The construction industry has contracted sharply, partly due to Covid, and needs to rebalance its focus if it wants to survive
COMMENT
The South African construction sector constituted 3% of the total nominal value added to the second quarter of this year’s [Q2:2020] gross domestic product (GDP). Construction’s contribution to GDP has ranged between 3 and 4 percent since Q1:2020 to Q2:2020 in the face of muted demand for construction in the country.
The construction sector employs approximately 1.3-million people, which has stayed relatively constant from Q1:2019 to Q1:2020. The sector has been plagued by challenges, such as declining government infrastructure spend, rising material costs and a decline in profit margins. Capital expenditure on infrastructure by the government has been on the decline since 2016. According to a 2019 report by Statistics SA focused on capital expenditure by the public sector, South Africa’s 757 public sector institutions spent R250-billion on fixed assets in 2018, R272-billion in 2017, and R283-billion in 2016.
The value of building plans passed in 2019 amounted to R108.1-billion, with Gauteng, Western Cape and KwaZulu-Natal constituting 37.8%, 26.6% and 16.5% of these plans, respectively. When the national lockdown commenced on 26 March 2020, all construction activities were shelved, save for repairs and maintenance of essential services infrastructure. This contributed to a contraction of the sector, which was already faced with low demand due to reduction in government expenditure on infrastructure development.
Data for the second quarter of 2020 from Stats SA showed the construction sector declining by a seasonally adjusted and annualised rate of 76.6%.
The construction sector experienced a significant contraction as seen by the value added to GDP year-on-year change in Q2:2020 being -30.7%, compared to -2.2% in Q1:2020 and -0.9% in Q4:2019.
Gross fixed capital formation in South Africa declined by a seasonally adjusted and annualised rate of 59.9% (quarter on quarter). This decline, according to StatsSA, was mainly due to decreasing investments in construction works (76% decrease), residential buildings (76.6% decrease), and non-residential buildings (80.8% decrease).
Construction works
In the run-up to the 2010 soccer World Cup, South Africa witnessed a surge in infrastructure development. However, after this period there has been a shortage of major construction projects in the country, resulting in a slowdown in the construction sector. This reduction resulted in companies such as Group Five and Basil Read undergoing business rescue processes in March 2019 and June 2018, respectively. Esor Construction was also placed into business rescue and its shares suspended from trading on the Johannesburg Stock Exchange (JSE) in August 2018. The company was eventually delisted from the JSE on 22 June 2020.
JSE-listed companies that have managed to weather the construction bust managed to do so by diversifying or rebalancing their focus into other market segments. Afrimat reduced its focus from construction materials and increased focus on more profitable and higher-margin industrial minerals and bulk commodities. Not having any debt also spared Afrimat.
Raubex diversified from road building to include focus on earthworks and infrastructure development (particularly in renewable energy).
Another strategy, which has been explored by construction firms such as Murray & Roberts, is geographic diversification. The company sought to expand their scope by targeting other regions such as Australia and the United Arab Emirates (UAE), although the firm eventually exited the UAE market in 2016/17.
Non-residential buildings
The national office vacancy rate was 12.3%, 0.7% up from the previous quarter and was 11% in Q4:2019. This weakening was a function of the fragile economic environment and more recently, Covid-19 related challenges. The South African Property Owners’ Association (Sapoa) highlighted that the effect of Covid-19 would only be fully realised some quarters after the end of the lockdown period due to leases only coming up for renewal then. Office development activity in South Africa ground to a halt during Q2:2020.
As some employees have been working remotely, some companies have invested in resources that allow for remote working, others have downsized or done away completely with physical offices. Such resources include the installation of fibre internet connectivity, ergonomic workstations (desks and chairs), web cameras, and so on. Although this can be an option, other companies such as Ernst & Young, Sasol and Discovery, which have invested significant amounts into constructing offices, are unlikely to completely do away with these facilities. Each organisation needs to examine its product and service offerings in order to see the optimal use of its human and financial resources.
Decentralisation has security risks, especially for organisations dealing with confidential client information. Another factor to consider with decentralisation is the policing cost for ensuring employees align with the work requirements (putting in the hours and going the extra mile while being distracted by personal or home commitments).
Companies operating office parks will have to consider repurposing the use of the office blocks. Where possible, some offices might need to be rezoned for other activities such as training centres, shared working spaces, warehousing, or distribution centres.
Residential buildings
A paradox of sorts exists in the South African construction sector, as seen in the collapse of large construction firms, yet there is a housing backlog amounting to around 2.3-million units. The expertise of these construction firms could easily be deployed to help address this backlog. In his 2020 national budget speech, Finance Minister Tito Mboweni detailed a reduction in funds allocated to the human settlements sector by R14.6-billion.
This reduction over the medium-term expenditure framework from 2016/17 to the 2022/23 period is anticipated to result in fewer subsidy houses, serviced sites and related bulk and connector infrastructure.
Such changes came about despite South Africa facing a housing backlog. The shift in government’s housing policy from building costly subsidised housing units to provision of serviced sites is unlikely to dampen the backlog. The serviced sites are being placed for people to build their own houses on the serviced stands, but with the loss of incomes due to slowdown in economic activity, demand for such sites is likely to be subdued in the short to medium term.
The National Development Plan proposes that by 2050 transformation of human settlements must result in “equitable and efficient spaces with citizens living in close proximity to work with access to social facilities and essential infrastructure”. The realisation of this vision requires a concerted effort between various roleplayers in the construction sector, with the government being at the forefront. Such efforts include making prime land (close to cities) available for infrastructure development, investments by private sector companies in social housing, as well as other public-private partnerships to increase the efficiency of project rollouts.
The views expressed are those of the author and do not necessarily reflect the official policy or position of the Mail & Guardian.