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2015/16 Construction Industry Trends and Forecast

The Australian Construction Industry Forum (ACIF) recently released its July 2015 Market Report (the Report) which outlined its forecast and predictions for the Australian construction industry over the next 12 months, 24 months and 5 year period.

This article is a brief summary of some of the key take home points from the Report.

General Introduction

On a macroeconomic level, there are strong indications that global economic growth is expected to strengthen over the next two financial years bringing global growth levels closer towards pre-GFC levels.

There is likely to be a significant fall in commodity prices in the medium term, spelling doom and gloom for Australia’s resources market as iron ore and gold prices continue to be hit heavily and fall into a state of steady decline.

In respect of the Australian economy, the next five years are likely to feature a significant and consistent devaluation of the Australian dollar combined with low inflation and hence, lower interest rates.

The positive take away point from this forecast is that it is anticipated that there will be a boost of investment in the residential construction sector, primarily driven by a significant increase in foreign investment into the Australian property market.

Lower interest rates could also see construction companies opting for a greater substitution of capital for labour, creating downward pressure on labour rates.

From a contrary perspective, low apprenticeship intake could also eventually result in an ageing Australian workforce resulting in construction projects becoming more expensive, as the supply of good quality labour declines and/or technological replacements for traditional labour roles increases.

Engineering Construction

All indicators appear to show that Australia’s mining and resources industry has hit its peak growth level and will now enter a period of downturn fuelled by a global reduction in commodity prices.

This drop in the mining and resources sector will see engineering construction growth decline and then plateau to a more sustainable level over the next 24 month period.

The slowing of the market in the engineering construction space is also being driven by the completion of many significant projects, including LNG projects and water and desalination plants.

“…New South Wales is now the best-placed State for a steady and constant growth over the next 24 months…”

It is expected that construction in the telecommunications sector will continue to rise over the next 12-24 month period, driven primarily by the continued rollout of NBN infrastructure across Australia.

However, following completion of the NBN works, it is likely that telecommunications based construction will suffer a prolonged reduction.

Infrastructure projects are likely to have continued and sustained levels of growth, within the engineering construction space as a number of major roads, bridges and tunnel based projects across Australia have now been approved or are expected to be approved shortly.

In addition, the sale of a number of Australian ports to foreign investors, is also likely to result in a large number of port redevelopment projects in the near future.

Residential Construction

The residential sector is predicted to be the strongest performer in the next 3-4 months as the increased demand for housing in capital cities continues to grow and foreign interest in investing into the Australian property market grows at exponential levels.

The resulting increase in housing prices and possible reduction in availability of developable land has not yet seemed to cause any downward pressure on the growth of the residential sector at this stage. However these factors may come into play in the long term.

The NSW average residential property age is around 25-30 years, meaning that there is likely to be an increase in demand for refurbishment and renovation based works.

Non-Residential Construction

Increased foreign investment in hotels and student accommodation facilities will see a growth in the accommodation sub-sector for non-residential construction.

In addition, the construction of aged care facilities will have continued growth over the next 24 month period, as well as the construction of hospitals and schools in regional areas.

A medium level office space occupancy rate is likely to see an increase in the conversion of office to residential space and an increase in demand for fit-out and refurbishment based works in the CBD areas.

State-by-State Analysis

As a whole, it is expected that the most significant reductions in growth will be suffered by Western Australian and Queensland. In previous years, these States have seen the highest levels of growth, which has been primarily fuelled by their reliance upon the mining and resources industry.

“…it is anticipated that there will be a boost of investment in the residential construction sector, primarily driven by a significant increase in foreign investment…”

New South Wales is now the best-placed State for a steady and constant growth over the next 24 months. This is largely as a result of New South Wales having the greatest spread of projects in the residential, non-residential and engineering construction sectors, without a particular reliance upon any of the three sectors.

Each of the major construction states, being New South Wales, Victoria and Queensland, will see their largest areas of growth in the next five years, being in new and other residential based works.

Infrastructure projects, particularly primarily road and transport based works will also be other areas which will have sustained and modest levels of growth over this period.

A full copy of the July 2015 Australian Construction Market Report which contains the full details of the ACIF Forecast can be purchased from: www.acif.com.au/shop

This communication has been prepared for the general information of clients and professional associates of Kreisson Legal. You should not rely on the contents. It is not legal advice and should not be regarded as a substitute for legal advice. The contents may contain copyright.