Grants boost activity

Economically empowered rural areas offer good growth prospects.

The building industry is cashing in on increasing development opportunities in semi-urban and rural areas, prompting companies to broaden their geographical footprint.

The construction of residential developments, schools, shopping malls and roads in outlying areas has increased, to serve a more economically empowered population. Part of this empowerment comes from social grants, says Cashbuild CEO Werner de Jager.

“Driving through rural towns, you find that everyone is doing something to improve their homes,” he says.

JSE-listed Cashbuild, which sells building materials directly to cash-paying customers, has 51 stores in rural areas, out of a total of 191 stores around the country.

Comparing its figures for the six months to December 2011 with the six months to December 2006 reveals that its rural business revenue has outstripped its urban store revenue . The average revenue per rural store increased by 80%, compared with the company’s average of 60% .

Cashbuild’s rural stores attract home owners who want to make their own improvements to their homes. Whereas in urban areas, Cashbuild stores generally serve bakkie builders (builders who work out of the back of a bakkie) who do small building jobs for home owners .

Cashbuild’s urban customers frequently buy from stores in cities like Cape Town, but arrange for their purchases to be collected at a rural store, in Butterworth, in the Eastern Cape, for example.

This form of remittance — or sending money home — is common, says De Jager. It supports the opinion that building activity, often the DIY-type, is on the increase.

PPC CEO Paul Stuiver echoes this sentiment. “Rural areas are feeling the effect of social grants. A portion of grant money is spent on home building and improvements, which has caused a general increase in demand outside the cities.”

He has noticed other pockets of investment. Construction in the Western Cape has slumped, affecting most companies that operate in that province, including PPC. But Stuiver says medium-sized contractors are busy. “I see the activity on secondary roads and small projects, like perlemoen farms.”

Data from Statistics SA reveals that building activity levels in Gauteng, the Western Cape and KwaZulu Natal are still the highest. But the percentage change of activity in the Northern Cape, Free State, Limpopo and North West has increased between the two comparable quarters, far in excess of any of the other provinces.

In the Northern Cape, for example, building activity rose by 86,1%, when comparing the first quarter of 2012 with that of 2011. However, its contribution to the total value of building plans passed in the country was just 1%.

The same report shows that building activity dropped in the first quarter of this year . The value of recorded building plans was 4,5% lower, at R15,4bn, compared with the first quarter of 2011. Non residential building activity decreased by 22,8%, while residential building rose by 4,2%, to R6,89bn.

The Bureau of Economic Research’s building confidence index rose from 29 to 34 over the quarter, after building contractors, manufacturers of building materials and quantity surveyors reported a better outlook for the sector.

Nevertheless, six out of 10 respondents still rate prevailing business conditions as unsatisfactory.

Government’s infrastructure plan supports growth in rural areas, which might boost building activity there . It has targeted investment in provinces such as North West, Limpopo and Mpumalanga, which should benefit rural economies and communities.

For example, with the promulgation of the Special Economic Zones Bill , government intends to develop multiple and geographically scattered pockets of industrial development. Small contractors report that rural activity is picking up.

Anele Madlanga, owner of Ola Paint, a Soweto-based company, says the limited availability of land in township areas has affected construction levels. But in outlying areas — rural and semi-urban — opportunities are on the increase.

Madlanga builds houses for low-cost housing developers in Fleurhof and Lufhereng, southwest of Johannesburg. He also does work in Orange Farm and expects to work on a housing project in Carletonville .

But he relies on subcontracted work and his profits are usually low. Smaller contractors believe tender requirements are preventing small and medium-sized enterprises (SMEs) from benefiting from infrastructure development.

Doctor Mfobela, owner of Doc’s Construction, says operating as a small contractor before 2000 was easy. He worked successfully in Queenstown in the Eastern Cape.

But that changed when contractors were graded according to Construction Industry Development Board guidelines. Such grading limits contractors to tendering for only those projects for which they are graded .

The system was designed to prevent capacity concerns that have been a problem in the past, where small operators take on projects that are too big for them. Mfobela says it has inadvertently cut out the small contractors.

He says government will have to resolve this shortcoming if its intention is to spread the benefits of large infrastructure projects to SMEs, particularly those in rural areas. Large companies already appear to be cashing in.

Stuiver says PPC has put systems in place to better serve rural areas. Contrary to popular opinion, cash-paying rural customers are extremely sophisticated . “They are more quality conscious than urban-based customers . They want to know exactly how many bricks they can make from a bag of cement. And they test quality by walking on the bricks two days after they have set, to see whether they will crack.”

He adds that rural customers are prepared to pay for higher-quality products, which they get more out of . “They do the calculations,” he says.

Building materials supplier Afrimat says contract values are diminishing . Three years ago, it was common to tender for contracts valued at between R800m and R1,5bn. Today, contracts are more commonly valued at about R100m, says CEO Andries van Heerden.

But he suggests that smaller contracts create more jobs, which fits in with government’s intention to use infrastructure as a means of job creation. Van Heerden also says the projects are more geographically dispersed. Smaller firms like Afrimat are more flexible, allowing them to respond more quickly than their larger rivals to work opportunities in different locations.

To date, however, government’s largest initiative to direct money where it is most needed, the Expanded Public Works Project, has not achieved what it set out to. Only a small amount of funding has reached the intended beneficiaries. Wages have been low and much of the work is short term. 

Source : http://www.fm.co.za/Article.aspx?id=173859