Industry compact: Construction activity in Australia based on expansion of transport infrastructure

Residential construction offers good opportunities in the medium term / By Heiko Stumpf
Sydney (GTAI) – The mood in the Australian construction industry is divided. Building construction is facing difficult years. Civil engineering faces an upswing as a result of high infrastructure spending.

Market opportunities

Residential construction still in crisis until 2021
The construction industry in Australia is operating in a difficult business environment. According to figures from the industry association Master Builders Australia, construction investment fell by 5.3 percent in real terms in the 2018/19 fiscal year (July to June). A further decline of 2.1 percent in real terms is forecast for 2019/20. Over the five-year period to 2023/24, an average decline of 0.6 percent per year is expected.

Structural data on the construction industry in Australia (in millions of US dollars, change based on Australian dollar)

Source: Australian Bureau of Statistics (ABS)

A significant market correction is currently taking place in residential construction. Construction spending is expected to take a big hit in 2019/20, falling by -12.9 percent in real terms. The construction boom of recent years has created an oversupply in Australian cities, leading to higher vacancy rates and falling residential rents. In the past three years, the number of apartments in Sydney has almost doubled. Property prices have also been caught in a downward spiral and are expected to fall by about seven percent nationally in 2019.

As a result, developers are holding back on new projects. The number of building permits issued fell by 19.1 percent in 2018/19 to 187,933 residential units. Of these, single-family homes accounted for about 60 percent and apartments for 40 percent. At the height of the housing boom, around 240,000 residential units were still approved in 2015/16.

Industry analysts report that, particularly in multi-story residential construction, many already approved projects are being postponed or abandoned altogether. Construction companies will therefore have to cope with declines in orders, as the number of housing starts is expected to continue to fall until 2021.

From 2021, residential construction is expected to recover. Due to the high population growth of 1.6 percent per year, there is a high demand for housing in the medium term. Australia’s population is currently increasing by around 400,000 people per year and is expected to rise to around 30 million by 2030 (2019: 25.4 million).

The population increase is highly concentrated in the major cities of Sydney, Melbourne, Brisbane and Perth. In Sydney alone, about 725,000 new homes will be needed by 2030. From 2020, property prices are also expected to pick up again and, together with interest rates at record lows, improve the market environment for residential construction.

Construction defects cause damage worth billions

Major problems exist with regard to the quality of construction, particularly in multi-story apartment buildings. Serious construction defects are found in numerous apartment buildings. In Sydney, high-rise apartment buildings had to be evacuated in 2018 and 2019 due to cracks. Industry insiders report that construction plans are frequently deviated from during work and inferior materials are installed. In addition, flammable facade cladding has been used in many projects.

Experts estimate that the equivalent of around US$7.5 billion will have to be spent over the next ten years to remedy the defects. The state of Victoria is helping private owners replace flammable facade elements with financial grants of around US$450 million. In addition, Victoria and New South Wales are launching reforms to the building code, including tightening liability rules for defective construction.

Commercial construction passes zenith and faces correction

Commercial construction must prepare for a slowdown. According to Master Builders’ expectations, construction investment will initially still rise by 6.3 percent in real terms in 2019/20 and reach an all-time high. In the period 2020/21 to 2023/24, however, investment activity is expected to fall by an average of 3.7 percent.

For the construction of office buildings in particular, significantly fewer cranes are likely to be turning from 2021. Vacancy rates in the office market are relatively low, averaging 7.9 percent nationwide. There is particularly strong demand in the inner cities of Sydney and Melbourne, which is why only around 4 percent of space is vacant.

This has ensured a construction boom since 2017. According to data from the Property Council of Australia, a total of 1.3 million square meters of new office space is expected to be built in the country’s inner cities alone in 2020 and 2021. Sydney and Melbourne account for around two-thirds of this. Following the completion of numerous projects, the market is expected to consolidate. Investment in office buildings is expected to fall by around 11 percent per year in 2021/22 and 2022/23 as a result

In hotel construction, a lot of new capacity has been created in recent years, which is why occupancy and room rates are developing negatively. Average room occupancy fell from 77.8 percent at the end of 2017 to 72.6 percent by mid-2019. Construction of new hotels is therefore likely to slow. About 43,000 new rooms are expected to be built nationwide by 2027.

Industrial construction must also leave a peak phase behind. Due to rising online retail sales, numerous new spaces for distribution centers have been built in recent years. E-commerce accounted for ten percent of retail sales in 2018 and is expected to rise to 12 percent by 2021, according to Australia Post forecasts.

However, real estate experts expect the pace of industrial space additions to slow in the coming years. In Sydney, a ten-year high of 685,000 square meters was still reached in 2018. For 2019, real estate company Knight Franks expects an increase of only 679,000 square meters with a downward trend. In Melbourne, only around 450,000 square meters are expected to be newly built in 2019 and 2020 respectively, after around 612,000 square meters in 2018.

The issue of green building is gaining in importance. The national government agreed with the states on the “Trajectory for Low Energy Buildings” program of measures at the beginning of 2019. This calls for a gradual tightening of energy efficiency regulations in the National Construction Code in 2022 and 2025. The number of buildings certified by the Green Buildings Council Australia (GBCA) is increasing significantly and already stood at 2,429 at mid-year 2019, compared with 1,986 at mid-year 2018.

States push ahead with infrastructure expansion

Sentiment is brightening in civil engineering. Most recently, the sector suffered from declining spending in the resources sector, which contributes about 60 percent of civil engineering construction spending. Now, the Australian states are launching major infrastructure programs. A total of around US$168 billion will be invested over the next four years. New South Wales is leading the way with a US$70 billion infrastructure pipeline. Victoria plans to spend around US$40 billion on infrastructure by 2022/23.

Most of the spending is focused on major transportation projects in the country’s metropolitan areas. Overall, the peak of the investment wave is not expected to be reached until 2023, which is why civil engineering spending will rise again significantly in the medium term. Master Builders expects an increase of 6.1 and 3.5 percent in fiscal years 2020/21 and 2021/22, respectively.

Local industry structure

High capacity utilization in infrastructure construction attracts international construction groups

In the important single-family housing sector, the Australian construction industry is highly fragmented. The 100 largest companies together achieve a market share of around 40 percent. Nationwide, there are only about 30 companies that build more than 400 homes per year. These include Metricon Homes, ABN Group, Simonds Group, MJH Group and Burbank. Many companies are only active regionally. Tradespeople (“tradies”) play an important role. This is the name given in Australia to the numerous self-employed craftsmen who work as subcontractors on construction sites.

The companies like FiveStarScaffolding are the leaders in the construction of Scaffolding hire projects.

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