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Studium Ad Prosperandum

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BMI BMI

BUILDING BUILDINGRESEARCH RESEARCH STRATEGY STRATEGYCONSULTING CONSULTING UNIT UNITcc cc Reg. No. 2002/105109/23

Voluntas in Conveniendum

Our Vision Building and construction is an engine for growth and wealth creation and property is a preferred investment.

EXECUTIVE SUMMARY:

Our Mission Developing competitive Industry foresight and strategic leadership as a way of business life.

SENSEMAKING UPDATE: *YTD 2018 (*MARCH)

FUTURESCAPE™: THE NEW PLANNING PARADIGM FUTURESCAPE FOR THE BUILDING, CONSTRUCTIOIN AND PROPERTY MARKET

A Futurescape™ as shown here, supports the process of visual thinking by enabling the link between your intuitive sense of Investment Climate events in the larger environment with what you already know and BUILDING CONSTRUCTION what the data indicates. This PROPERTY visual synthesis promotes insight Investor Property Confidence Delivery about the present and foresight about the future - the keys to successful strategic thinking. An important trend in the Building Environment, shown in the Futurescape ™ here is the threat on Property investment by Expropriation without Compensation (EWC) (T. Irene Sanders: strategic thinking and the new Science: Planning in the midst of chaos complexity and change) Radical Economic Transformation, BBBEE, “Licence to steal” Affirmative Action Inequality, Grants Unemployment Skills lack

Secondary Property Market Construction Charter

Rating Agencies, IMF, World Bank

State Capture Cabinet reshuffles Credit downgrades

Corruption, Looting

Populism Labour unrest Strikes Fees must fall Protest marches Arson

GDP, GFCF, GFCF RES GFCF NON RES, GFCF CONSTRUCTION

EWC Expropriation without compensation BFLF Confidence, Policy Uncertainty; Political Climate Reconciliation, Nation building

Population Growth, Urbanisation, Squatting

White Monopoly Capital Collusion, Competition Commission, Corruption, Tax avoidance, Money laundering

SARB, Treasury, SARS, SABS, CSIR, PIC, IDC, DBSA, SANRAL, Judiciary, StatsSA NHBRC, CIDB, SOE’s, Eskom, SAA, ACSA, PIC, Transnet

Public & private Res, Non Res and Construction BPP & BC, NBIP

Engine for Growth and Wealth Creation

Constitution, NDP VISION Provinces, Local Authorities

Reconciliation, Nation building, Compelling Vision

Professions, Architects, Engineers, QS’s, Town planners

CIDB, NHBRC, SABS, MBA’s, SEIFSA, SAICE, BLSA

Infrastructure structural failure, Affordable Housing, Mortgage Advances, NMIP, National Credit Act Property Rights Land reform, BFLF

No Confidence debates Accountability, SABC, e News, AJJ

Poverty, Inequality, Housing backlog, Infrastructure Maintenance

Forecasting, the most familiar tool for getting advance information about the future, is based on analysis of existing conditions and trends. Through analysis and the use of mathematical models, forecasters estimate or calculate the future state. Classical forecasting models are based on the old cause and effect belief that, given a set of initial conditions, all you must do is project those forward and arrive at the conclusion about the future. This was the type of challenge for meteorologists in coming anywhere close to forecasting the local weather was to see and understand the dynamics of the larger system in a coherent and realistic way. The same thing is true for the business world, and this is where a Futurescape ™ analysis becomes useful. The reason for this as we know from the new science, is that in complex adaptive systems such as the Building Industry, change can be introduced at almost any point. Through the butterfly effect any change in initial conditions can create dramatic changes in the future.

Executive summary Sense-making Update for YTD 2018 (March) 1


Foresight provides the ability to see what is emerging – i.e. to understand the dynamics of the larger context and to recognise new initial conditions as they are forming. In today’s complex and rapidly changing world, the development of foresight skills is a must. Without foresight, all we can see ahead of us is a wall of darkness. With foresight, we see the future as it is taking place. The so-called perking data identified in the environment (e.g. land expropriation without compensation) are the leverage points. The perking data are those new initial conditions to which the future of the building industry is sensitive. The perking data are, in fact, beginning to create the future of the industry. Through the futurescape™ map we can begin to see the connections, relationships, and patterns that are creating the dynamics of the system that we are observing. We will begin to see the creative edge, where the future is emerging. Finally, we will begin to see the leverage points and opportunities for influencing the future. We know intuitively that the radical nature of the EFF political party is causing populist behaviour through encouragement of land invasion, and this has already begun to impact the environment in terms of confidence and also in terms of violence which could easily get out of hand and cause human suffering. Prof Richard Calland, a partner of the Consulting Firm Paternoster, was recently involved in a strategic foresight exercise convened by German development agency GIZ. The land issue emerged as a microcosmic driver of change, in both directions. Get it right, and the positive multiplier effect is profound; get it wrong, and the tilt in the opposite direction in terms of economic development, social stability and political risk is powerfully negative. (Business Day, 4th June 2018) After a period of internal confusion and contestation, the statement from the ANC’s recent land summit presented a far more nuanced expression of the party’s intent. The statement broadly reflected Ramaphosa’s stated position. He has argued that a radical land reform and redistribution programme must be built on the triple pillars of inclusive economic growth, increased agricultural productivity and reduced food insecurity. But the stark reality is this: for as long as all sides continue to talk past each other, the land reform issue will be highly divisive and dangerous and the opportunity for it to become a driver for the developmental high road will sharply diminish. (Business Day, 4th June 2018) With foresight, we can influence the future by responding to and influencing what is emerging. With foresight we can see change coming and respond-before a crisis arises. We have an opportunity to focus our resources in ways that will begin to influence the future immediately. Until now, however, what has been missing in our attempted foresight is the sight part of the process. The concept of environmental scanning - the process of gathering information about changes in the environment of a business or industry - provided the framework for developing the approach to thinking about change. And, chaos theory and complexity provides an understanding about the dynamics of change.

Executive summary Sense-making Update for YTD 2018 (March) 2


CONFIDENCE, POLITICAL UNCERTAINTY AND THE ECONOMY Can one person like Pres. Cyril Ramaphosa make a difference to the future of the country? As explained earlier, Complexity theory makes the point that a small change in initial conditions can have major consequences through the butterfly effect. TINY DIFFERENCES IN INPUT COULD QUICKLY BECOME OVERWHELMING DIFFERENCES IN OUTPUT—A PHENOMENON GIVEN THE NAME “SENSITIVE DEPENDENCE ON INITIAL CONDITIONS.” Since Ramaphosa’s election, confidence has already improved, impacting the exchange rate and Moody’s stay of the downgrade to junk status. Eighty-nine per cent of manufacturers view the political climate as a constraint on business, reflecting public policy uncertainty and poor public finances. Politics remained the key to economic improvement, especially as noise got louder in the run-up to the ANC’s leadership contest in December. (Lesetja Kganyago, Reserve Bank Governor, BD 29 Sept 2017). Figure 1.4: Potential impact of selected NDP reforms on GDP growth Other policies and reforms, such as addressing the skills constraint

5.0 4.5 4.0 0.2

3.5

Per cent

In this regard, ‘Cyril Watch’, compiled by political risk consultancy The Paternoster Group, gives Cyril Ramaphosa 64% for his performance in his first 100 days as president. The group’s Richard Calland explains the score:

0.3

3.0

0.6

2.5 0.6 2.0 0.5 1.5 1.0 0.5 0.0 Current

Improvement

Telecoms

Barriers to

Transport

Prioritising

Potential

potential in confidence reforms entry reforms tourism and growth after May 25 marks 100 growth agriculture reforms days since Cyril Source: National Treasury: Budget Review 2018 Ramaphosa was sworn in as SA’s fifth president. The shift away from the Zuma years has undoubtedly been significant: the Ramaphosa era has ushered in renewed hope and optimism. But he inherited a dysfunctional government, a fractured society and a deeply divided governing party.

Executive summary Sense-making Update for YTD 2018 (March) 3


So, is Ramaphosa winning? To answer this, the Paternoster Group has developed a framework for analysis called "Cyril Watch" with five cluster headings and 15 indicators. Here’s what it tells us. Political leadership — taking tough decisions at the top So far, Ramaphosa has barely put a foot wrong. He has distanced himself from the Zuma administration — no mean feat as he was Zuma’s deputy from 2014. Aided by his #TummyMustFall early morning walks, he has been able to project himself as both energetic and approachable, in contrast to his predecessor. His first state of the nation address, less than 48 hours after Zuma resigned, was well delivered and well received. But the real test is whether he will be sharp enough and, where necessary, ruthless enough to use power now that he has won it. The answer to that question, based on his performance so far, must be a resounding yes. He ousted Zuma from power, reshuffled the cabinet, fired or suspended key agents of the state capture project (such as Tom Moyane at the SA Revenue Service), and embarked on a wide-ranging clean-up of state-owned enterprise boards. Putting the right people in the right jobs in government — such as Nhlanhla Nene at treasury, Pravin Gordhan at public enterprises and Lindiwe Sisulu at international relations — has brought credibility and authority to government. But has Ramaphosa imposed his vision on his country? The “thuma mina” (send me) rhetoric of his state of the nation address resonated strongly. Yet, with uncertainties about big policy issues such as land and mining, and progress yet to be made in job creation, Ramaphosa has a long way to go before it can be said he has put in place a strategic single vision for all to see. Still, a careful reading of his statements shows a clear-minded approach to priorities. Perhaps a strategic single vision will only emerge if he receives a fresh mandate after the 2019 election. Until then he will have to continue to emphasise his government’s approach to revitalising economic growth — too many potential investors remain unconvinced, looking for clearer signals that Ramaphosa is able to execute the structural reforms needed. Governance and corruption — uncapturing the state Swift action has been taken at Eskom, SAA, Prasa, Denel and Transnet with complete overhauls of their boards. Ramaphosa’s "enforcer-in-chief" Gordhan announced in his budget vote speech on May 15 that Safcol and Alexkor will be next. For those looking for tangible examples of progress in confronting corruption in the public sector, Eskom has set the pace: lifestyle audits have been instituted. But Gordhan faces the risk of being stymied by the financial difficulties of many of these state-owned enterprises. Recently Ramaphosa said he would grasp the intelligence network nettle when he highlighted his intention to create a review panel to deal with allegations of corruption and wrongdoing in the state security agency — a source of the "deep state" problems. Executive summary Sense-making Update for YTD 2018 (March) 4


Policy lightning rods — balancing stability with transition. We refer to these as Perking data in our Futurescape™ Land reform. How Ramaphosa handles the land issue will have a major impact on the success of his first year in office and represents a real test of his political skill. So far, so good, with the ANC emerging from its recent land reform indaba with a carefully worded statement that aligns with the president’s own approach. But Ramaphosa continues to walk a tightrope. Mining charter. In his state of the nation address Ramaphosa emphasised mining is a sunrise and not a sunset sector. So, the mining charter negotiations are a litmus test for his administration’s commitment to removing obstacles to economic growth. Until the new mining charter is agreed by all stakeholders, the jury is out. Fiscal stability. It is too early into the new budget cycle to assess whether government is on track with its public expenditure targets, given the tight fiscal space Ramaphosa inherited. Opposition parties are watching for signs of continued excess in the use of state resources, so it will be a lightning-rod issue for the new administration. In the short term, attention will focus on the presidency’s own budget (on May 23). It’s been 100 days since Cyril Ramaphosa has been in office as the president of South Africa. Here’s a look back at what he’s done since he was sworn in as president. Socioeconomic recovery and the social compact — forging consensus for economic growth There are signs of impatience in the investor and corporate communities. Even though there is goodwill towards Ramaphosa, there’s anxiety over whether he can deliver. The ANC — keeping his party in the rear-view mirror Factional disputes within the ANC still constitute a major threat to Ramaphosa’s leadership. Pushback from the "Zupta" rump in the North West, Free State and Kwa-Zulu Natal continues to undermine the drive towards unity. Ramaphosa has demonstrated his determination to rid the ANC of its most rotten elements, returning home early from a Commonwealth summit in London to begin the process of removing North West Premier Supra Mahumapelo, who defied calls from the ANC’s national working committee to quit. In assessing Ramaphosa’s performance against these "key performance indicators", it is crucial to distinguish between those things over which he has almost full authority (such as the cabinet reshuffle), those over which he has only partial authority (the jobs summit), and those over which he has hardly any control (global commodity prices). Applying the football scoring system — three points for a win (green light), one for a draw (orange) and nought for a loss (red) — Ramaphosa gets 29/45 (64%). Executive summary Sense-making Update for YTD 2018 (March) 5


Given the huge challenges, long to-do list, uncongenial fiscal and economic context and the dismal Zuma legacy, this represents a strong performance by the new president. BUILDING PLANS PASSED AND BUILDINGS COMPLETED: *YTD ACTUAL 2017 vs 2016 IT MUST BE EMPHASISED THAT BPP AND BC (PUBLISHED BY STATSSA) COMPRISES < 20% OF TOTAL INVESTMENT IN BUILDING. In fact, in 2017 it was 9,2 million m2 (18,3%) in a Total Investment in Building of 50,33 million m2. Nevertheless, it is an excellent short-term indicator of the trends in the Building Industry (published 6 weekly in arrears) but it must be interpreted in this context. The Purpose of the BPP and BC survey is that the monthly survey data are used in monitoring the state of economy and formulation of economic policy. Furthermore, the results are important inputs to estimate the gross domestic product (GDP) and to calculate the Composite Leading Business Cycle Indicator. The data are extensively used by the private sector. BUILDING PLANS PASSED: *YTD ACTUAL 2018 vs 2017 (* MARCH) The 2018 YTD Actual Residential BPP vs the same period in 2017 shows an INCREASE of + 2,75% in m2; and an INCREASE of + 4,89% in value. The 2018 YTD Actual Non-Residential BPP vs 2016 recorded an INCREASE of + 3,57% in m2; and an INCREASE of + 9,17% in value. Therefore the 2018 YTD Actual Total BPP vs 2017 shows an INCREASE of + 3,00% in m2 and an INCREASE of + 6,25% in value.

PRIVATE SECTOR BUILDING PLANS PASSED: YTD ACTUAL 2018 VS 2017 (R*1000) (MARCH) Other + 646,38% Flats & Townhouses + 32,73%

Additions & Alterations

+ 69,52% % Change in Value of Building Plans Passed between YTD 2018 and 2017 by Building Type

Dwellings > 80 m2 + 65,08%

Residential + 4,89%

Dwellings < 80 m2 + 97,71%

All Buildings + 6,25% Non Residential + 9,17%

Offices & Banking + 83,21%

Shopping + 20,40% Additions & Alterations

Industrial & Warehousing + 18,44%

+ 132,70% Other + 44,68%

BUILDINGS COMPLETED: *YTD ACTUAL 2018 vs 2017 (* MARCH) Buildings completed showed a DECLINING pattern IN CONTRAST to BPP, with both Residential and Non-Residential BC recording a decline, with Non-Residential BC recording even worse decline. The 2018 YTD Actual Residential BC (March) vs the same period in 2017 shows a DECREASE of - 13,13% in m2; and a DECREASE of – 9,33% in value. The 2018 YTD Actual Non-Residential BC (March) vs 2017 recorded a DECREASE of +18,48% in m2; and of – 22,18% in value. Therefore, the 2018 YTD Actual Total BC (March) vs 2017 shows a DECREASE of – 14,82% in m2 and of – 13,71% in value.

Executive summary Sense-making Update for YTD 2018 (March) 6


The NBIP™ = BPP-BC is a proxy for "Building Starts, or the Order book”, because the building of this remnant must be postponed, cancelled or COMMENCED, for delivery of Buildings in the Pipeline to be maintained.

MIN/MAX/AVE/YTD ACTUAL2018/FC2018-2020 OF BPP/BQ: 1993 - 2018 RES NON RES TOTAL m2 R*1000 m2 R*1000 m2 R*1000 PARAMETER 1,62 1,61 1,31 1,29 1,51 1,49 Actual 2017 1,62 1,70 1,68 1,76 1,63 1,71 Average 1993-2017 1,06 1,10 1,06 1,12 1,19 1,05 Minimum (2005) 1,88 1,99 2,34 2,63 1,92 2,10 Maximum (2009) 1,83 1,77 1,85 1,92 1,84 1,82 YTD Actual 2018 * 1,64 1,59 1,73 1,69 1,67 1,62 *YTD FC 2018 0,22 0,07 0,17 0,16 0,21 0,11 *YTD Act-Ave 0,79 0,71 0,74 0,86 0,72 0,63 *YTD Act-Min -0,05 -0,22 -0,50 -0,71 -0,08 -0,28 *YTD Act-Max 0,02 1,61 1,31 1,29 1,51 1,49 *YTD FC-Ave © BMI-BRSCU * March 2018

The ratio BPP/BC for *YTD Actual 2018 varies from a low of 1,77 (Res R*1000) to a high of 1,92 (Non-Res R*1000). Note that all the ratios for YTD 2018 are below the maximums (achieved in 2009), generally above the average for the 25 years from 1993 – 2017, and well above the minimum (achieved in 2005). A high ratio can be that BPP exceeds BC and interpreted as the “health of the Industry”, either to depict “health” or could be an indication of sluggish Building Completions. Interpreting the ratio correctly requires scrutiny of the STATS. Our conclusion is that the ratio BPP/BC and Net Building in the Pipeline in both RES and NON-RES NBIP™ (see table) shows that the Residential and Non-Residential Buildings in the Pipeline (in m2) are exceeding the pace of construction. (With NonRes BPP/BC = 1,85 or BPP = 85%*BC, and with Res BPP/BC = 1,83 or BPP = 83%*BC), thus the pipeline is marginally “healthier” for NON-RESIDENTIAL BC than for RESIDENTIAL BC. This is indicative of the greater volatility in Non-Residential investment resulting from, inter alia, larger projects with longer planning cycles, greater sensitivity to risk because of lack of investor confidence and political uncertainty. The situation in the Residential Sector is substantially better. The next Chart shows the interaction between BPP, BC and NBIP™. It is evident that the outlook to 2020 for BC is flat, more of the same and slightly better. Total Building: BC: 1993 - *YTD FC 2020: Net Building in the Pipeline (NBIP): by Month: m2 (* March) (Source: StatsSA, BMI-BRSCU: BC Total RSA by Month and Type of Building: NBIP (BPP-BC): Chart 2948 (2)) 2 200 000 2 000 000

Total Building NBIP (BPP-BC) Total Building BC

1 800 000

Total Building BPP 12 per. Mov. Avg. (Total Building NBIP (BPP-BC))

NBIP = 57,14%*BC

12 per. Mov. Avg. (Total Building BC)

NBIP = 65,26%*BC

12 per. Mov. Avg. (Total Building BPP)

1 400 000

NBIP = 44.02%*BC NBIP = 59.43%*BC

1 200 000

NBIP = 81.33%*BC 1 000 000

NBIP = 65.98%*BC

800 000 600 000 400 000 200 000

These two periods (1993-2000 and 2011-2016) are very similar. Return to the New Normal?

Executive summary Sense-making Update for YTD 2018 (March) 7

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

0

1993

Square Metres

1 600 000


THE BMI BUILDING & CONSTRUCTION and RETAIL SALES INDICIES: 2002 â&#x20AC;&#x201C; 2020 These indices provide a historic, current and future index of building and construction activity and Retail Trade Sales. It is essentially based on our Investment table from 2002 to 2020 at constant 2016 values. The index is calculated from 28 contributing indicators, with 2008 (the onset of the financial crisis), set at 100. Both Public and Private Investments are included, thus allowing for comparison of the contributions by Public and Private Sector. The following Charts display the trends in the Indices. BMI Index of Total Investment in Building:

BMI Index of Total Investment in Construction:

INDEX (2008 = 100):2002 - 2020; Total Investment in Bldng: Constant 2016

INDEX (2008 = 100):2002 - 2020; Total Investment in Constr: Constant 2016

2025

2024

2023

2022

2021

2020

2019

49564

128

123

118

114

109

104

101

99

2023

2024

2025

93

2022

91

2021

92

2020

88

155

138

2019

81

150

134

137

146

131

142

130

2018

82

109

2016

100 40

103

2015

60

2017

80

82

79

87

84

86

92

96

101

100 100

108

Investment in Building

20

2014

2012

0

2011

0

Paint & Hardware Sales

2010

2025

2024

100 000

TOTAL INVESTMENT IN CONSTRUCTION: CONSTANT 2016 VALUE

120

2009

GFCF INDEX (2008 = 100)

TOTAL INV IN BUILDING & CONSTR

200 000

140

2008

Public Sector

GDP INDEX (2008 = 100)

300 000

Public Sector

TOTAL INV IN BLDNG & CONSTR: CONSTANT 2016 VALUE

268660

255867

247215

241185

236456

232961

231090

225782

226075

262703

246968

234162

213690

211505

220263

269468

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

5 000

160

INDEX (2008 = 100) Retail Trade Sales vs Investment in Building: 2008 - FC 2020

Private Sector

2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

50 000

BMI INDEX (2008 = 100) RETAIL TRADE SALES VS INVESTMENT IN BUILDING: 2008 - FC 2025 (Source: StatsSA; BMI-BRSCU Workings, Chart 8) TOTAL INV IN BLDNG & CONSTR: CONSTANT 2016 VALUE

666690

634375

608135

586819

568371

550494

535521

518901

548165

512759

500954

485589

477539

455647

463089

470389

400706

347741

270308

514292 60

2009

10

2008

20

70

67 70 66 65 66 66 61 57 62 63 65 53 57 56 57 58 60 64 73 45 48 48 50 37 46 45 44 42 42 39 44 40 41 43 34 39 32 36 23 31 29 25 19 20

2007

30

500 000 400 000

56

2006

40

700 000 600 000

68

2005

50

2004

60

2003

70

200259

80

242732

90

299980

100

475738

140

2002

TOTAL INV IN BLDNG & CONSTR: Index (2008 = 100)

150

110

95 000

TOTAL INVESTMENT IN BUILDING: CONSTANT 2016 VALUE

BMI Index of Total Investment in Building & Construction: INDEX (2008 = 100):2002 - 2020; Total Investment in Bldng & Constr:, GDP Const 2016 value: (Source: SARB, StatsSA; Treasury, BMI BRSCU Workings, Chart 4(2))

120

204025

185552 127764 90283

76138

63350

71205

2005

2004

2025

2024

2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

140 000

Private Sector

130

230 000

91 87 88 86 86 86 87 86 86 50 54 96 103 110 113 44 46 38 40 42 101 94 94 93 30 30 31 32 35 36 89 23 29 33 35 43 61 18 16 21 21 11 4 5 5 6 6 8

2013

Public Sector

2013

2012

2011

2010

2009

2008

Private Sector

275 000

185 000

2003

37

200 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0

2002

45

TOTAL INV IN BLDNG & CONSTR: Index (2008 = 100)

55 80 56 54 75 54 34 68 53 31 65 67 65 47 49 51 34 34 61 46 58 33 34 55 54 56 50 53 50 52 52 46 48

410 000 390 000 370 000 350 000 330 000 310 000 290 000 270 000 250 000 230 000 210 000 190 000 170 000 150 000 130 000 110 000 90 000 70 000 50 000

TOTAL INV IN BLDNG & CONSTR: CONSTANT 2016 VALUE

398030

378508

360921

345634

331915

304431

293118

286684

278697

251427

238251

244142

294029

257458

230571

57

29 30

2004

20

2003

30

60

32 55 31 23 32

249400

199102

50 40

value: (Source: SARB, StatsSA; Treasury, BMI BRSCU Workings, Chart 4 (3))

35 34 35

34

2007

60

2006

70

2005

80

150695

90

179382

100

223842

110

272942

120

290186

130

266364

140

317533

150

2002

TOTAL INV IN BLDNG & CONSTR: Index (2008 = 100)

value: (Source: SARB, StatsSA; Treasury, BMI BRSCU Workings, Chart 4)

Total Investment in Building deteriorated from an Index of 100 in 2008 to 79 in 2014, a decline of 21%. It then increased to 99 by 2017. It is forecast to increase to 109 by 2020, 9% above the index of 100 in 2008 and to 137 by 2025. Total Investment in Construction improved from an Index of 100 in 2008 to 145 in 2016, an increase of 45%. It declined to 122 in 2017 and is expected to remain at this level in 2018 and then to increase steadily to 126 by 2020 and to 145 by 2025. Total Investment in Retail Trade Sales declined sharply from 100 in 2008 to 82 in 2009, thereafter remaining steady with gradual growth to 130 in 2017, an increase of 30%. It is expected to increase to 131 in 2018 and then 137 by 2020 and to 155 by 2025.

Executive summary Sense-making Update for YTD 2018 (March) 8


Total Investment in Building & Construction improved from an Index of 100 in 2008 to 116 in 2016, an increase of 16%. It decreased to 107 in 2017 and is expected to increase to 116 by 2020 and on to 140 by 2025. From the foregoing analysis, it is evident that the major cause of the decline in building activity (particularly Residential) can be ascribed to the 2008 financial crisis, exacerbated in South Africa by the simultaneous introduction of the NCA â&#x20AC;&#x201C; and consequent drying up of Mortgage Advances. Recovery has commenced and the improvement is gradual but promising. PROGNOSIS AND SHORT-TERM OUTLOOK The next Chart shows the short-term outlook for various parameters (Res and NonRes BPP, BC in m2 and value), Local Building Lumber Sales in m3 and Domestic Cement Sales in Tonnes. It is evidently a mixed bag of parameters when comparing the YTD Actual Y/Y change with the YTD Forecast by Dec 2017. However, the general convergence of the trend lines is around the zero line, between 11% negative (Non-Residential BPP in m2) or + 25% positive (Non-Residential BC in m2), thus confirming Non-Residential BC (and BPP) are more volatile than

Cumulative YTD BPP and BC, Domestic Cement Sales and Local Building Lumber Sales: % Change by Sector: January - Dec 2018

(Source: StatsSA; BMI-BRSCU Workings: Perc Change Trend BPP & BC,Chart 558) 25%

YTD CUM ACTUAL

20%

YTD CUM FORECAST

15% 10% 5%

Percentage

0% -5% -10% -15% -20% -25% -30% -35% -40% Total Res BC Cum YTD % Change (m2) Total Non Res BC Cum YTD % Change (m2) Total BC Cum YTD % Change (m2) Total Residential BPP (m2) Total Non Residential BPP (m2) Total Building BPP (m2) Local Building Lumber Sales (m3) Domestic Cement Sales (Tonnes)

Jan -18 0,02% -34,07% -11,79% 6,77% -21,30% -3,18%

Feb Mar AprMay Jun JulAug Sep OctNov Dec -18 -18 18 -18 -18 18 -18 -18 18 -18 -18 0,73% -13,13% -15,36% -12,96% -12,49% -8,72% -6,27% -4,61% -2,07% -0,76% -1,56% 10,64% 3,44% 7,12% 4,05% 6,12%

-18,48% -8,77% -10,21% -21,50% -20,47% -17,98% -22,21% -23,76% -25,50% -21,93% -14,82% -13,47% -12,15% -15,38% -12,55% -10,05% -10,56% -9,64% -9,59% -8,57% 2,75% 3,33% 1,97% 0,32% -0,23% 0,88% 1,00% 0,39% 1,02% -0,36% 3,57% 15,23% 18,87% 17,07% 11,02% 5,02% 8,01% 9,66% 5,11% 3,15% 3,00% 6,72% 6,66% 4,94% 2,95% 2,11% 3,03% 3,04% 2,23% 0,68%

3,33% 2,71% 0,05% 4,08% 4,90% 6,13% 6,43% 5,17% 4,49% 3,25% 2,50% 1,70% -0,82% -0,82% -0,82% -0,82% -0,82% -0,82% -0,82% -0,82% -0,82% -0,82% -0,82% -0,82%

Residential because of the reasons mentioned. The large gap between Non-Res BPP (black line) and BC (red line) is evident from the Chart. When scrutinising the data further for BC per Province it shows an unusually large total for Kwazulu Natal in January and this influenced the performance for the remainder of the year.

65%

60%

55%

50%

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%

NON RES BLDNGS COMPLETED (BC) BY PROVINCE AND SEGMENT: *YTD 2017: M2 (* DEC) (Source: StatsSA, BMI-BRSCU Workings; BPP SA Chart 88(3))

Western Cape Eastern Cape Gauteng Kwazulu Natal Mpumalanga Northern Cape Free State Limpopo Northwest Total Rank by Segment Size SA (%)

Office and banking Shopping Industrial and warehouse Other buildings Additions and alterations TOTAL NON RESIDENTIAL CUM YTD* 2017 % Change Cum YTD 2017 vs 2016 Non Res Rank by Non Res Size TOTAL RESIDENTIAL CUM YTD* 2017 GRAND TOTAL RES AND NON RES CUM YTD 2017 % Change Cum YTD 2017 vs 2016: Total Res & Non Res Rank by Total size RSA

Rank by Segment Northwes Free Northern Mpumala Total Limpopo Size SA t State Cape nga (%) 7 6,31% 2,13% 1,36% 1,73% 5,88% 1,25% 5 9,76% 8,56% 2,81% 0,66% 2,27% 6,82% 3 11,56% 6,02% 18,64% 0,90% 4,50% 6,02% 9 2,74% 0,43% 4,83% 6,88% 26,13% 1,09% 8 4,00% 7,74% 1,74% 1,24% 6,67% 2,30% 34,37% 24,88% 29,37% 11,42% 45,44% 17,47% 22,46% 65,63%

42,71% 4 75,12%

-6,87% 6 70,63%

Kwazulu Eastern Western Gauteng Natal Cape Cape 4,87% 35,94% 12,19% 1,48% 4,44% 58,91%

9,97% 4,91% 13,77% 2,44% 2,17% 33,27%

1,09% 0,61% 6,73% 1,69% 10,02% 20,14%

4,15% 5,98% 10,19% 3,39% 5,46% 29,18%

-77,75% 63,01% -47,54% 49,34% 9 8 7 3 88,58% 54,56% 82,53% 41,09%

23,88% 1 66,73%

45,79% 5 79,86%

25,20% 2 70,82%

It is common knowledge that large projects in the North-coast Town of Umhlanga are under construction or nearing completion (e.g. The Pearls in Umhlanga and the Cornubia Shopping Centre in Mt. Edgecombe).

100,00% 100,00% 100,00% 100,00% 100,00% 100,00% 100,00% 100,00% 100,00% 6,93%

-25,46%

0,84%

4

7

-48,07% -21,07% -41,66% 34,62% 8

9

6

3

7,93%

-5,79%

16,84%

1

5

2

Executive summary Sense-making Update for YTD 2018 (March) 9


The next table shows a more detailed forecast of BPP and BC in m2 and Value. The link between GDP, Total GFCF, Res and Non-Res GFCF, is clear in the Table. LONGTERM FORECAST SUMMARY: GDP AND GFCF: 2015 - 2025 CONSTANT 2016 VALUE Year

GDP Value R Billion

GDP Y/Y % Growth

GFCF Total Value R Billion

GFCF Y/Y % Growth

GFCF/GDP %

LONGTERM FORECAST SUMMARY: GFCF RES, NON RES AND CONST: 2015 - 2025 CONSTANT 2016 VALUE

Year

GFCF Res GFCF RES GFCF Non GFCF NON Value Res Value RES Y/Y % Y/Y % Growth R Billion Growth R Billion

GFCF TOTAL BUILDING R Billion

GFCF TOTAL GFCF Constr CONSTR BLDNG Y/Y Total Value R Y/Y % % Growth Billion Growth

GFCF Bldng + TOTAL BLDNG + Constr Total CONSTR Y/Y % Value R Growth Billion

*2015

R 4 327

-3,59%

R 884

2,33%

20,43%

*2015

R 80,21

8,62%

R 79,35

0,69%

R 160

4,53%

R 247,73

6,38%

R 407,29

5,65%

***2016 ***2017 ***2018 ***2019 **2020 **2021 **2022 **2023 **2024 **2025

R 4 339 R 4 369 R 4 417 R 4 484 R 4 551 R 4 423 R 4 495 R 4 575 R 4 669 R 4 772

0,30% 0,70% 1,10% 1,50% 1,50% -2,80% 1,62% 1,77% 2,05% 2,21%

R 849 R 844 R 848 R 874 R 904 R 885 R 922 R 949 R 980 R 1 026

-3,93% -0,60% 0,50% 3,00% 3,50% -2,18% 4,16% 3,01% 3,28% 4,65%

19,57% 19,32% 19,21% 19,49% 19,87% 20,00% 20,50% 20,75% 21,00% 21,50%

*2016 *2017 *2018 **2019 **2020 **2021 **2022 **2023 **2024 **2025

R 78,28 R 76,25 R 76,45 R 78,57 R 81,14 R 84,59 R 88,62 R 93,28 R 98,93 R 105,37

-2,40% -2,60% 0,27% 2,77% 3,27% 4,26% 4,76% 5,26% 6,06% 6,51%

R 77,30 R 76,66 R 76,88 R 79,01 R 81,59 R 85,08 R 89,13 R 93,83 R 99,51 R 105,99

-2,59% -0,82% 0,28% 2,77% 3,27% 4,27% 4,77% 5,27% 6,06% 6,51%

R 156 R 153 R 153 R 158 R 163 R 170 R 178 R 187 R 198 R 211

-2,49% -1,71% 0,28% 2,77% 3,27% 4,27% 4,76% 5,26% 6,06% 6,51%

R 254,11 R 226,18 R 226,63 R 232,73 R 240,16 R 236,46 R 241,18 R 247,21 R 255,87 R 268,66

2,57% -10,99% 0,20% 2,69% 3,19% -1,54% 2,00% 2,50% 3,50% 5,00%

R 409,69 R 379,09 R 379,97 R 390,31 R 402,89 R 406,13 R 418,94 R 434,32 R 454,32 R 480,03

0,59% -7,47% 0,23% 2,72% 3,22% 0,80% 3,15% 3,67% 4,60% 5,66%

* Growth 2015 - 2018 by Treasury ** Growth 2019-2020 by BMI-BRSCU *** Growth 2016 -2019 by Treasury Budget Feb 2017

Our analysis leads to the conclusion that we have reached the bottom of the cycle and are now climbing slowly out of the so-called “valley of death” It is a slow and laborious process, two steps forward and one step back up a slippery slope. The strategy is firstly survival and then growth. As described by Andy Grove of Intel fame “I think of this hostile landscape through which you and your company must struggle - or else perish - as the valley of death. It is an inevitable part of every strategic inflection point. To make it through the valley of death successfully, your first task is to form a mental image of what the company should look like when you get to the other side. (Andrew S. Grove; Only the paranoid survives: 1996: 139). As Michael Porter says: (Porter in Rethinking the Future: 1997: 51) “A good strategy is concerned with the structural evolution of the industry, as well as with the firm’s own unique position within Executive summary Sense-making Update for YTD 2018 (March) 10


that industry. Effects in the industry can overwhelm a good strategy. If a company finds itself in a bad industry at the wrong time, it doesn’t matter how well positioned it is, to put it bluntly. So, managers have to look at the dynamics of their industry and at its future trajectory. A significant part of any company’s success will depend on the industry ….” In the final section of our Sense-making update we connect the dots and show that our forecast for BPP and BC is linked to GDP, Total GFCF, GFCF RES, NonRes and Construction. The big numbers are forecast by the Reserve Bank and BPP and BC is only one component which contribute to the GDP and GFCF. However, as shown earlier, we recommend that the focus should be directed to the bigger picture of aggregated trends in GFCF Res, Non-Res and Construction. This provides evidence that the impact was most severe on Residential Investment with inevitable ripple effect on Non-Res, with Construction of course dependent on different forces. Nonetheless we have illustrated that the Total Building and Construction Industry has bottomed out and gradual growth has commenced.

7,00

Middle Road (Apollo 4,86) scenarios.

6,14 5,29 4,43 3,57 2,71 1,86

CURRENT REALITY (4,31)

High Road Columbus Scenario (5,72)

Upper Middle Road Apollo Scenario (4,86)

Lower Middle Road Soyuz Scenario (4,00)

Current Reality (4,26) indicates that the Building Industry is between the Lower Middle Road (Soyuz 4,00) and the Upper Middle Road (Apollo 4,86) scenarios.

SEE EXCELL SPREADSHEET FOR COM PONENTS COM PRISING THE 8 GENERIC VARIABLES THAT INFLUENCE CHANGE.

Role of Consumer

Role of Key Capabilities

Role of Critical Resources

Role of Service Providers

Role of Financial Institutions

Role of the Public Sector

Role of the Private Sector

Role of the Building Sector

Confidence related

PROPERTY DELIVERY

Activity related

Lifestyle related

Value related

Market related

Finance related

Cost related

Policy related

Market influences

INVESTMENT CLIMATE

Promotional influences

Neighbourhood influences

Safety and Security influences

Referee influences (Tertiary Stakeholders)

Subject influences (Secondary Stakeholders)

INVESTOR CONFIDENCE

1,00

Onlooker influences (Other Stakeholders)

Low Road Challenger Scenario (3,14)

Player influences (Primary Stakeholders)

PERFORMANCE OF INDUSTRY

MAKING SENSE OF THE FUTURE OF THE BUILDING INDUSTRY Current Reality (4,26) indicates that the Current Reality versus Strategic Forum Scenarios Building Industry is between the Lower (Source: BMI-BRSCU; Chart 18) Middle Road (Soyuz 4,00) and the Upper

Moreover, the building and Construction Industry is large at some R497 Billion annually, it has critical mass, it has momentum and it has a future.

Accordingly - Our Vision is that Building is an Engine for growth and wealth creation and Property is a preferred investment. This is the narrative that we promote to the entire industry. If the Industry doesn’t promote and show confidence in its future, then no-one will and the future may be captured by competing companies and industries. Dr Llewellyn B. Lewis, Principal Consultant, BMI Building Research Strategy Consulting Unit. www.strategicforum.co.za, June 2018

Executive summary Sense-making Update for YTD 2018 (March) 11

Executive Summary Sense-making Update YTD 2018 (March)  

The Executive summary provides explanatory narrative of the more focused and expanded Power point presentation of the SM Update.

Executive Summary Sense-making Update YTD 2018 (March)  

The Executive summary provides explanatory narrative of the more focused and expanded Power point presentation of the SM Update.