The FNB Building Confidence Index measures the business confidence of all major role players and suppliers involved in the building industry, such as architects, quantity surveyors, building contractors, building sub-contractors, wholesale and retail merchants, and manufacturers of building materials.

The index is compiled quarterly from building, manufacturing, retail and wholesale opinion surveys undertaken by the Bureau for Economic Research (BER) in Stellenbosch.

The FNB Building Confidence Index declined marginally to 87 in 1Q2007 compared to 89 recorded in the 4Q2006. This decline in business confidence was due to a moderation in all categories, except in the case of quantity surveyors where confidence increased by 6 index points and building contractors where levels remained unchanged.

Overall business confidence in the building industry remains on a comparatively high level, with such a large percentage of building industry participants expressing their satisfaction with current conditions.  However, evidence of sector rotation in favour of non-residential building activity is becoming discernable.

Regarding the residential building sector, it was noted that business conditions are becoming less favourable compared to the situation in 2004/05 when building activity in this sector was booming.

Business confidence of residential building contractors decreased slightly from a reading of 89 in 4Q2006 to 84 in 1Q2007.  A closer analysis of the survey results suggests that the weakening in business confidence can be primarily related to a slowing in building activity.

On the supply-side, developers are increasingly encountering problems of gaining municipal approval and/or connection to water supply and sewage disposal due to strained municipal infrastructure.

Demand-wise, the rapid escalation in building costs and the 2% rise in mortgage rates during 2006 has contributed to deterioration in new housing affordability.  But instead of demand drying up overall, however, it seems to have been increasingly deflected into the secondary property market, going by the unceasingly high volume of deed office registrations and mortgage bonds granted by banks in recent months, as commented upon in the most recent FNB Residential Property Barometer. 

As a result of the deterioration in the demand for new residential units, the growth in profit margins of contractors has taken a sharp knock.  Expectations expressed by respondents to the BER survey were that residential building activity would slow down further during 2Q2007.

In contrast, business conditions in the non-residential building sector are very buoyant at present.

The latest BER survey revealed that the business confidence of non-residential building contractors increased marginally from a reading of 93 during 4Q2006 to 94 in 1Q2007.

The growth in building activity reported by respondents was well above the level expected at the time of the previous survey. The demand for non-residential buildings was relatively robust at present. A high level of retail building activity is still taking place in "lagged" response to the country's consumer boom, while very low vacancy rates in the area of industrial and office space are driving an increase in activity in these property categories too. With overall commercial property returns still strong at 27.4% in 2006, according to the Investment Property Databank (IPD), and little sign of the low vacancy situation abating, the climate is highly suitable to strong investment and building levels in the commercial property sector.

The overall profitability of building contractors operating in the sector has improved. Shortages of skilled labour and building materials are, however, constraining building activity and are hindering the timeous completion of building projects.

Respondents to the BER survey expect that business conditions could improve further in 2Q2007 and that building activity will remain robust.

The results of the survey are very much in line with FNB Commercial Property Finance's own experience of slowing residential development activity but a booming commercial property development sector.