CHANGING DYNAMICS WITHIN THE SOUTH AFRICAN CONSTRUCTION INDUSTRY

CHANGING DYNAMICS WITHIN THE SOUTH AFRICAN CONSTRUCTION INDUSTRY SOUTH AFRICAN FORUM OF CIVIL ENGINEERING CONTRACTORS LR 2/6/3/138 DAVID METELERKAMP SENIOR ECONOMIST INDUSTRY INSIGHT

PRESENTATION OUTLINE ECONOMIC OUTLOOK GLOBAL PICKUP, DOMESTIC OUTLOOK, CONSTRUCTION SECTOR OUTLOOK CHANGING DYNAMICS AND OVERALL TRENDS, CIVIL CONSTRUCTION, BUILDING, FORECASTS/SUMMARY South African Forum of Civil Engineering Contractors LR 2/6/3/138 2

PICK UP IN THE GLOBAL ECONOMY THE GLOBAL GROWTH RECOVERY IS CONTINUING AND AT A FASTER PACE INTERNATIONAL MONETARY FUND REVISED GLOBAL GROWTH PROJECTIONS UPWARDS THIS WILL BENEFIT SOUTH AFRICA South African Forum of Civil Engineering Contractors LR 2/6/3/138 3

DOMESTIC OUTLOOK South African Forum of Civil Engineering Contractors LR 2/6/3/138 BOUNCE BACK FROM TECHNICAL RECESSION GROWTH OF 2,5% IN Q2 TURNING POINT? SEVERE LACK OF CONFIDENCE IN THE ECONOMY 4

CONSTRUCTION SECTOR ONLY MAJOR SECTOR TO DECLINE IN Q2 2009 Annual 2010 Annual 2011 Annual 2012 Annual 2013 Annual 2014 Annual 2015 Annual 2016 Annual 2017 Q1 2017 Q2 Agriculture, forestry and fishing -3,0% 0,9% -0,4% 2,3% 1,5% 5,6% -6,1% -7,8% 22,2% 33,6% Mining and quarrying -4,2% 5,8% 0,2% -4,0% 4,0% -1,6% 3,9% -4,7% 12,8% 3,9% Manufacturing -10,4% 5,0% 2,4% 2,4% 0,7% 0,0% -0,2% 0,7% -3,7% 1,5% Electricity and water -1,6% 2,0% 1,3% -1,2% -0,6% -0,9% -1,5% -3,5% -4,8% 8,8% Construction 7,4% 1,5% 0,8% 2,5% 2,7% 2,9% 1,7% 0,7% -1,3% -0,5% Wholesale and retail trade; hotels and restaurants -2,5% 2,2% 4,4% 3,6% 1,9% 1,3% 1,4% 1,2% -5,9% 0,6% Transport and communication 0,6% 2,9% 3,3% 2,3% 2,0% 2,3% 1,1% 0,4% -1,6% 2,2% Finance, real estate and business services 0,9% 1,9% 3,5% 3,3% 3,0% 2,2% 2,8% 1,9% -1,2% 2,5% GDP at market prices -1,7% 2,8% 3,1% 2,5% 2,2% 1,5% 1,3% 0,3% -0,7% 2,5% South African Forum of Civil Engineering Contractors LR 2/6/3/138 5

CRISIS OF CONFIDENCE: 29 IN Q1 WORST SINCE FINANCIAL CRISIS 90 80 70 60 50 40 30 20 10 0 BER consumer confidence index 01-Mar-2007 01-Jul-2007 01-Nov-2007 01-Mar-2008 01-Jul-2008 01-Nov-2008 01-Mar-2009 01-Jul-2009 01-Nov-2009 01-Mar-2010 01-Jul-2010 01-Nov-2010 01-Mar-2011 01-Jul-2011 01-Nov-2011 01-Mar-2012 01-Jul-2012 01-Nov-2012 01-Mar-2013 01-Jul-2013 01-Nov-2013 01-Mar-2014 01-Jul-2014 01-Nov-2014 01-Mar-2015 01-Jul-2015 01-Nov-2015 01-Mar-2016 01-Jul-2016 01-Nov-2016 01-Mar-2017 01-Jul-2017 South African Forum of Civil Engineering Contractors LR 2/6/3/138 6

CRISIS OF CONFIDENCE: ANECDOTAL EVIDENCE NEW STUDY FROM THE CENTRE FOR COMPETITION, REGULATION AND ECONOMIC DEVELOPMENT (CCRED) TOP 50 FIRMS ON JSE HOARDING CASH NOT INVESTING HIGH LEVELS OF CAUTION AMIDST UNCERTAINTY RESERVES OF R1.4 TRILLION South African Forum of Civil Engineering Contractors LR 2/6/3/138 7

UPSIDE RISKS DOWNSIDE RISKS UPTICK IN COMMODITY PRICES RECOVERY OF PRIMARY SECTOR. LOW INFLATION FURTHER INTEREST RATE DECREASES. STABLE EXCHANGE RATE. GLOBAL UPTICK. STABLE LABOUR RELATIONS AND CONSTANT ELECTRICITY SUPPLY POLITICAL AND POLICY UNCERTAINTY MANY EXAMPLES OVER THE LAST FEW MONTHS: MINING CHARTER, PP COMMENTS, STATE CAPTURE ETC. CRISIS OF CONFIDENCE RATING AGENCIES? South African Forum of Civil Engineering Contractors LR 2/6/3/138 8

OUR FORECASTS South African Forum of Civil Engineering Contractors LR 2/6/3/138 9

WHERE ARE WE NOW? South African Forum of Civil Engineering Contractors LR 2/6/3/138 10

CHANGE IN DYNAMICS FROM 2011/2012 South African Forum of Civil Engineering Contractors LR 2/6/3/138 11

SMALL CONTRACTORS TAKING A BIGGER SHARE OF THE OVERALL PIE 70,0% Contribution by Construction Enterprises % of Industry Turnover 60,0% 50,0% 40,0% 30,0% 20,0% 10,0% 0,0% Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Large Small Medium South African Forum of Civil Engineering Contractors LR 2/6/3/138 12

HIGHER END OF THE SECTOR IN DIRE STRAIGHTS 250 = JSE versus contractors index (08/2007 = 100) 200 150 100 50 0 2007/08 2007/12 2008/04 2008/08 2008/12 2009/04 2009/08 2009/12 2010/04 2010/08 2010/12 2011/04 2011/08 2011/12 2012/04 2012/08 2012/12 2013/04 2013/08 2013/12 2014/04 2014/08 2014/12 2015/04 2015/08 2015/12 2016/04 2016/08 2016/12 2017/04 JSE Contractors South African Forum of Civil Engineering Contractors LR 2/6/3/138 13

FLAT GROWTH IN THE AWARDING OF GRADE 8 AND 9 PROJECTS South African Forum of Civil Engineering Contractors LR 2/6/3/138 14

27,0% INCREASE IN THE VALUE OF PROJECTS AWARDED (NOMINAL) 13,3% LESS PROJECTS OUT TO TENDER OVER THE LAST YEAR 30,0% Value of civil projects awarded and out to tender (y-y, MAT) 20,0% 10,0% 0,0% -10,0% -20,0% -30,0% 201506 201507 201508 201509 201510 201511 201512 201601 201602 201603 201604 201605 201606 201607 201608 201609 201610 201611 201612 201701 201702 201703 201704 201705 201706 201707 201708 Awarded Tender South African Forum of Civil Engineering Contractors LR 2/6/3/138 15

CONSTRUCTION OF ROADS DRIVING UP CIVIL ACTIVITY South African Forum of Civil Engineering Contractors LR 2/6/3/138 16

WORRYING NO. OF PROJECTS POSTPONED AND CANCELLED POSTPONED (281,4%) CANCELLED (87%) UP OVER THE LAST YEAR Growth in the number of civil projects cancelled and postponed (MAT) 400,0% 350,0% 300,0% 250,0% 200,0% 150,0% 100,0% 50,0% 0,0% -50,0% -100,0% -150,0% Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Cancelled Postponed South African Forum of Civil Engineering Contractors LR 2/6/3/138 17

WORRYING NO. OF PROJECTS POSTPONED AND CANCELLED POSTPONED (281,4%) CANCELLED (87%) UP OVER THE LAST YEAR Growth in the number of civil projects cancelled and postponed (MAT) 400,0% 350,0% 300,0% 250,0% 200,0% 150,0% 100,0% 50,0% 0,0% -50,0% -100,0% -150,0% Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Cancelled Postponed South African Forum of Civil Engineering Contractors LR 2/6/3/138 18

RESIDENTIAL MARKET SLIGHTLY MORE BUOYANT THAN NON-RES 70000 65000 60000 55000 50000 Residential investment (quarterly growth and levels) 20,0% 15,0% 10,0% 5,0% 0,0% -5,0% -10,0% -15,0% -20,0% 45000 Dec/2007 Apr/2008 Aug/2008 Dec/2008 Apr/2009 Aug/2009 Dec/2009 Apr/2010 Aug/2010 Dec/2010 Apr/2011 Aug/2011 Dec/2011 Apr/2012 Aug/2012 Dec/2012 Apr/2013 Aug/2013 Dec/2013 Apr/2014 Aug/2014 Dec/2014 Apr/2015 Aug/2015 Dec/2015 Apr/2016 Aug/2016 Dec/2016 Apr/2017-25,0% Gross fixed capital formation Percentage change South African Forum of Civil Engineering Contractors LR 2/6/3/138 19

PRIVATE RESIDENTIAL Distribution of SQM of private residential building plans over the last 12 months 40,0% 30,0% Growth in SQM approved over the last 12 months non-residential segments (percentage change MAT) 28,3% 8,3% Low cost 20,0% 10,0% 0,0% Luxury homes -10,0% Flats and townhouses Renovations -20,0% -30,0% -40,0% 24,2% 39,2% 01-Dec-2014 01-Feb-2015 01-Apr-2015 01-Jun-2015 01-Aug-2015 01-Oct-2015 01-Dec-2015 01-Feb-2016 01-Apr-2016 01-Jun-2016 01-Aug-2016 01-Oct-2016 01-Dec-2016 01-Feb-2017 01-Apr-2017 01-Jun-2017 Low cost housing Luxury homes Flats and townhouses South African Forum of Civil Engineering Contractors LR 2/6/3/138 20

DEMAND FOR FLATS AND TOWNHOUSES IN THE CURRENT DEPRESSED ENVIRONMENT: CHEAPER TO BUILD/BUY CHEAPER TO MAINTAIN BETTER RETURNS IN CURRENT ENVIRONMENT PROVINCE SPECIFIC ANOTHER HOTSPOT: LOW COST AND AFFORDABLE HOUSING CATALYTIC HUMAN SETTLEMENT PROJECTS South African Forum of Civil Engineering Contractors LR 2/6/3/138 21

NON-RESIDENTIAL MARKET MORE DEPRESSED 70000 65000 60000 55000 Non-residential investment (quarterly growth and levels) 28,0% 23,0% 18,0% 13,0% 8,0% 3,0% -2,0% 50000 45000 Dec/2007 May/2008 Oct/2008 Mar/2009 Aug/2009 Jan/2010 Jun/2010 Nov/2010 Apr/2011 Sep/2011 Feb/2012 Jul/2012 Dec/2012 May/2013 Oct/2013 Mar/2014 Aug/2014 Jan/2015 Jun/2015 Nov/2015 Apr/2016 Sep/2016 Feb/2017-7,0% -12,0% -17,0% Gross fixed capital formation Percentage change South African Forum of Civil Engineering Contractors LR 2/6/3/138 22

17,9% DECREASE IN THE VALUE OF PROJECTS AWARDED (NOMINAL) 3,5% LESS PROJECTS OUT TO TENDER OVER THE LAST YEAR 30,0% Number of non-residential projects awarded and out to tender (y-y, MAT) 20,0% 10,0% 0,0% -10,0% -20,0% -30,0% -40,0% -50,0% 201506 201507 201508 201509 201510 201511 201512 201601 201602 201603 201604 201605 201606 201607 201608 201609 201610 201611 201612 201701 201702 201703 201704 201705 201706 201707 201708 Awarded Tender South African Forum of Civil Engineering Contractors LR 2/6/3/138 23

NON-RESIDENTIAL PRIVATE 120,0% 100,0% 80,0% 60,0% 40,0% 20,0% 0,0% -20,0% -40,0% -60,0% -80,0% Growth in SQM approved over the last 12 months non-residential segments (percentage change MAT) 01-Dec-2014 01-Jan-2015 01-Feb-2015 01-Mar-2015 01-Apr-2015 01-May-2015 01-Jun-2015 01-Jul-2015 01-Aug-2015 01-Sep-2015 01-Oct-2015 01-Nov-2015 01-Dec-2015 01-Jan-2016 01-Feb-2016 01-Mar-2016 01-Apr-2016 01-May-2016 01-Jun-2016 01-Jul-2016 01-Aug-2016 01-Sep-2016 01-Oct-2016 01-Nov-2016 Commercial Retail Industrial and warehousing 01-Dec-2016 01-Jan-2017 01-Feb-2017 01-Mar-2017 01-Apr-2017 01-May-2017 01-Jun-2017 01-Jul-2017 31% GROWTH IN INDUSTRIAL AND WAREHOUSING -47% IN RETAIL. SHOPPING CENTRE BOOM ENDED. 5,3% COMMERCIAL South African Forum of Civil Engineering Contractors LR 2/6/3/138 24

SOME KEY ISSUES IN THE SECTOR DISCONNECT BETWEEN AWARDS AND TENDERS. GOVERNMENT, NOT PRIVATE SLOW PACE PROJECTS ROLLED OUT BY SOE S MASSIVE INEFFICIENCIES (LACK OF SECURITY RELATED TO FINANCE CONSUMER DRIVEN TARIFFS ETC.) BUSINESS CONFIDENCE (GENERAL ECONOMIC FACTORS) TRANSFORMATION South African Forum of Civil Engineering Contractors LR 2/6/3/138 25

OVERALL OVERALL, THE OUTLOOK IS RELATIVELY DEPRESSED BUT THERE ARE NODES OF GROWTH IF ONE LOOKS MORE PROVINCIALLY. CIVIL OUTLOOK FLAT (MARGINAL NEGATIVE REAL GROWTH) BUILDING MORE OR LESS THE SAME, FLAT GROWTH IN NOMINAL TERMS OVER THE NEXT 28-24 MONTHS CHANGING LANDSCAPE South African Forum of Civil Engineering Contractors LR 2/6/3/138 26

OUR FORECASTS South African Forum of Civil Engineering Contractors LR 2/6/3/138 27

THANK YOU South African Forum of Civil Engineering Contractors LR 2/6/3/138 28