27 Jun 2012
Just less than half (+49 percent) of South African businesses in the property and construction sectors are optimistic about the future outlook.
According to Grant Thornton’s International Business Report 2012, this is lower than the average for all local businesses who reported a +54 percent optimism balance in the same survey, highlighting the stress under which the local property and construction sectors are currently operating.
“These low levels of optimism are a reflection of the tough trading conditions faced by both the property and construction industries,” says Lee-Anne Bac, head of property advisory at Grant Thornton.
Bac explains that a reduction in orders due to the generally sluggish economy has impacted on these sectors and while government’s infrastructure upgrade is in the pipeline there is no clear indication of when projects will be launched, compounding concerns about the future.
Grant Thornton’s International Business Report tracks quarterly insights into the views and expectations of over 11 500 owners of privately held business in 40 economies.
These figures refer to the optimism balance for the one year period from the second quarter of 2011 to the first quarter of 2012.
The report also highlights that the most significant constraints to doing business in the South African property and construction sectors are regulations and red tape (49 percent), the lack of availability of a skilled workforce (40 percent), shortage of demand (36 percent), shortage of working capital (20 percent), transport infrastructure (20 percent), shortage of long-term finance (16 percent), cost of finance (15 percent) and ICT infrastructure (7 percent).
“Although these are the top constraints identified for all South African businesses, they are particularly pertinent to the property and construction sectors, especially a shortage of demand/orders, which is a clear indication of a stagnant industry.”
Over regulation also has a real strangle-hold on this sector, which could lead to further stagnation if not addressed, says Bac.
However, because most privately held South African companies in these sectors focus predominantly on the local market and have limited international exposure relative to their total assets/investments, they have been shielded from the poor performance of the global sector.
International peers reported an optimism balance of a mere +8 percent, she says.
The top constraints to doing business in the property and construction sectors internationally are regulation/red tape (29 percent), lack of long-term finance (27 percent), cost of finance (26 percent) and lack of working capital (23 percent), making three out of four finance-related.
Bac says these findings show that local property and construction businesses are focusing on business fundamentals – looking to increase turnover and profitability - to improve performance.
While this is no different to the strategies employed by business owners in general, it is clear that property and construction businesses see limited opportunity in increasing pricing.
On strategies to improve business performance, business owners in the property and construction sector recorded 56 percent to increase turnover/revenue, increase profitability (53 percent), increase investment in plant and machinery (49 percent), increase research and development (36 percent), increase in selling prices (33 percent), increase employment (27 percent), increase investment in new buildings (25 percent) and increase exports (9 percent).
“This is typical of a stressed and highly competitive sector and business owners clearly feel they have limited room to manoeuvre in increasing prices and the sector is still demand driven or a buyers' market,” says Bac.
So while times remain tough, property and construction businesses are focusing on existing assets and investing in building renovations and machinery.
“Typically not many are investing in new buildings, but rather consolidating and improving their current assets in order to be more attractive to potential tenants or clients as the economy turns,” adds Bac.
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