Government spending on infrastructure remains key to the outlook for the construction sector in 2010 and beyond.

FNB's building confidence index, which measures the business confidence of all the major role players and suppliers involved in the building industry, declined to 66 points in 2008's first quarter, compared with 86 points in the last quarter of 2007.

FNB chief economist Cees Bruggemans said in statement that the deterioration of the index was the result of the business confidence of all subcategories comprising the index declining during the period.

The confidence of building material retailers, manufacturers, wholesalers and contractors declined the most.

The business confidence of residential building contractors dropped from 76 points in the last quarter of 2007 to 60 points in the first quarter of the year, and Bruggemans stated that the growth in building activity in this sector disappointed.

The survey said that some 21% of respondents had expected a weakening in the first quarter of 2008, but that the latest survey revealed that in fact a net 39% experienced a decline in workloads.

"The tightening in demand conditions and increasing tendering competition currently being experienced in the residential sector continues to exert downward pressure on profit margins. It was, therefore, not surprising that a net 46% of respondents to the survey indicated that the growth in profitability of companies was below that of the same quarter a year ago," Bruggemans said.

With the demand for residential buildings waning, the reduction in workloads forced respondents to further reduce the number of people employed. Nevertheless, the availability of skilled labour remained a noteworthy constraint, hampering the building operations of respondents.

Respondents also indicated that they were expecting business conditions in the residential sector of the industry to remain "unfavourable".

Meanwhile, business confidence of nonresidential building contractors "rather unexpectedly" also declined relatively sharply, Bruggemans said.

The index fell to 78 points in the first quarter, compared with 92 points in the fourth quarter of 2007.

Respondents to the survey reported that business conditions turned out well below expectations.

At the time of the previous survey, about 2% of respondents were expecting an improvement in the growth in building activity, but first quarter results revealed that 20% of nonresidential contractor participants experienced a decline in activity.

"In view of the weaker demand conditions experienced, competition in tendering edged up sharply. As a direct result, margins came under pressure and the growth in profitability of nonresidential contractor respondents deteriorated notably. This trend is expected to continue in the coming quarter," Bruggeman said.

Looking ahead, he said that the survey's participants did not expect a reversal in current business conditions and they anticipated the profitability of companies to deteriorate further.

The index is compiled quarterly from the building, manufacturing, retail and wholesale opinion surveys undertaken by the Bureau for Economic Research (BER) at Stellenbosch University. The BER business survey in the building industry was conducted between February 4 and March 3.

Government and private sector infrastructure investments are expected to secure the boom in the construction and building industries until well after the 2010 soccer World Cup, according to industry leaders.

They said the government's decision to go ahead with a R400-billion infrastructure programme, an even bigger commitment by the private sector and economic growth rates well above 5% a year would buoy the industries and drive the economy.

Brian Bruce, chief executive of Murray & Roberts, predicted the boom would continue long after 2010 and well "into the teens of the 21st century".

He cautioned, however, that there might be some ups and downs in the industry during this period.

But, despite this caution, construction companies are flocking to list on the JSE's alternate exchange, which facilitates listing of small companies.

Since AltX was established almost three years ago, 14 of the 50 companies listed are related to the building and construction sector with interests in home improvements, heavy construction and building materials and fixtures.

Among the bigger groups are Esor, Sanyati Holdings, Afrimat and the Raubex Group. The total market capitalisation of these companies this week was R20.6-billion, according to an AltX spokesman.

And Stefanutti & Bressan, with annual turnover of R1.7-billion, plans to list on the JSEs' main board on Friday after raising up to R465-million by placing 35 million shares. A limited offer of a further 11.5 million shares will be offered to vendors.

The company believes that revenues will grow to R2.5-billion in 2008. In the year to February, the group earned a net profit of R67.2-million, after the cost of BEE involvement, and expects this to grow to R115-million in 2008.

The group has a 15% BEE involvement through Mowana Investments.

Chairman and co-founder of Stefanutti & Bressan, Gino Stefanutti, said the construction industry was experiencing unprecedented growth and that there was "a positive picture of long-term growth for the industry".

Last month, the FNB Civil Construction Confidence Index, compiled by the Bureau for Economic Research recorded another increase.

Cees Bruggemans, chief economist at First National Bank, said that the figure reflected "very favourable business conditions". It is reported that the industry had grown by 13% a year since 2003.

The SA Federation of Civil Engineering Contractors noted that the number of people in the construction industry had risen to 114 000 in the first quarter of this year .

But, the FNB Index found , a shortage of skilled labour was affecting construction activities and impinging on completion times. Training would have to be accelerated to contain construction costs as a result of higher wages .

Power generation, with Eskom looking at another nuclear power station, will also help keep activity high. Power generation infrastructure development will begin in earnest next year and this is a 25-year project.

Transport, water and sanitation, schools and hospitals will need to keep pace with the macro- economic growth, said Bruce.

The attractiveness of the building and construction sector has attracted an unsolicited bid for building materials supplier Iliad Africa from a consortium led by Absa Capital. Talks are continuing.

Last week Iliad said it had acquired the Gauteng-based, R220-million-a-year Thorpe Timbers . Recently, the group bought USM Building Supplies and Lumber City in Lephalale (Ellisras). The combined acquisitions should add R350-million to revenues.

South Ocean, the Johannesburg-based manufacturer of building wires, has spent R10-million on the first phase of its expansion plans by purchasing new machinery that will increase its capacity by 10%.

The company, which was listed in February, has begun the second phase of expansion at a cost of R30-million for new machinery, buildings and working capital, which will add 15% to capacity.

The company recently acquired Radiant Lighting for R485-million, which expands its operations into decorative lighting, lamps and bulbs and electrical products.

Black empowerment group Afrimat announced two weeks ago that it had purchased two quarries and a concrete block-and-brick factory in KwaZulu-Natal, its second acquisition since listing in November. This brings its number of quarries to 22 and brick factories to nine.

Building confidence in SA rose back to near a record peak in the second quarter of this year, reflecting a boom spurred by public spending and pent-up demand for affordable housing, an independent survey showed yesterday.

The FNB building confidence index rose to 88 points from 87 in the first quarter of this year, edging back towards a historic high of 89 posted in the fourth quarter of last year.

FNB chief economist Cees Bruggemans said improved confidence in the building industry reflected higher overall economic growth, which quickened to an average annual rate of 5% over the past three years from 3% earlier in the decade.

"We have barely started. It looks like we are in an extended growth cycle which is likely to last another 7-8 years," he said.

Release of the survey coincided with official data yesterday showing that capital spending by the government rose by 25,4% to R71,8bn in the financial year which ended in March, with expenditure on land and buildings soaring by 149% and construction up by 23,1%.

A slowdown in public sector capital expenditure is expected this year, before the pace picks up again in 2008, the figures from Statistics SA showed.

Construction is playing an increasing role in the economy, with the sector expanding a blistering 21,3% in the first quarter of this year a 17-year record.

At the same time, the government's R416bn infrastructure spending drive is having positive spin-offs, although it focuses on ports, roads, railways and soccer stadiums.

The FNB building survey showed that confidence in the nonresidential sector, which covers commercial buildings, was steady at 94 points but fell in the residential sector to 82 points from 86 in the first quarter.

This suggested business conditions there had been hit by the cumulative two percentage point increase in lending rates last year, Bruggemans said.

The Reserve Bank raised its key repo rate by half a percentage point to 9,5% again in June, and many analysts expect another hike at its meeting next month. But the residential slowdown is unlikely to last, the survey carried out by the Bureau for Economic Research showed.

"Regarding the business outlook for the third quarter, residential contractors said they expected business conditions to remain more or less stable, but an improvement in the tempo of building activity is expected," FNB said.

Bruggemans said there was "enormous pent-up demand" for affordable housing units worth R170000-R250000 from the expanding black middle class.

FNB commercial property strategist John Loos said builders in the nonresidential sector were "very optimistic" and "upbeat" about short-term prospects but they also indicated that shortages of skilled labour and inadequate supplies of materials were "seriously constraining" operations.

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.