SA’s construction sector activity slowed in the first quarter of 2024 due to seasonal effects as well as the high cost of capital and dysfunctional municipalities not passing or completing building plans, according to an index tracking activity in the sector.
Building materials and mining group Afrimat’s construction index has been positive for three consecutive sectors, driven by public-private partnerships and the private sector and individuals aiming to reduce reliance on Eskom.
However, the first quarter of 2024 — a traditionally subdued quarter — experienced lethargy owing to a combination of factors.
This included the high cost of capital in SA, dysfunctional municipalities that cannot access conditional National Treasury grants earmarked for infrastructure upgrading and weak economic growth constraining construction-related capital expenditure in the 2024/25 national budget.
The author of the Afrimat Construction Index (ACI), Roelof Botha, said while the cost of construction in SA has been high, there might also have been a measure of hesitancy with new construction projects due to uncertainty about the elections.
“The uncertainty created in the run-up to the election might have also led to some delays in getting things done,” Botha told Business Day.
Fortunately, the two largest political parties appeared to be committed to maintaining the constitution and the principle of private property rights, he said.
“But the biggest single problem remains the interest rates. I’ve got no doubts about that,” he cautioned.
According to Botha, lending rates are at their highest level in 14 years, despite the consumer price index having been within the SA Reserve Bank’s (SARB) target range for inflation of 3%-6% for 11 consecutive months and the long-standing absence of demand inflation in the economy.
The index recorded a level of 103.7 in the first quarter, compared to 117.3 in the previous quarter, and 105 in the first quarter of 2023.
Subindices include salaries and wages in the construction sector, the value of buildings completed, sales of building materials, as well as passing of building plans.
Only two of the 10 subcomponents recorded quarter-on-quarter growth in the first three months of 2024 with a year-on-year increase of 14,000 jobs in the sector.
Building plans slump
Among the worst performing was the value of building plans passed, which slumped 13.8% yearly. The value of buildings completed, which are also done at the municipal level, was down 23% year on year.
According to Botha, one factor behind the slump in the passing of plans could have been the lack of expertise at the municipalities to assess and approve building plans.
“They can be very technical,” he said, “You need somebody that has the qualifications and experience to evaluate building plans before they are passed.”
The economist said he was encouraged by President Cyril Ramaphosa’s stance that whatever the government of national unity might look like, continuing the work of the national logistics crisis committee needed to remain the priority.
He said if the government ensured there were no unnecessary delays in the implementation of the committee recommendations, “that could become a huge growth driver for construction”.
“They need to root out corruption in construction and tender rigging,” he said adding that including the private sector expertise in the tender designs and appraisals would also go a long way.
Afrimat CEO Andries van Heerden said that while the construction sector remained relatively weak, the recent results achieved by the group — the highest in its history — illustrated its focus on cash generation, strict capital allocation, and maintaining a strong balance sheet.
Van Heerden indicated that efforts by Sanral and maintenance by Transnet were showing positive momentum demand for aggregates, further supported by large road maintenance projects in KwaZulu-Natal.
Botha said he was bullish about an interest rate decline in July, saying that the consistent decline in the consumer price index would force SARB’s hand to lower interest rates at the monetary policy committee meeting, especially now that the European Central Bank has cut its key rate from 4% to 3.75%.
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