With corporate collapses, union protests, new public sector building codes, a massive glut of unsold homes and apartments, dire office market predictions and the end to home owner incentive schemes, the Victorian property, building and construction industry is in a state of turmoil and upheaval.
While some of this may be good for corporate tenants in commercial property, for builders, developers, investors, construction sector workers and others, things are looking grim.
Below is an outline of current market conditions in terms of overall construction activity, residential construction, commercial property/non-residential construction, engineering construction, and the construction labour market within the state.
Overall construction activity
At the moment, overall construction sector growth throughout Victoria has stalled as weak housing conditions and a wind back in public sector building projects offset healthy levels of civil construction activity.
At $8.558 billion, the seasonally adjusted value of building and engineering work done throughout the state was well down on the (admittedly strong) previous quarter and was no higher than the previous corresponding figure one year earlier ($8.589 billion).
Moreover, forward looking indicators are not encouraging. While at face value, building approval numbers are reasonably healthy – at $12.432 billion, the seasonally adjusted value of new building work approved for construction in the six months to May was well up on the previous six months ($10.858 billion) – these are being potentially skewed by a surge in approvals prior to the expiration of home buyer incentive schemes in June as well as a one-off jump in non-residential approvals in February and should thus be read with caution.
Furthermore, at $14.559 billion (ABS), the forward pipeline of building work yet to be done is at its lowest level since June, 2009. Meanwhile, while respectable pipeline of civil projects ($6.236 billion) points to reasonable near-term prospects for engineering construction, forecasters expect long-term activity in this sector to be subdued as work winds down on projects like the Peninsula Link and Victoria Desalination Plant.
Following the house building boom of recent years precipitated by federal and state government home building incentive schemes, residential construction conditions in Victoria have dropped back and are now running at levels which were considered normal prior to the stimulus programs.
In 2012, the Housing Industry Association (HIA) expects the overall number of dwelling unit starts, including stand-alone and multi-residential, to come in at 44,830 – well down from the 59,740 starts achieved as recently as 2010 but roughly on par with levels seen consistently prior to incentive programs.
Going forward, the near term outlook is not good. While recent cuts in interest rates will help, these will be offset by a pull back from first-time home buyers and regional purchasers following the end of the $13,000 first home bonus and the $6,500 regional bonus, both of which expired at the end of June.
Far more significantly, over the long term, the state is suffering from a glut of unsold inner city apartments and outer suburban homes, which is certain to affect both capital growth and building activity in coming years.
Already, media reports suggest that as many as 1,700 apartments at Docklands and Southbank remain unoccupied – a number that will inevitably climb if BIS Shrapnel forecasts for an average annual rate of 2,800 completions throughout the Melbourne CBD over the next five years are realised.
In the outer suburbs, recent reports suggest as many as 35,000 homes remain unsold on Melbourne’s urban fringe.
Commercial Property/Non-residential building
The picture does not look any better in commercial property, which is being hit by a depressed state economy and job losses in the financial and manufacturing sectors.
In the latest Property Confidence survey conducted by the Property Council of Australia, survey participants from the property and construction industry indicated negative price expectations over the next 12 months in terms of industrial, retail and tourism related property . Meanwhile, respondents expect capital growth rates to come in well below national averages for offices and retirement living.
As banks and others shed white collar staff, demand for office space is falling and vacancies are on the rise. The latest report from Jones Lang La Selle indicates that office vacancy rates in the Melbourne CBD jumped from 5.8 per cent to 7.4 per cent in the June quarter and could hit 10 per cent or more in the next 12 months.
Demand for industrial property, too, is being hit by subdued conditions in the state’s manufacturing sector.
In terms of non-residential construction activity, with the seasonally adjusted value of new work approved for construction over the last six months ($4.912 billion) being well above that for the six months prior to that ($3.642 billion), the immediate picture looks surprisingly encouraging.
Longer term though, subdued levels of demand will inevitably affect activity levels. According to the aforementioned Property Council survey, work levels for developers and construction firms throughout the state are expected to remain in mildly positive territory over the next 12 months, though still well below national average expectations.
If one area of the industry is doing reasonably well, albeit with subdued long term expectations, it is civil construction.
At $2.910 billion, the seasonally adjusted value of engineering construction work done throughout the state in the March quarter was virtually unchanged compared to the March quarter in 2011, but was up by more than a quarter when compared with the same quarter in 2010.
Going forward, a respectable looking forward order book ($6.236 billion) bodes reasonably well for near-term prospects in this sector, with the Construction Forecasting Council (CFC) expecting activity of an estimated $12.816 billion in 2011/12 to reach $13.392 billion in 2012/13.
Beyond that, however, forecasters are not optimistic. BIS Shrapnel, for example, expects activity to drop back as projects like the Wonthaggi Desalination Plant and the Peninsula Link move to completion, and the CFC expects almost no growth in activity in either 2013/14 or 2014/15.
Not surprisingly, given the subdued levels of construction activity, conditions in the state’s construction labour market are poor.
At 198,800, the number of people the ABS estimates were employed in the industry throughout the three months to May was well below any other recent levels and lower than at any other time on record since the three months to November, 2009.
Further evidence of this weakness – at least in the residential market – can be seen through the March Quarter HIA Trades Report. Despite showing a tiny undersupply of residential construction tradespeople in regional Victoria, the report showed a mild oversupply in Melbourne. Furthermore, the report shows that although prices for the services of residential tradespeople in regional Victoria are holding up reasonably well, rates for those in Melbourne have now fallen for five out of the past six quarters, indicating strong downward pressure on wages and contractor prices.
Moreover, given the combination of high-profile corporate bankruptcies and expectations for subdued activity, there is little sign of any imminent improvement going forward.
Not surprisingly then, participants in the Property Council’s confidence survey are not optimistic about the immediate future, saying they expect anaemic levels of growth in the size of their workforces over the next 12 months and that they expect the Victorian construction labour market to substantially underperform all other states except for Tasmania.
An industry in Turmoil
All this and more points to one cold hard underlying reality: the industry is in a state of turmoil.
Along with the end of the home owner grants, the glut of apartments, the rising corporate vacancies and the decrease in jobs, there are a number of other issues causing upheaval in the industry.
First, a new building code for state government projects came into force on July 1. While the government says the new code will avoid costly disruptions to vital infrastructure projects, union suspicions about possible efforts to undermine workers led to a strike of involving thousands of workers in the first week of July.
Additionally, many property industry participants say the government is doing a poor job at managing urban planning and infrastructure. When asked in the Property Council survey whether or not they thought the state government was doing a good job in planning for growth, a mere 13.4 per cent agreed – a lower portion than for any other states except for Queensland and Tasmania.
Add all this up and it is clear the state’s construction industry is going through a lot right now. It’s a rough ride now and will continue to be that way for the foreseeable future.