Construction cost escalation slowing as sentiment remains positive
24 February 2017
The
Rider Levett Bucknall Q1 2017 RLB Oceania Report released today
shows the construction outlook for both Australia and
New Zealand remains positive, with the
residential market fuelling growth with inconsistent rises in
construction costs forecasted across the region.
Non-resource sector seeing steady increase
Mr Stephen Ballesty, Director of Research & Development at RLB said,
‘With economic growth in Australia projected to pick up to 3% by 2018,
the market’s positive sentiment looks set to continue. The decline in
resource-sector investment has started to tail off but the non-resource
sector is seeing a steady increase in household consumption and
investment as wages and employment rise.’
He added, ‘Recent strong economic growth in New Zealand is projected to
moderate to less than 3% in 2018. Both net migration and expenditure on
the Canterbury earthquake rebuild are expected to slow gradually,
slowing domestic demand, especially construction activity.’
The RLB Market Sector Activity Model
These observations are highlighted in the RLB Market Sector Activity
Model, which tracks whether the houses, apartments, offices, industrial,
hotel, civil and retail sectors are in a growth or decline phase. Across
Oceania, of the seven sectors RLB monitors, 64% of all city’s sectors
are in a growth phase, with 36% in a decline phase.
Mr Ballesty continued, ‘All market sectors within
Sydney are in the growth and mid phases of the market cycle, whereas
Canberra has the most sectors within the trough phase.
Wellington, where six of seven sectors are in the mid growth phase,
is poised for a stronger year in 2017.’
Both
Melbourne and
Darwin have four sectors within the peak phase, showcasing the
historical construction work done performance,’ he said.
According to the report, RLB’s forecast escalation in construction costs
is very mild compared to the last peak period of building work seen in
2002 to 2004, where annual construction cost escalation within the major
observed cities ranged from 3.5% to 11.7%. RLB has reported escalation
rises for the past three years of between 0.6% to 6.0%, which is a
significant decrease from the 2002 and 2004 numbers.
Adelaide
The tender market continues to be keen but there are clear signs, with
more work coming into the pipeline, the cost of construction is
increasing. RLB continues to see signs of larger contractors pricing
smaller projects to ensure they maintain work into 2017.
Major projects include:
Adelaide University Clinical School
($230M);
University of South Australia Health Innovation Building ($200M);
Skycity Casino ($300M), University of South Australia Great Hall
($50M); New CBD High School Adelaide ($80M).
All trade contractors continue to remain competitive and are actively
seeking new work as the year comes to an end. With the prospect of more
work becoming available in 2017, there is an expectation that costs will
rise.
Brisbane
The lack of job opportunities in
Queensland following the resource sector downturn has resulted in
the population remaining static.
The long-awaited commencement of the
Queens Wharf project will occur in early 2017 with the demolition of
the government buildings. The State Government announced Australian
Unity as the preferred proponent for the redevelopment of the
Herston Quarter. This will see a major health, research and aged
care precinct developed on the site of the old Children’s Hospital site.
Many major commercial projects were completed in 2016:
1 William Street,
480 Queen Street and
160 Ann Street. This has resulted in historically high commercial
vacancy rates in both Brisbane CBD and Fringe markets. With commercial
buildings at
Southpoint and
900 Ann Street yet to come, this situation is likely to get worse
before it improves.
Canberra
Capital Metro Light Rail has commenced initial works on Northbourne
Ave. The
Australian National University (ANU) recently awarded the circa
$160M
Union Court project to
Lendlease.
This will revitalise the heart of the university campus while providing
new learning, teaching, social and community facilities.
The new ANU 800-bed student accommodation project will start towards the
end of the year along with other key education projects. There is strong
sentiment in the residential market with the proposed $500M “Section
200” mixed-use development in Belconnen, a development to be staged over
the next 10 years. There has been an increase in dwelling unit approvals
of approximately 14% from the previous year.
Darwin
The market has essentially been flat this year with very little pickup
expected for 2017. Construction of the
Inpex LNG plant will be continuing throughout 2017 and no major
replacement project is expected upon its completion leading potentially
to further market instability. It is likely that some
Defence projects may commence, which will infuse activity in the
construction sector.
Gold Coast
The recent introduction of the 3% surcharge on stamp duty for foreign
investors together with tightening of the lending industries financing
requirements has led to a general easing of the Gold Coast construction
industry. There appears to be a perceived drop in developer confidence,
with many largescale residential projects stalling and not proceeding
beyond
Development Approval stage.
On a positive note, there has been a substantial increase of both
international and interstate visitors to the Gold Coast. This is driving
investment in tourism facilities such as hotels and ongoing retail
upgrades and developments.
Projects underway include;
Stage 2 of the Light Rail to link Helensvale heavy
rail at the Gold Coast University Hospital station, the $300M
Gold Coast airport expansion, the $1B
Jewel Project and the 89-storey Spirit residential Tower in Surfers
Paradise, the new high-rise hotel at
Jupiter’s Casino, and the Commonwealth Games venues are progressing
well.
Costs of trades increasing
The increase in construction activity has led to an increase in the
costs of trades such as formwork, tiling and plasterboard partitions. We
are also seeing the ongoing influence of the lower Australian dollar on
the cost of imported materials and equipment with trades such as lifts,
mechanical, aluminum windows and doors and white goods.
Melbourne
Major projects such as Melbourne’s new
Metro Tunnel and the
Western Distributor are ready to proceed after the State Government
announced they intend to fund these projects without assistance from the
Federal Government.
Labour rates are still fluctuating. On detached housing sites, labour is
inching up slightly in the ‘hard’ trades i.e. bricklayers and
carpenters. Within large commercial and residential projects, the volume
of overtime is diminishing, causing a net constant pricing of labour
within the project.
Small decreases in steel costs have shown up in the tender market during
the past quarter. This is due to the reduction in base cost from China
and companies attempting to secure pipeline for the future. Tendering is
described as aggressive while contractors are trying to secure work with
building costs remaining relatively stable.
Perth
The Perth office vacancies are at historically high levels at 22% in the
Perth CBD and construction in the office sector is likely to remain low
for a period. The residential sector has been strong over the last few
years, but is now slowing on the back of slower pre-sales and slowing
population growth. The retail sector (major shopping centres) have
significant capital works planned over the next few years.
The State Government has awarded the $2B
Forrestfield Link, a new train line that will connect the city with
Perth Airport and a new terminus at this eastern suburb. The contract
for design and construction has been awarded to a joint venture led by
the Italian industrial group,
Salini Impreglio.
The government is also proceeding with the
Perth Freight link. This $1.6B project is a major infrastructure
project to enhance freight movement to Fremantle Ports. Despite five
years without any measurable construction price increase, the current
depressed work volumes have continued to keep price levels flat across
most sectors.
Sydney
Recent comments from economic analysts have noted that
NSW is the top economic performing state in Australia. Activity in
the Sydney construction market continues to be a major contributor to
the economic performance of the state.
The
Barangaroo South and
International Convention Centre developments are now nearing
completion, however subcontractors and suppliers appear to be able to
source new replacement work in other sectors.
Work in the education, health, and aged-care sectors are of significant
interest to contractors. Concrete and masonry supply prices increased by
5% in the second quarter of 2016, while steel and plasterboard products
increased by approx 3% in the third quarter. Most other building
material prices remained stable over the year to date.
Market experiencing labour shortage
While the supply cost of building materials has remained steady, the
cost of labour has continued to increase. All sectors of the industry
are reporting increased demands for wage increases up to 5% per annum.
These increases are being passed on to the cost of construction. The
Sydney market is now also experiencing labour shortage in reinforcement
fixers, form workers, bricklayers, carpenter/joiner and fire protection
trades, with these trades reporting full order books and unable to
accept new opportunities.
Contractors are being forced into seeking alternative sources of
subcontractor procurement. In response to increasing wages and scarce
resources, contractors and designers are continuing to take an increased
interest in prefabricated methods of construction in order to overcome
labour shortages and increase efficiency on site.
Increased cost pressures for 2017
The availability of trades pricing new projects for contractors
compiling tender offers is becoming a significant risk issue within the
market due to levels of work. The strong fundamentals for a continuing
strong work load throughout 2016 and into 2017 indicate construction
prices will increase in the range of 4.5% to 5% in 2016. Current
indicators of current strong work load and the opportunity for further
increased work in the first half of 2017 may lead to increased cost
pressure due to the competition for scarce resources to complete work
that is in hand.
Townsville
2017 is shaping up to be the start of recovery in major activities in
the Townsville region. The Townsville Waterfront Priority Development
Area will deliver a great opportunity for the revitalisation of the CBD.
The
North Queensland Stadium and Entertainment precinct project
(commencing construction in 2018) will also provide a catalyst for
further CBD renewal.
But the biggest impact is that Townsville is likely to become the
headquarters for the
Carmichael coal mine project. It is expected that the wider North
Queensland region will also benefit from this.
Read the full report here,
http://assets.rlb.com/production/2017/02/07234930/RLB-Oceania-Construction-Market-Intelligence-Report-Q1-2017.pdf
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Source: Rider Levett & Bucknall - www.rlb.com
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