: The Building and Construction Industry Outlook 2009
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In its latest analysis of the construction industry, research and credit insurance company Coface South Africa, has split the industry into two sectors, infrastructure construction and residential construction, because they have been differently affected.
“Infrastructure development is mainly due to South Africa’s Government spending, which accounts for more than 50% of this market,” says Wayne Basson, Coface industry analyst.
The expectation is that certain elements of this sector will pick up from the fourth quarter of 2009 as the 2010 World Cup projects accelerate and near completion.
The South African government’s R787-billion infrastructure spending has had a positive effect on the construction industry. Due to the huge infrastructure backlog, large construction companies have secured contracts to sustain them past the demand created by 2010. The results can be seen in the financial performance of many of these companies so far this year.
The performance of these companies will benefit the economy over the next 12 months, and the continued demand will assist with job creation.
Conversely, the residential property market is in decline, which is the result of many factors. Banks have become restrictive in their credit lending, with the percentage bonds now being granted below 100% and with addition restrictions and NCA compliance requirements. Buyers have the added burden of requiring up to 10% deposit to contend with.
The drop in interest rates have not assisted low to medium income earners. This is because the majority of these people are currently servicing debt and are not considering any form of building or construction purchase right now.
In addition, property investors remain skittish as the demand for residential property remains low. Due to the high levels of household debt many home owners are defaulting, leaving financial institutions with a myriad of repossessed assets which including motor vehicles.
“As a result of this slow-down in residential demand, Coface South Africa has witnessed a shake out in the residential construction industry with only well-run construction companies left. The past 18 months of the credit crunch has resulted in the consolidation in the market as the smaller ‘one-bakkie’ construction SME’s fall by the way side,” says Basson.
The future of the residential construction industry is dependent on the level of demand for property, which is equally dependent on access to credit. If financial institutions are able to, along with the National Credit Act, find ways to safely lend money, the market will begin to recover. That said, Coface South Africa does not believe such a recovery will be possible in the remainder of 2009.
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