Activity in the South Australian construction industry remains subdued, but there are expectations of a near-term uptick in non-residential and engineering construction arising out of work on the Olympic Dam expansion and the new Royal Adelaide Hospital.
While expectations regarding commercial property rents and capital values remain subdued in the immediate future, these are expected to pick up over the longer term.
Poor approval data, however, points to ongoing weakness in residential construction.
In the December quarter, on a seasonally adjusted basis, the total value of building and engineering construction work done in the state came in at $2.353 billion – up 0.68 per cent when compared with the September quarter ($2.337 billion) but down 3.36 per cent when compared with the same figure twelve months ago ($2.433 billion.)
Moving forward, expectations are somewhat positive. In the December quarter, the Confidence Index for the state on the Property Council of Australia Property Confidence Survey stood at 105.0 – slightly above the 100.0 point which separates overall optimism from pessimism.
Below is a snapshot of each sector within the industry:
Housing/Multi-residential construction
Conditions in residential construction are severely depressed. At $1.126 billion (seasonally adjusted), the overall value of work done on residential buildings throughout the state registered its lowest level since the September quarter of 2008.
Looking ahead, approval data is not encouraging. At 661 and 707 respectively, the seasonally adjusted number of new dwelling units approved for construction in December and January marked the lowest and third-lowest such figures, respectively, since May 2001. This indicates the pace at which new work is coming in is now at 10-year lows.
Mixed signals cloud the market for renovations. As reported in our previous analysis for this state, Chris Schutze, General Manager of Scott Salisbury Homes, says his firm has experienced a 70 per cent increase in renovation work throughout Adelaide over the past two years and expects more to come this year. Approval figures, however, tell a different story. According to figures from the Australian Bureau of Statistics (ABS), the seasonally adjusted value of additions and alterations approved for existing properties has fallen from $186.7 million to $180.3 million over the past six months.
South Australia Market Analysis- March 2012
Commercial Property/Non-residential building
In the short term, expectations for rents, yields and capital values on commercial property remain subdued. In the current quarter, the majority of participants in the Property Council’s confidence survey expect capital values to contract significantly in retail and tourism and also to a lesser extent in office and industrial property, with retirement living being the only area of anticipated growth.
At 7.7 per cent, vacancy rates in Adelaide’s office market remain steady.
Longer term, however, commercial property expectations are more buoyant because of an anticipated flow-through increase in demand resulting from the Olympic Dam expansion.
In contrast, the immediate outlook for construction activity is positive, with a number of Property Council respondents saying work levels are rising in all categories except tourism. The outlook for non-residential construction is also being boosted by work on the new Royal Adelaide Hospital.
Total construction activity south Australia
Engineering Construction
Assuming BHP’s Olympic Dam expansion eventually goes ahead, the overall value of engineering construction activity in the state is set to rise.
Outside of Olympic Dam, the other main new engineering construction projects on the horizon are the Witchery Hill iron ore project and the Oaklands Park Stormwater re-use scheme. The latter project, in the city of Marion, includes wetlands to clean harvested stormwater, aquifer injection for stormwater storage, landscape design of a park, and reticulation of 10km of pipelines to up to 30 reserves.
Employment/Construction Costs
With the number of Property Council survey participants anticipating either a moderate or significant increase in employment levels within their firm (37.8 per cent) far outweighing those anticipating any decrease (14.6 per cent), the overall employment market in the South Australian construction industry appears set to strengthen.
With that, however, expectations are in place for a mild increase in construction costs. Some 45.2 per cent of survey respondents expect construction costs to rise this year (albeit with most expecting rises of less than 5 per cent), whereas only 35.4 per cent are anticipating any form of decrease in costs.
