While current market conditions in Queensland are terrible, the state’s building and construction sector is set for a comeback amid a rebound in home building and continued strength in resource construction.
Furthermore, with office space in short supply, the immediate outlook for rents and capital growth in commercial property is strong. According to the Property Council of Australia’s Confidence Survey (June quarter), executives in the property and construction industry are more than twice as confident about property market prospects in Queensland as they are with regard to overall prospects throughout Australia.
Overall Construction Activity
Though on dollar value measures, the overall value of construction work done throughout Queensland is on the rise, this measure is of limited value as it merely represents strong levels of resource construction which is obscuring extremely weak conditions in building construction.
Going forward, however, overall levels of construction activity are expected to rise as engineering construction work continues to increase at the same time as home building makes a significant comeback.
Residential Construction/House Prices
At the moment, conditions in the Queensland residential construction industry are terrible.
At just 25,370, the number of new housing starts the Housing Industry Association (HIA) believes took place in the financial year just past was lower than for any other time in at least the past eight years.
Going forward, however, with the HIA expecting start numbers to bounce back by 13.3 per cent this year followed by further growth of 15.8 per cent in 2013/14, there are signs that home building conditions will return to something resembling normal levels over the next two years.
Near term indicators are reasonably encouraging. Though approval numbers in multi-residential units remain subdued, the seasonally adjusted number of stand-alone houses approved for construction throughout the state over the last six months (9,441) is up 18.7 per cent over the previous six months, meaning the pace at which new home building work is coming in has picked up.
While the end to the state based home owner incentive scheme in April will undoubtedly have a negative effect, the impact of this will be mostly offset by recent cuts to official interest rates.
The market for renovations, too, appears to be returning to some form of normality, with the overall value of renovations investment in the state having rebounded from low levels of $6.871 billion in 2010/11 to $7.155 billion in 2011/12. This year, HIA expects modest growth of two per cent before a slight contraction of 0.7 per cent follows in 2013/14.
House prices, however, are expected to remain subdued. Participants in the Property Council’s confidence survey expect almost no growth in residential property prices over the next 12 months.
As strong resource investment flows through into increasing demand for commercial space, the outlook for capital gains and investment returns on commercial property in Queensland is reasonably good.
While participants in the Property Council’s confidence survey expect negative growth in capital values for tourism and retail property over the next 12 months, they expect price growth around twice the national averages for commercial and industrial property as well as strong growth in line with the rest of the country in retirement living property.
In offices especially, the fundamentals look good. With current office vacancy rates in Brisbane at around six per cent, the market is already tight. With Jones Lang LaSelle not expecting large offerings of new supply to come onto the market until at least 2015/16, and strong demand for space expected from resource companies in the next few years, Mark Curtain, Jones Lang LaSelle’s head of leasing, says a ‘supply gap’ between now and then is almost inevitable.
In terms of construction activity, however, current market conditions are rather weak. At $1.669 billion, the seasonally adjusted value of non-residential building work done in the March quarter this year was at its lowest quarterly level in four years.
Going forward, while Property Council survey participants remain buoyant about their own work schedules over the next 12 months, near-term indicators are not promising.
At $2.618 billion (seasonally adjusted) the overall dollar value of non-residential buildings approved for construction in the last six months is well down on the six months prior to that ($2.868 billion), meaning that new work is coming in more slowly than before.
Driven largely by growth in resources and mining, especially projects such as the Australia Pacific LNG Plant, the Queensland engineering construction sector is running hot.
At $8.284 billion, the seasonally adjusted value of work done on engineering construction activity is up by more than one third when compared to the same quarter last year ($6.020 billion) and by more than 70 per cent compared with the March quarter of 2010 ($4.857 billion).
Going forward, with a huge backlog of work waiting to be done, there is no sign of any near-term slowdown. At $56.926 billion, the overall value of work yet to be done in this sector as of March 31 was not only at record levels but was more than four times its level from the same time period two years earlier ($13.727 billion).
Not surprisingly then, the Construction Forecasting Council (CFC) is extremely optimistic about the immediate outlook. In 2011/12, the CFC reckons, the overall dollar value of work done in the sector increased from $23.819 billion to $30.873 billion. This year, the forecaster expects activity to reach $32.923 billion before peaking at $36.610 billion in 2013/14.
For now, the construction labour market in Queensland is not strong – no doubt a reflection of weak building conditions.
At 187,000, the number of people the Australian Bureau of Statistics estimates were employed in the industry on a full time basis in the three months to May was at its lowest level on record since the three months to August, 2006.
Worse, in regional Queensland, the HIA Trades report for the March quarter shows an oversupply of residential tradespeople of more than twice that evident anywhere else in the country. That same report also showed a large oversupply in Brisbane, meaning that in residential construction at least, there are far more tradespeople in the market than are currently needed.
Fortunately, this situation may be about to turn around as building activity recovers. Participants in the Property Council’s confidence survey expect their own staffing levels in Queensland to increase by more than any other states except for the Northern Territory and Western Australia.