Building confidence in construction industry

THE alarming losses in the share prices of South Africa’s top six construction companies is likely to have brought about irreversible change in the sector, according to business risk specialist Bryte Insurance.

Juan-pierre Holmes, the head of the specialised property division at Bryte, said four of the companies lost 50%-75% of their value last year, with some losing more than 90% by June this year.

Commenting on the latest Bryte Construction Industry Monitor, Holmes said there was a major spike in construction in the first quarter of last year and activity tapered off over successive quarters.

Holmes said overall activity in each quarter of last year was greater than for the corresponding period in 2016.

He said the gross insured value of construction activity was estimated at R61 billion last year compared to R42bn in 2016.

However, Holmes said this was substantially lower than the insured construction activity values recorded

SECTOR SLOW-DOWN TO OPEN WAY FOR SMALLER PROJECTS,WRITES

from 2006 to 2008, a period during which infrastructure expenditure was markedly higher in preparation for the 2010 Fifa World Cup.

Holmes said there was a contradictory trend within the broader South African context, with a slowdown in construction activity last year from the year before.

“Unfortunately, 2018 is not expected to fare much better in terms of the number of projects, but costs will continue to climb due to currency fluctuations, high rates of borrowing and a record high petrol price, among other things.

“Already up 6%, Johannesburg has experienced the highest cost inflation on the continent,” he said.

Holmes said there was already evidence of this year being tough, with decreased government spending, low business confidence, which was worsened by corruption, policy uncertainty and labour

ROY COKAYNE

challenges, and decreased foreign direct investment.

“While a major turnaround for the construction sector might not be on the cards, sustained growth is expected in successive years, which will be spurred by a continued prudent focus on costs,” he said.

Holmes said overall efforts by the government to stabilise the economy was a good sign for progress across key sectors, including construction.

The proposed budget of more than R800bn for public infrastructure development would be vital in igniting sustainable growth within the sector.

Holmes said the Treasury’s public sector infrastructure expenditure in relation to gross domestic product had shown a declining trend since 2009, which was constraining to the construction sector and created a need for greater private sector investment. “The muted construction activity is also depicted by the challenges construction companies face, with many increasingly seeking consolidation in the sector,” he said.

Holmes said there was likely to be an increase in the number of smaller-value construction projects in coming years, which could potentially be because government and business were looking to break up large-scale, complex construction projects into smaller undertakings that were less challenging to finance and manage.

It could also be spurred by the need to better manage project delays, from approvals to execution, and facilitate shorter turnarounds.

“Despite the anticipated decrease in large-scale insured activities, project values are expected to rise.

“Gradual increases in confidence within the sector following a 17-year low in 2017, a stronger performing rand and greater investments in advanced technologies that drive process and cost efficiencies will contribute to this trend,” he said.