BUSINESS conditions in the building sector have deteriorated in the second quarter as high interest rates take a bite out of residential property demand, a survey from the University of Stellenbosch's Bureau of Economic Research shows. 

The bureau's business confidence index for the building industry slipped to 54 last quarter from 58 in the first quarter as economic growth slowed. The delayed effect of last year's four interest rate hikes "have now left a mark on the industry", the bureau said.

Residential property was worst hit by the high interest rates and a slowdown in gross domestic product growth, with building contractors' profit margins coming under pressure in the second quarter, resulting in job losses. 

Domestic demand has been fairly resilient in the first quarter, with the construction sector benefiting from capital expenditure projects in both the public and private sector, according to last month's Reserve Bank quarterly bulletin.

However, the survey results signal much weaker conditions in the second quarter.

"Growth is slowing down in the building sector, which has hurt business confidence. Retrenchments have increased, especially in the residential sector, as business conditions have deteriorated," said the bureau's senior economist Charles Martin.

Civil engineers, typically involved in large government infrastructural projects, experienced far better business activity in the second quarter compared to other sectors of the construction sector.

Civil engineering firms said competition for tenders was intense and profit margins were under pressure, according to the bureau.

"The majority of contractors polled expect the market to weaken somewhat in the third quarter," said Martin. A lower interest rate this year was likely to boost the industry's prospects, but this would materialise only next year.

"Conditions are weaker, but this is not a recession. We will see a gradual pick-up in business confidence by the fourth quarter, but a full turnaround is only likely next year," said Martin.

The confidence index has a tendency to lead the official building figures released by Statistics SA by at least two quarters.

Stats SA's April release of building figures shows an 8,4% year on year drop in actual building plans passed, with less building plans passed in Gauteng, Eastern Cape, Mpumalanga and Northern Cape this year compared to last year.

The real value of buildings completed in April increased by 2,7% year on year, mainly due to a sharp rise in non residential buildings, according to Stats SA's figures.

The survey shows building costs have remained high, despite the strong rand reducing the price of imported inputs.

However, costs are likely to moderate during the year, with the bureau forecasting building costs to grow 8% this year.      

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