Ongoing strength in mining and resources in Western Australia continues to feed through into strong demand for commercial property in Perth and further growth in engineering construction activity in the state.
Subdued conditions persist, however, in the state’s residential construction sector.
Below is an analysis of current market conditions in the Western Australian market for residential construction, commercial property and non-residential construction, engineering construction, employment and construction costs.
Subdued conditions persist in residential construction throughout Western Australia. At 4,609, the seasonally adjusted number of dwelling units approved for construction throughout the state in the three months to February is down almost four per cent on the that for November and 10.52 per cent when compared with the 5,173 dwellings approved for construction in the three months to February last year. This means the pace at which new building work is coming in has slowed.
Not surprisingly, then, the near-term outlook is not encouraging. In 2012, Housing Industry Association (HIA) expects the number of dwelling starts throughout the state to come in at 20,220 – the second-lowest level on record over the past eight years.
Outside of new houses, the market for renovations of existing homes is not much better. In the six months to February, the seasonally adjusted dollar value of approvals for modification of existing homes throughout the state came in at $304.4 million, down from $331.4 million in the previous six months to August last year.
Commercial Property/Non Residential Construction
With office vacancies in the Perth CBD (3.3 per cent) standing at less than half the national average, the Western Australian commercial property sector is currently the darling of the nation as far as landlords and investors are concerned.
Going forward, conditions are expected to tighten further, with industry research firm CBRE Australia forecasting an average annual rental growth rate of 4.5 per cent over the next five years as a continued strengthening in demand from mining growth drives down vacancy rates to a staggering low of less than two per cent within the next two years.
With strength from the resources sector flowing through into stronger demand for industrial facilities, the good news does not stop at offices. In the most recent Property Council of Australia Property Confidence Survey (December 2010), respondents who indicated they expect a rise in industrial sector capital values over the short term outnumbered those expecting a near term fall in values by almost six to one.
As with the rest of Australia, however, conditions in Western Australia’s retail sector are poor. In the latest NAB Quarterly Australian Commercial Property Survey, the Retail Property Index for WA came in at -50 points, the worst reading for any main state in Australia bar Queensland (any reading of less than zero on the index indicates deteriorating investment conditions for the state in question).
Also consistent with the rest of the nation, demand for property associated with retirement living remains strong while continued weakness in tourism means that demand for tourist-related accommodation remains weak.
As of yet, the benefits of the strength in demand for office and industrial space have yet to translate into any material increase in levels of non-residential construction activity. At $2.013 billion, the seasonally adjusted value of non-residential buildings approved for construction throughout the state in the six months to February was up by just 1.95 per cent when compared to that for the previous six months to August last year ($1.974 billion).
Not surprisingly, the resources boom in Western Australia is feeding through into strong activity in engineering construction. At $7.344 billion, the seasonally adjusted value of engineering construction work done in the December quarter last year was up by 18.7 per cent compared to the corresponding quarter in 2010.
Furthermore, even without the contribution from mining, the value of engineering construction work done throughout the state was still up by 14.86 per cent in the December quarter when compared with the same quarter one year earlier.
Going forward, the Construction Forecasting Council (CFC) expects mining activity to nearly double, which will propel overall levels of engineering construction activity in the state to a peak of $40.207 billion in by 2013/14, up from $25.933 billion in 2010/11.
In even more promising news, industry research firm BIS Shrapnel expects growth to spread beyond mining, with the state seeing a near tripling in harbours work, a near tripling in pipelines activity and strong increases in telecommunications work via the NBN over the next five years.
With a strong construction labour market, the benefits of the state’s mining boom are spreading to workers. In the most recent Property Council survey referred to above, respondents expecting an their firm’s staffing levels to increase over the next twelve months outnumbered those expecting a decrease by more than six to one, giving Western Australia the second-strongest construction labour market (behind NT) out of any state in Australia. Indeed, owners of many resource projects are reporting considerable challenges in finding suitably qualified staff.
In regional WA at least, the current strength in the labour market is spreading to the residential sector despite the current softening of activity in that sector. The latest HIA Trades Report revealed a significant shortage of tradespeople working in the residential sector in regional WA. That same report, however, revealed a moderate oversupply in tradespeople in the Perth residential sector, meaning that tradespeople in Perth are feeling the pinch of the current weakness in residential construction.
Partly as a result of the strength of the labour market, upward pressure remains on construction costs. Almost three quarters of respondents to the Property Council’s survey expect an increase in construction costs in WA this year, with 15 per cent expecting increases of more than five per cent.
By Andrew Heaton