The construction sector was the worst-performing sector in 2020 contracting 20.3%. Statistics SA data shows that the civil industry contracted by just more than 18% in 2020 while investment in the residential building industry contracted by 20.9% and the non-residential building industry by 25.3%.
The reason for this performance was due to construction was not deemed to be an “essential service” during the hard lockdown in March, April, and May of 2020. South Africa was one of the few countries in the world not to classify construction as an “essential service” in a decision that could only be described as puzzling and disturbing.
David Metelerkamp, the senior economist at construction market intelligence firm Industry Insight, is however anticipating “a reasonable bounce back” by the civil industry. He says in a Moneyweb article (https://www.moneyweb.co.za/news/industry/construction-industry-to-bounce-back-in-2021/) that the civil and building industries are both coming off a low base and expect “an about 10% bounce back” by the civil industry in 2021 but opportunities for an improvement in the building industry to be limited and for it to achieve “low single-digit growth in 2021”. “The data is definitely better for civil construction because there are a lot of big projects coming out for tender and there are tenders that are being awarded. Public and private sector investments in transport infrastructure and electricity projects are expected to drive growth over the medium- to long term.
THREE Reasons to Believe in the Future of the South African Construction Industry
Reason 1: COVID-19 losses are NOT structural
The COVID pandemic will eventually come to an end. Office development activity in South Africa ground to a halt during Q2:2020. Some people now argue that COVID 19 will irreversibly change the way that we work; that companies will continue to allow their employees to work remotely and this will have a dramatically adverse effect on office construction. In my opinion, this is not entirely true. 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.
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).
Looking at the broader construction sector, with gradual national and global recovery will come new investment – and construction projects that generate jobs and boost the industry. South Africa’s fundamental need for infrastructure remains. Demand is high for better and more roads and other transport options, housing, power, and other utilities and so on. The government has already committed to using infrastructure projects to drive post-COVID-19 economic recovery. There is still a housing backlog amounting to around 2.3-million units. 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.
The shift in the government’s housing policy is from building costly subsidised housing units to the provision of serviced sites. 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.
Reason 2: Focus on Small and Private - Not Big and Public
Private construction projects will forge ahead post-lockdown. Urban residential projects remain a lucrative source of income. They’re backed by private or foreign investors. So they aren’t hobbled by a lack of government funding. In terms of construction companies, the media likes to focus on the demise of the large construction companies and use this demise as symptomatic of the demise of the sector. One also needs to take into account the rise of smaller construction firms that have stepped up to the plate to fill the gap. There are increased opportunities for these smaller firms.
Reason 3: Save on equipment costs with used equipment
New equipment is a heavy cost to bear during an economic downturn – but not having much-needed machinery can cost your company contracts. With so much high-quality used equipment on the market at any given time, there’s really no need to go for new equipment. There are three reasons why used equipment is better than new. Firstly, lower cost. The cost of one new piece of equipment could equate to two or more used pieces, depending on availability and demand. Secondly, you avoid the initial depreciation. New heavy equipment is no different from new cars in that the minute you drive them off the lot, they depreciate in value – as much as 20 to 40 percent in the first 12 months. Thirdly, used equipment holds its value. Although used equipment has depreciated, it can hold its value if it’s well-maintained. When it’s time to sell, it’s actually possible to get close to what you paid if you sell at the right time, to a market where your equipment is in demand.
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