While overall building and construction conditions in Victoria are set to remain subdued, the civil sector represents the best area of opportunity thanks to a good number of significant dollar value projects in areas such as pipelines and electricity, transport and telecommunications.
Outside of engineering, areas such as housing renovations, multi-residential construction and retirement living/accommodation are expected to perform reasonably well.
Overall, however, the outlook for property and construction in the state remains underwhelming amid poor conditions in new house construction and a subdued commercial building sector.
Participants in the latest Property Council of Australia-ANZ Property Industry Confidence Survey are generally pessimistic about the state’s prospects over the next 12 months.
Below is a snapshot of the outlook in terms of residential construction, commercial property/non-residential building, engineering construction and employment in the state’s property and construction industry.
Following an exceptionally strong period in recent years, current market conditions in stand-alone residential construction are weakening.
While recent interest rate cuts will help, the situation is set to deteriorate further going forward with the end of the home owner incentive scheme, a subdued state economy and an excess of supply following recent high levels of building activity.
Because of this, the Housing Industry Association (HIA) expects the number of starts for stand-alone houses to drop from 49,650 in 2011/12 to 41,780 in 2012/13 and 40,340 in 2013/14.
Furthermore, participants in the Property Council’s confidence survey expect moderate declines in house prices over the next 12 months.
Fortunately, the news is not all bad. Despite coming off its peak in recent years, multi-residential construction levels are set to remain reasonably high by standards of the last decade, as are levels of renovations investment which, at $6.599 billion and $6.634 billion in 2012/13 and 2013/14 according to HIA forecasts, are set to record their third and fourth-highest levels on record over the past 10 years.
Commercial Property/Non-residential building
A combination of subdued economic conditions, soft levels of business investment, weak employment growth, a horrible manufacturing and retail environment and a significant expectation of new office stock set to come online has created a recipe for a weak commercial property outlook.
Not surprisingly then, participants in the Property Council’s confidence survey expect declines in capital values over the next 12 months across almost all classes of commercial property, and real-estate services firm CBRE Australia expects office vacancies to rise from around six to seven per cent now to more than 10 per cent over the next two years.
The one bright spot is retirement living, which is benefiting from an aging population.
A similar story applies for non-residential construction, which is also being impacted by a wind back in public sector activity amid the end of stimulus spending and tight fiscal conditions. At $3.337 billion, the seasonally adjusted value of new work approved for construction in non-residential building in the six months to August was well down from that for previous corresponding period last year ($3.869 billion), meaning that the pace at which new building work is coming in has slowed.
Again, the key areas of opportunity are accommodation and aged care, which in the medium to long term at least are set to benefit in 2012/13 from the Merrifield Masterplanned Community in Mickleham; in 2013/14 from the Lara West Estate Subdivision in Lara, the Pegasus Project Toolern in Toolern Vale and the Docklands New Quay Central project at the Docklands; and then in 2014/15 from the Lockerbie Masterplanned Community in Kalkallo.
Engineering construction is the area of greatest opportunity.
Despite the fallout from the GFC, a fivefold increase in work on water and sewerage facilities (Victoria Desalination Plant) and a doubling of activity in electricity has underpinned strong growth in this area over the past five years.
Going forward, work on projects such as the Loy Yang Coldry Plant Project ($6 billion), the Yallourn Gas Power Station ($2 billion), the National Broadband Network and the Melbourne Metro Rail Tunnel ($4.5 billion) are set to keep activity levels high even as work on the desalination project winds down (see chart), with key areas of strength including pipelines and electricity, bridges and railways, roads, telecommunications and heavy industry.
Not surprisingly, weak building conditions are impacting the sector’s workforce, with the number of people employed in the industry having now dropped back to pre-stimulus levels and. In the residential sector, the latest HIA Trades Report shows a moderate oversupply of tradespeople in Melbourne as well as a significant oversupply in regional Victoria.
Going forward, participants in the Property Council Survey referred to above do expect increases in staffing levels over the next 12 months, though those increases are expected to be very modest. This would indicate that the situation may at least stabilise going forward. Still, the residential construction workforce is set for subdued times given the weak anticipated conditions in that sector.