Far away from the excitement of London Olympics, the South Australian property and construction industry is having an Olympic event of its own – and it’s not a pleasant one.
As talk of several years in delays to the Olympic Dam expansion project intensify, the outlook for the commercial property values and construction industry prospects in the state continues to deteriorate.
Indeed, participants in the latest Property Council of Australia Confidence Survey now have negative expectations about the state’s overall prospects for the next 12 months – good news for corporate tenants but bad news for investors, property owners and developers, as well as the state’s construction workforce.
Below is an outline of current market conditions and forward expectations in residential construction, commercial property/non-residential construction, engineering construction and construction industry employment.
Residential Construction
‘From bad to worse’ is how the Housing Industry Association (HIA) describes the state of South Australia’s residential construction industry.
At 8,850, the overall number of dwelling unit starts the HIA reckons broke ground in the last financial year was far lower than any other number on record for at least the past eight years and is down by a whopping 35.2 per cent compared to levels experienced two years ago in 2010/11.
Looking ahead, though recent cuts in interest rates will help, as will moves by the government to stimulate multi-residential building in Adelaide through temporary stamp duty concessions and the recent extension of the $8,000 First Home Owner Grant, there is little in the way of light at the end of the tunnel.
As shown in the chart, the HIA expects conditions to stabilise but envisages negligible growth over the next two years, meaning that home building levels will remain at extremely low levels for the immediate future.
Approval data is discouraging. At 1,873, the overall number of dwelling units approved for construction throughout the state in the June quarter (seasonally adjusted) was well below that for the March quarter (2,226) and nowhere near that of the June quarter last year (2,696), meaning the pace at which new work is coming in continues to slow dramatically.
Outside of new houses, the market for renovations looks slightly better, with the HIA expecting growth of roughly 2.7 per cent in 2011/12 and further modest growth of 1.1 per cent in 2012/13.
Expectations for house prices are weak. Participants in the Property Council survey referred to above say they expect modest falls in house prices over the next 12 months.
Commercial Property/Non-residential construction
A combination of a weak state economy and growing doubts over Olympic Dam are playing havoc with the outlook for commercial property in South Australia.
Over the next 12 months, participants in the Property Council survey say they expect negative capital growth in all commercial sectors except for retirement living.
For now, office vacancy rates (7.7 per cent – Adelaide CBD) are holding up reasonably well, but only because of a withdrawal of supply. With negative net absorption of 2,066 square metres over the six months to July (according to the Property Council), demand for space has shrunk. This situation will not be helped if Olympic Dam either doesn’t go ahead or is significantly delayed as expected.
In terms of non-residential construction activity, overall volumes of work should be reasonably strong in the near term, but only because work on the Royal Adelaide Hospital is masking otherwise slow conditions.
Indeed, non-residential approval numbers have been disappointing of late, and 12-month forward work schedule expectations of South Australian participants in the Property Council survey were moderately positive but well below the average expectations across Australia.
Engineering Construction
Following the completion of projects such as the Adelaide Desalination Plant, the value of work done in engineering construction activity throughout South Australia has eased back.
Going forward, much depends on the fate of Olympic Dam, which is looking increasingly doubtful amid media reports that the final investment decision for the project could be delayed by up to two years.
Obviously, this sector is in for extremely strong activity if and when the project goes ahead. Industry research firm BIS Shrapnel says the project would ‘transform’ the state’s civil construction landscape as it stands.
Even if the project gets dumped or significantly delayed, with $2.437 billion worth of work on the books as at March 31 – the third-highest level on record – the near-term future would appear to be reasonably promising.
Without many other large-scale projects on the near term horizon, however, the Construction Forecasting Council (CFC) expects only modest growth ahead, with an estimated $5.611 billion worth of work having been done in 2011/12 growing by just 3.65 per cent in 2012/13 and by a further 5.63 per cent in 2013/14.
Employment
Consistent with the weakness in housing activity, the state’s construction labour market is not strong.
At 56,600, the ABS estimate of the number of people employed full time in the South Australian construction industry throughout the three months to May is at is second-lowest level over the past two years and is well down on the 62,000 and 60,900 the ABS says were employed in the industry during the same period last year and in 2010 respectively.
Further, in residential construction at least, the HIA Trades Report for the June quarter indicates an oversupply of tradespeople in both Adelaide and Regional SA, though the size of the oversupply is miniscule and had shrunk since the March quarter.
Not surprisingly, given subdued levels of anticipated construction activity, expectations regarding the next 12 months are not strong, with participants in the Property Council survey indicating they expect only very small increases in their own staffing levels during that time.
