wtp market report 2013 03

8/12/2019 WTP Market Report 2013 03

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REVIEW OF AUSTRALIANCONSTRUCTION MARKETCONDITIONSMARCH 2013


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Decline in mining activity in the finalquarter of 2012 is now having animpact in both Queensland and WesternAustralia where mining companies arereviewing expansion and developmentplans in the face of falling profits.Commercial and residentialconstruction continues tocontract and the pressures

we commented on in previousReports in relation to thedangers inherent in tenderingat cut-throat levels are onlyincreasing. Across all states,our offices are experiencingextremely keen pricing ascontractors remain in survivalmode desperate to retainsome level of turnover. OurSydney office reports continuedaggressive competitivetendering at levels resultingin contractor failure and ourAdelaide, Canberra and Hobartoffices are experiencing tenderpricing at rock bottom levels.

Following a survey ofconstruction business leaders,The Australian Industry Groupsays CEOs expect another yearof contraction with the majority

saying they will have to lay offstaff. BCI Australia predicts thatconstruction activity will remainweak due to reduced publicsector spending, a high dollar,tight corporate budgets andtough lending criteria.

With the Federal Governmentgoing into survival mode and alengthy period of campaigning

leading up to the election inSeptember, it is unlikely thatthere will be any improvementin confidence or any increaseddemand in the constructionsector.

Our tender price escalationforecasts for 2012 proved to befairly accurate with New SouthWales, Victoria, Queensland,Australia Capital Territory andWestern Australia trendingat levels close to zero. SouthAustralia, where we predicteda fall in prices of 10% has seentender levels drop by even morethan 10% in some sectors withlittle signs of any rebound.

Our forecast trends show littleuplift over the balance of thisyear and through 2014 with an

expectation that each state willexperience greater increasestowards 2015.

NATIONAL ECONOMIC INDICATORS

GDP expanded 3.0% from December 2011 through to December2012.

CPI rose 2.2% over the year ending December 2012. Thiscompares with a rise of 3.1% through the year ending December2011. The downward trend over the last four quarters (2.0%)appears to be reversing with inflation currently trending around2.2%.

The Australian dollar traded at parity with the US Dollar throughout2012 and was trading at approximately $1.03 in March 2013.

The seasonally adjusted Australian unemployment rate has

increased since our previous report (September 2012). The rate iscurrently 5.4% in the ABS January 2013 data.

During 2012, the RBA reduced the official cash rate by a total of125 basis points. The RBAs current Cash Rate is 3.0%.

National GDP measure: seasonally adjusted quarterly % changeSource: RBA; ABS; Quarterly trend review on GDP, CPI inflation, RBA cash rate.

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WT PARTNERSHIP TENDER PRICE ESCALATION FORECAST -AUSTRALIAN AVERAGE

The above graph index is set at 100 for September 2008. Recorded data and forecasts are based on tenders forlarge building construction projects (value $20 million to $300 million).

VALUE OF CONSTRUCTION WORK DONE IN AUSTRALIA ($ BILLION)NATIONAL CONSTRUCTION INDICATORS

The total value of construction work done increased by 14.9% inthe 2012 year compared to the 2011 year.

In 2012, the seasonally adjusted estimate for building work donedecreased by 1.4% compared to the previous year. The last twoquarters of 2012 show a 4% increase for each quarter.

The seasonally adjusted estimate for engineering work done in2012 increased by 24% over the previous year. The December2012 quarter records a decline of 0.69% from the Septemberquarter.

Of the total construction work done in the amount of $200,286

million, building work done represents 38% of total constructionwork done while engineering work done represents 62%.

Engineering work done as a percentage of total construction workdone has continued to increase since the December 2010 quarter.



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State by State Commentary

NEW SOUTH WALES

The building constructionsector in NEW SOUTH WALEScontinues to struggle intorecovery, with a minor increasein construction commencementsin residential and non-residentialsectors from the same period of2012.

Commercial vacancy rates havedropped to the lowest in years,but the demand appears to havebeen immediately absorbedby major CBD commercialdevelopments currently underconstruction.

Aggressive, competitivetendering by contractors in allconstruction market sectorscontinues, in particular the mid-sized residential sector, whichhas already seen several wellestablished builders going into

administration in the past 12to 18 months. However, landrelease areas are experiencingvery positive sales outcomes.

Strong demand for rentalproperties, and an apparentundersupply of housing,especially in inner citylocations, has not yet resultedin an increase in residentialconstruction, recovery in thissector is not expected until atleast the end of 2013.

Changes in January of this yearto the Building Code 2013(Federal Code)under the FairWork Building Industry Act 2012

(Cth) as it relates to enterprisebargaining agreements mayalso place upward pressure onlabour costs. The full extent ofthis however will not be totallyunderstood until the respectiveguidelines and policies of bothFederal and State Governmentsare in harmony.

Transportation features heavilyin the NSW State Government'sspending plans with a numberof major projects identified inits Long Term Transport MasterPlancoming online. The SWRL(Glenfield to Leppington RailLine) is in the constructionphase, the NWRL is now being

tendered for station buildings,rail, rolling stock, tunnelling,civil and viaduct packages,light rail projects are beinginvestigated and major roadupgrades and extensions arebeing planned. Resource relatedconstruction work has slowedas the demand for coal easesand the investigation into NSWprospects for LNG comes underpressure from landowners.

There is an air of confidence thatthings are starting to improve,with low interest rates and avery low base starting point -the construction sector has toexperience substantial growthsoon.

We are projecting an averagecost escalation of 1.5% for2013, and an average of 3.0%per annum for 2014 and 3.5%for 2015.

VICTORIA

In VICTORIA , tender marketsacross the board returnedcompetitive results in the lastquarter of 2012. Established Tier2and 3 contractors are activelycompeting for projects whichsuggests any rises in materialand labour costs are still beingabsorbed by discounted head-contractor and sub-contractmargins.

Developers continue to requestpreliminary feasibility exercisesfor a variety of higher densityresidential and mixed-use

projects, though anecdotally,pre-sales are now harder to comeby than they were 18 monthsago.

There are a number of largerretail centre expansions dueto be tendered in the secondquarter of 2013 as well as avolume of work at MelbourneAirport.

Government projects in thehealth and civil infrastructure/port sectors are also to betendered, however on-site

activity is not expected tocommence until the third andfourth quarters of the year.While there is expected to be avolume of work in the market, itis likely to be below the recenthigh capacity and as such we arenot forecasting higher levels ofcost escalation.

We forecast tender priceescalation to be in the order of2.0% per annum through 2013,2.75% in 2014 and 3.0% in2015.

AUSTRALIAN CAPITAL TERRITORY

With the announcement of aGeneral Election for September,the immediate outlook for thealready declining constructionmarket in AUSTRALIAN CAPITALTERRITORYis not promising.

Prospects of further staff cutsby both the current and futureFederal Government as partof their efficiency/austeritymeasures have added to fearsof further tightening in themarket with the trend of largeinvestment projects beingpostponed or shelved continuing.

Due to ACT Governmentbudgetary measures, new StateGovernment projects remainthin on the ground with theexceptions of the ongoinginfrastructure works aroundCanberra and the redevelopmentof the ACT health sector whichincludes the Canberra Hospital.

In the face of rising labour andmaterial costs, builders continueto discount preliminaries,overheads and margins in orderto remain competitive.

In the residential sector, an influxof developments has pushedCanberras residential rental

market to new levels of supplywith discounted rents beginningto emerge. The vacancy rate isnow approaching 5% with moreproperties on the rental marketnow than in the past 15 years.Office vacancy rates have risenin the past few months and arenow trending at around 12%.

It is anticipated that tenderprices will continue to be keenthroughout 2013 rising to 1.5%in 2014 and up to 3.0% in 2015.

There is an air ofconfidence that thingsare starting to improve,with low interest rates

and a very low basestarting point - theconstruction sector hasto experience substantialgrowth soon.Nick Deeks (Sydney)



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SOUTH AUSTRALIA

During late 2012 we noted thatthere had been an extraordinarydrop in pricing levels in SOUTHAUSTRALIAand there wasmuch speculation over whetherthere would be a correction inthe short term or whether thepricing drop would have a longerterm impact. It appears that thelatter situation will prevail.

Over the past few months, wehave witnessed a steadyingof tender pricing, which wasnecessary given the dramaticfalls during 2012. However,we have not witnessed anysignificant correction and tenderpricing on the whole still reflectsthe levels that we forecast in ourlast report, which was a net 10%reduction in tender price levelsduring 2012.

There continue to be relativelyfew public sector projects ascompared to the pre-BER periodand the financial problems of theState Government are regularlyaired in the media. State debt isat levels that prompt comparisonwith the State Bank collapsein 1991 and ratings agencyMoodys reported in January2013 that South Australian debtis among the fastest-growingin the nation. Aims to keep theState Government debt below50% of revenue appear to bedoomed and completion of thenew Royal Adelaide Hospitalin 2015 will see an associatedincrease in taxpayer debt, withthe result that State debt may

rise to 75% of revenue accordingto Moodys. Standard & Poors haswarned that gross debt may riseto as high as 95% of revenueby 2015. Both Moodys andStandard & Poors have revokedSouth Australia's Triple A creditrating based on spending andborrowing forecasts.

Private sector investment isgenerally limited to owner-occupiers and we are seeingvery few feasibility studies,which is a sign that speculativedevelopers are struggling.Overseas investment, principallyfrom China, in South Australiais very cautious and hinderedby developers' expectationsthat construction costs shouldbe even lower than they are.In addition, local experiencesuggests that financiers maybe imposing harsher conditions,such as higher pre-sales, onChinese-funded developers.

The impact of mining sectorinvestment, which is oftentouted as being the State'ssaviour (notwithstanding BHPBilliton's cancelation of plansfor Olympic Dam during 2012),continues to have no effect atall on the normal building andcivil engineering constructionmarkets.

As a result, and perhaps notsurprisingly, pessimism reignsnow in the South Australianconstruction market and we seeno sign of any recovery in eitheroptimism or workload during2013.

We anticipate escalation rates of1.0% for both 2013 and 2014and 2.0% for 2015.

SOUTH EAST QUEENSLAND

Tender price levels in SOUTHEAST QUEENSLANDcontinueat cut throat levels with fiercecompetition prevailing in adiminishing construction market.

Tender levels are under pressurefrom rising labour costs in

addition to material costincreases. Outside of the miningand infrastructure markets,margins and price cutting areprevalent. BIS Shrapnel, in its2013 Major Projects Reportpredicts that the amount ofconstruction work on majorprojects will fall by over 40%over the next four years (some$7.6 billion).

The resources sector, whichhas buoyed the Queenslandeconomy for several years now,is forecast to decline as profitsfrom iron ore, coal, oil and gascontinue to plummet in theface of rising costs and fallingcommodity prices.

Coupled with this, the savingsand cuts in State Government

spending will further reducedemand in the civil engineeringsector.

The Sunshine Coast constructionsector has some welcomerelief with building of the newSunshine Coast UniversityHospital gearing up.

Activity on the Gold Coastis expected to pick up with

major projects such as thelight rail under way, the 2018Commonwealth infrastructure,venues and village proceedingand the cruise terminal andresort back on the drawingboards.

In and around Brisbane, earlyworks have commenced onthe Williams Street StateGovernment Building, majorretail developers are advancingnumerous projects andresidential development isincreasing.

We expect escalation in tenderpricing levels to continue ataround 2.0% through to 2014and trend at around 3.0% in2015.

State debt is at levelsthat prompt comparisonwith the State Bankcollapse in 1991 andratings agency Moodysreported in January 2013that South Australiandebt is among thefastest-growing in thenation.

Tony Brewster (Adelaide)

Activity on the Gold Coast and in Brisbaneis expected to increase with the Gold CoastLight Rail (2) already underway, 1 WilliamStreet (3) about to commence constructionand works for the 2018 CommonwealthGames (1) currently in planning.

Images courtesy of the Brisb ane Convention& Exhibition Centre, GoldLinQ andQueensland Treasury & Trade


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NSW VIC QLD ACT SA WA TAS

2005 3.5% 5.4% 6.9% 5.4% 6.4% 7.8% 4.8%

2006 4.6% 4.2% 5.9% 6.3% 6.3% 12.0% 5.9%

2007 4.6% 4.5% 5.5% 6.0% 7.6% 10.9% 5.1%

2008 4.0% 5.1% -0.7% 4.6% 5.4% -2.8% 5.2%

2009 -4.4% 1.6% -3.6% -1.9% 2.0% -5.7% 4.7%

2010 0.6% 2.8% 0.5% 2.3% 2.0% -2.1% 4.1%

2011 1.0% 3.0% -1.0% 1.5% 1.0% -2.7% 0.2%

2012 0.0% 1.5% 1.0% 0.8% -10.0% -1.6% -2.9%

2013 1.5% 2.0% 2.0% 0.8% 1.0% 2.2% 0.0%

2014 3.0% 2.8% 2.0% 1.5% 1.0% 3.0% 1.0%

2015 3.5% 3.0% 3.0% 3.0% 2.0% 3.6% 1.5%

Tender PriceEscalation ForecastsRegional Market Summary

The above indices reflect capital city CBD and metropolitan construction costs.

WESTERN AUSTRALIA

In WESTERN AUSTRALIA,ongoing activity in the miningand resources sector in regionalareas will continue to underpinoverall construction activitylevels within the State. It ishowever noted that constructionworkforce numbers in this sectorare predicted to peak sometimein 2014 and are then predictedto slowly reduce as the currentwave of construction activityassociated with minerals andresource production gives way tooperational activity.

Whilst overall constructiondemand in the State is expectedto remain at relatively high levels,this slowing of the resourcesector will see the total value ofconstruction activity flatten outwith levels predicted to remainlargely static over the coming 5to 10 years.

After a number of very pooryears we anticipate a return tostrong demand in the residentialsector, due largely to the effectof demographic pressurescoupled with the significantpopulation growth experiencedby the State in recent times.

Non-residential constructionactivity is also predicted toincrease steadily in the comingyear with many projects nowscheduled to commence afterthe last years' cautious approachfrom developers'owners towardscommitting to significant retailand commercial projects.

It is anticipated that increasesin construction prices will trendat 2.2% for 2013, rising to 3.0%for 2014 and 3.6% for 2015.

TASMANIA

In TASMANIA , the constructionmarket outlook continues to begloomy with little activity in theresidential, commercial, industrialand retail sectors. StateGovernment spending has beensignificantly reduced and FederalGovernment stimulus fundinghas dried up. Housing approvalsare continuing to fall withlatest records showing a 16%reduction from the previous year.The value of non-residentialconstruction approvals has fallen35% since last year.

Over the last six months, severalcontractors, civil engineers,design consultants andsuppliers have ceased trading.Tasmanian Timber Engineering,one of Tasmanias biggestbuilding suppliers, has gone into

voluntary administration, citingthe downturn in the buildingindustry and Tasmania's biggestbuilding company, Fairbrother,has been forced to lay off staffsince Christmas.

The Housing IndustryAssociation said the number ofnew homes built in Tasmania

would drop by 700 this year, to2,200 the lowest level in morethan a decade.

According to the HIA, manybuilders were hugely decreasingtheir staff pool to compensatefor the downturn, with morethan 1,900 construction workersleaving the industry in thepast year.The Master BuildersAssociation is also concernedabout the decline in the number

of new apprentices employedsince the removal of payroll taxexemption for employers.

An ABS Building Activity updateshowed Tasmanian buildingactivity stabilized towards theend of 2012 and it is hoped thatthe decline in the industry hasbeen arrested.

We anticipate constructionactivity to remain subduedthroughout 2013 with no tenderprice escalation followed byincreases in the order of 1.0to 1.5% in the years 2014 and2015.



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Note on Applying Tender Price IndicesA number of project specifics should be considered when reviewingtender price escalation forecasts including, but not limited to, theprocurement route, size, complexity, location and risk. Equally, thekeenness of tenderers is important in terms of pricing and this will bedriven by issues such as local market dynamics, workloads, hotspotsand realisable margins. With the current uncertainties in the local,

national and international arena, it is important to continually monitorthe market and review escalation allowances. Clearly, it is very difficultto predict future escalation over the next few years therefore theabove advice is offered for guide purposes only at this point..

DisclaimerWT Partnership will not in any way be liable to any person or body forany cost, expense, loss, claim or damage of any nature arising in anyway out of or in connection with the information, opinions or otherrepresentations, actual or implied contained in or omitted from this paperor by reason of any reliance thereon by any person or b ody. This paperis not business or investment advice and persons should seek their own

independent professional advice in relation to construction costs andprice indexes. No representation or assurance is given that any indexesproduced, used or referred to are accurate, without error or appropriate foruse by persons.

WT PARTNERSHIP IS AN AWARD WINNING INTERNATIONAL PRACTICE OF PROPERTYAND COST MANAGEMENT CONSULTANTS FOR THE BUILDING, CONSTRUCTION ANDINFRASTRUCTURE SECTORS.

WT Partnership is wholly owned by the Principals of the Practice, who ensure thatindependent advice is solely aligned to our clients desired project objectives.

WT Partnership draws on the collective experience, knowledge and capability of over 1,100professional staff in locations throughout Australasia, South East Asia, Central America, theUnited Kingdom and Europe to provide our clients with the right advice on all aspects of cost,value and risk to help them achieve optimum commercial outcomes.

CONTACT USAdelaide

Sam PaddickP: +61 8 8274 4666E: [email protected]

Brisbane

Craig McHardyP: +61 7 3839 8777

E: [email protected]

James OsentonP: +61 2 6282 3733E: [email protected]

Gold Coast

Jason ThornleyP: +61 7 5591 9552E: [email protected]

Hobart

Lee DeaceyP: +61 3 6234 5466E: [email protected]

Melbourne

Tim RobertsP: +61 3 9867 3677E:[email protected]

Perth

Tom ConnorP: +61 8 9202 1233

E: [email protected]

Nick DeeksP: +61 2 9929 7422E: [email protected]

WT Sustainability

Stephen HennessyP: +61 2 8197 9140E: [email protected]

www.wtpartnership.com.au

wtp market report 2013 03

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