The commercial sector remains in free-fall as activity slumped in March for the ninth straight month in a row.
According to the Performance of Construction Index March 2011 report released by Australian Industry Group (AIG) on April 7th, the commercial construction sector sub-index plummeted by 9.2 index points last month to 33.2. This means that not only did activity contract, but the pace of the decline increased dramatically. (A reading of any less than 50 implies a contraction in activity.)
New orders, currently at 42.0, have also been in decline for nine months straight.
There may be some light at the end of the tunnel. After a surge in December, the value of office building approvals during the three months to February ($967.3 million) was up 23.06% when compared with the same period one year earlier, according to figures from the Australian Bureau of Statistics (ABS). Following on from this has been a subsequent upsurge in construction starts. After strong results in January and February ($480 million and $472 million respectively), the value of commercial construction starts rose again in March to $597 million, according to construction information services provider BCI Australia. At this level, starts are more than four times November’s low of $119 million.
Encouragingly, strong white collar employment growth has created a reasonable amount of latent demand for future take-up of office space, according to BIS Shrapnel Chief Economist Frank Gelber.
Nevertheless, a substantial increase in construction will not occur whilst rents and prices remain low, Gelber said in his regular column in The Australian on April 7.
“If I had a site and a choice over timing, I wouldn’t develop now,” he wrote. “I would wait three years.”
State by State
Larger states have borne the brunt of the post-GFC slowdown. Conditions in each of New South Wales, Victoria, Queensland and Western Australia are much weaker than what they were prior to the GFC.
Activity in New South Wales is sluggish. The Construction Forecasting Council (CFC) expects the total value of all work done this year to amount to $1.377 billion. Although this actually represents an increase from last year ($1.187 billion), it is miles off the pre-GFC high of $2.125 billion in 2007/08.
BCI expects starts to grow by a healthy 56% in the June quarter, which the forecaster says would mean an overall increase of a modest 5% in the year to June when compared with the twelve month long term trend.
There are a few projects on the horizon, such as a $1 billion residential and commercial redevelopment around North Ryde Station in Sydney’s inner north (currently under consideration by the New South Wales Government).
Conditions are dire in Queensland. The CFC expects activity to have declined by 48% during 2010 when compared with 2009, and to shrink by another 28.4% this year. Starts, too, have been weak. Even with a recent spike last month ($259 million), BCI still expects starts in the year to June to be 8% below long term trend.
Longer term, the picture looks mildly brighter. The CFC expects conditions to remain flat during 2011/12 before picking up in 2012/13. News in December that developer Leighton Properties had been awarded the contract for the $1 billion redevelopment of the city centre in Ipswich was more than welcome. Work is expected to start before the end of the year.
Current conditions in Victoria are appalling, but there are signs of better times in the not-too-distant future. This financial year, the CFC expects activity to amount to a mere $963 million – less than half of the levels experienced prior to the GFC. Expectations are high for a strong rebound, however. The CFC expects activity to bounce back to $1.363 billion in 2012 and to reach the $2 billion mark again in 2013/14.
There are already signs of activity picking up. With a spike in starts ($293 million) in January, BCI expects construction starts to have increased by 55% in the year to June when compared to long term trend.
Despite being the primary beneficiary of the resources boom, Western Australia has not been spared any of the pain. Activity this financial will register a dreadful $715 million, the CFC believes. This may be still be more than double levels experienced seven years ago in 2004/05, but it’s nowhere near pre-GFC highs of $1.234 billion in 2007/08.
Things may have picked up temporarily. A $350 million expansion of the Burswood Entertainment Complex underpinned a surge in construction starts in February. The renovation is generating frantic activity as workers scramble to finish most of it before this year’s Commonwealth Heads of Government meeting (CHOGM) in October.
Still, the CFC expects only a modest pick-up next year. Activity will only really kick into gear again in 2012/13, the forecaster says.
With a relatively small office construction sector, South Australia has experienced only experienced a mild contraction over the past two years. Helped along by the commencement in January of Gunns Group of Companies’ hotel development in the city of Victor Harbor, BCI expects starts in the year to June to be 31% above long term trend.
Longer term, the CFC expects flat to modest growth over the next five years.
There are no signs of any significant commercial activity in either Tasmania or the Northern Territory.