to the improved situation in the rest of the World, the Reserve Bank November Statement reflected a relatively dire situation in South Africa:

    “The forecast for GDP growth generated by the QPM has been revised up marginally to 0.7% for 2017, but revised down to 1.2% … for 2018 … The construction sector, which recorded negative growth in the second quarter, remains weak…This is indicative of the poor outlook for infrastructure expenditure.”

    The news that followed from Statistics South Africa compounded concerns:

    “The South African economy grew by 2,0% in the third quarter of 2017 …, down from a revised 2,8% in the second …. agriculture 44,2%, mining 6,6% and manufacturing 4,3% were the main drivers of the expansion, while there was a contraction in general government services resulting from low employment numbers in the public sector … construction -1,1%, electricity -5,5%” (others including government relatively flat).”

    While for 5 months the JSE and recently the Rand valuation has shown a significant improvement of overall sentiment, it is not reflecting in building yet. The Stellenbosch Bureau of Economic Research (BER) Building Confidence Surveys remains negatively unsettled:

    “Quarter 2 of Jun 22, 2017. After reaching its highest level in more than a year of 43 points in 2017Q1, the FNB/BER Building Confidence Index fell sharply to 32 in 2017Q2.

    Quarter 3 of Sep 19, 2017. The FNB/BER Building Confidence Index rose to 35 index points in 2017Q3, from 32 in 2017Q2. However, despite the slight increase in the overall confidence index, the underlying indicators (particularly activity) suggest that growth in the building sector likely continued to weaken …

    Quarter 4 of Dec 7, 2017. The FNB/BER Building Confidence Index fell to 31 in 2017Q4, from 35 in 2017Q3. This marks the lowest confidence since 2012Q3. Despite the fall in confidence, on balance, activity was broadly unchanged compared to 2017Q3, albeit still weak.”

    Ongoing negative Building Activity is of extreme concern to every Contractor.

    With Building Activity remaining weak, to keep traction companies are not just going to have to focus on their strengths, but on aggressive marketing and networking, perhaps even lobbying politically for more infrastructure expenditure and a fairer operational environment, to find and stay in business in 2018.

    In this regard Mohau Mphomela the Executive Director of MBA North noted two additional points:

    • “Prompt payment regulations are a desperate requirement for the industry especially with the negative growth experienced in the building industry. (The prompt payment regulations have not been promulgated but have been delayed since early 2016.) The ‘pay when paid principle’ is a problem because principal contractors when they are not paid, in turn don’t pay suppliers of material and equipment as well as sub-contractors. JBCC contracts that offer guidelines for payment are constantly being amended, resulting in sub- contractors being on the back-foot (unable to pay staff, creditors and meet daily operational requirements).
    • Another concern is the low margins that contractors work with. In PWC’s report (2016) they put margins at an average of 2.2% but contractors have even lower margins if anything disturbs the progress of their work, at times from factors beyond their control such as weather, strikes, etc. This results in contractors accepting projects just to remain in business.” Hopefully there will be no further major shocks such as those that shook South Africa recently and the glimmer of light at the end of the tunnel will strengthen and become a stronger and sustained turnaround.

     

    Boitumelo Thipe
    Marketing & Business Development Manager
    MBA North

     

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