In the Northern Territory, a single offshore LNG project has catapulted the entire territory into being Australia’s hottest market for commercial property and construction.
With BHP’s proposed Olympic Dam expansion, South Australia, too, has a singular project from which the state is expected to derive significant benefits.
Unlike the Northern Territory however, South Australia, with a total annual construction output more than four times its northern neighbour, cannot ride to glory on one project alone. Indeed, judging by the Property Council of Australia’s Property Confidence survey released on April 17, the state ranks in the middle of the pack when it comes to property industry expectations regarding capital growth, construction and employment over the next 12 months despite the boost from Olympic Dam.
That’s because outside of Olympic Dam, conditions in elsewhere in the state’s property and construction industry are awful.
In the NT, one project makes for the best-performing state in the nation. In South Australia, one big project merely moves an otherwise weak state from being an underperformer to being average.
Furthermore, while NT’s monster project already has final approval, Olympic Dam had yet to be fully signed off on and could still fall over, though the project has already survived a court challenge.
Below is an analysis of current market conditions throughout the state in residential construction, commercial property/non-residential building, engineering construction and employment.
Residential construction conditions in South Australia are downright ugly. Already, with ground breaking on just 9,610 dwelling units, the state had its lowest number of housing starts last year in at least eight years. Moreover, in the past few months, the pace at which new work is coming in has slowed even further; at 2,109, the total number of dwelling units approved for construction throughout the state in the three months to February was lower than any other three-month period on record since August, 2001.
Not surprisingly then, Housing Industry Association (HIA) expects the total number of residential construction starts in the state to fall even further this year to just 9,000. Indeed, according to HIA estimates, in the three months to March, the state experienced its lowest quarterly total of construction starts in at least eight years.
The story is no better with regard to either house prices or work on renovations of existing homes. At $175.7 million, the overall seasonally adjusted dollar value of additions, alterations or modifications to existing dwellings throughout the state in the six months to February was down by 6.97 per cent when compared with the previous six months, meaning that the pace at which new work for renovations is coming in has slowed. With regard to house prices, on average, participants in the most recent Property Council Confidence Survey say they expect a small contraction in values over the next 12 months.
Commercial Property/Non-residential construction
In what is neither positive nor negative news for investors and corporate landlords, prospects for capital growth and investment returns on commercial property remain modest.
In the Property Council survey, participants expected moderate growth in capital values for industrial property over the next 12 months but virtually zero capital growth during that time for offices and negative growth in shopping centres and tourism accommodation facilities.
Office vacancy rates, currently at 7.2 per cent, are now on the rise and are not expected to peak until they reach 12 per cent in 2013, according to industry research firm CBRE Australia – a prediction which does not augur well for rents in the short term. Despite this, CBRE has a positive long-term outlook for prime space rents in Adelaide, which it says will rise from just under $400 per square metre now to almost $500 per square metre in 2016.
One bright spot is retirement living, where Property Council survey participants expect stronger capital growth in South Australia than any other state. This is particularly positive news, given that strong growth is expected in this sector in all states.
Thanks to work on the Royal Adelaide Hospital, the outlook for non-residential construction in the state looks good. At $3.142 billion, the seasonally adjusted dollar value of non-residential buildings approved for construction over the last six months is up almost fourfold when compared with the previous six months. Even without Royal Adelaide, which is worth around $2 billion, that would still be an impressive rise, the dollar value of new work coming in has picked up over recent months even apart from the boost provided by the new hospital.
In contrast to housing, the outlook for engineering construction, where BIS Shrapnel says the Olympic Dam expansion will ‘transform the landscape of South Australia’ is extremely strong. Between 2011/12 and 2014/15, BIS expects a doubling in the overall value of work done on civil construction in the state.
Less optimistic, however, is the Construction Forecasting Council (CFC) which, despite strong resource activity, sees a falling back in the value of work from a forecast $4.937 billion in 2011/12 to $4.536 billion in 2012/13 as work drops back on transport and other forms of infrastructure. It would appear that this forecast, however, does not include the Olympic Dam expansion – which is not yet guaranteed to go ahead – and will almost certainly prove to be overly conservative if the expansion does proceed.
Mixed data clouds any assessment of the current situation regarding the construction labour market in South Australia.
On one hand, at 55,200, the Australian Bureau of Statistics estimate for the number of people employed full time in South Australia’s construction industry in the three months to February (not seasonally adjusted) is well down on the equivalent figure for the corresponding period twelve months earlier (64,000). All else being equal, this would appear to indicate weakness in the market consistent with the current weakness in building activity conditions.
In an apparent contradiction to this however, the most recent HIA Trades report indicated a severe shortage of skilled tradespeople for residential construction in regional South Australia and a good balance between demand and supply of tradespeople in Adelaide.
Going forward, participants in the Property Council’s survey are mildly optimistic about prospects for employment over the next 12 months, with a moderate increase in employment numbers anticipated over that period.