The building confidence index has dropped by two points amid a general slowdown in construction activity, says First National Bank (FNB) chief economist Cees Bruggemans.

The bank's index declined marginally to 87 points this year from 89 points last year.

Bruggemans said the decline in business confidence was due to a moderation in all building industry categories, except quantity surveyors, where confidence increased by six index points.

Residential property development was taking a hard knock while commercial property was experiencing a boom.

However, the Bureau for Economic Research's latest survey found that business confidence of nonresidential building contractors had increased marginally from 93 index points last year to 94 points this year.

John Loos, property strategist with FNB Commercial Property Finance, said the high level of retail building activity was still taking place in "lagged" response to SA's consumer boom. Low vacancy rates were driving growth in industrial and office space property categories.

According to the Investment Property Databank, overall commercial property returns were still strong at 27,4%, which created the right climate for strong investment and growth.

While the overall profitability of building contractors had improved, shortages in skilled labour and building materials were affecting output.

Bruggemans said overall business confidence in the building industry remained comparatively high, with major industry players satisfied with conditions.

He said business confidence of residential building contractors was down from 89 to 84 points, because conditions in this sector had become less favourable compared with 2005 when growth was strong.

On the supply side, developers were increasingly encountering problems in getting municipal approval, and connection to water supply and sewage disposal, as a result of strained municipal infrastructure.