Summary top

Although the Australian economy is beginning to show signs of recovering, some impacts of the global financial crisis are still being felt by many businesses in the economy including construction sector developers. The main change which has occurred in the economy as a result of the GFC is in the financial sector. Many of the independent lenders have withdrawn from the market, as a result of the difficulty and expense of raising funds on capital markets. The means that businesses in many industries continue to face difficulties and/or higher costs to obtain debt financing. Most financial market analysts agree that we are not likely to ever see cheap and easy credit conditions such as those of 2007/08 ever again.

The construction industry is no exception to this trend. Less than 2 years ago, in the first half of 2008, there were over 45 lenders providing loans to the construction industry in Queensland. Today, that number is down to just 3 or 4. The areas which have been hardest hit by the fundamental change in lending practices are office, retail, and industrial construction as well as medium density residential developments. All of these types of construction face a difficult 2010 and 2011, before a recovery commences some time in 2012.

The government announced major stimulus spending measures in the 2009/10 Budget which are having a positive impact across many areas of the economy. In particular, the schools building package has provided a welcome boost to the construction industry at a time when construction in the major types of non residential building are weak due to dififculties in obtaining finance. According to ABS data, the value of education building work approved in the September quarter 2009 was an unprecedented $7.6 billion, coinciding with the closing date for applications in the third round of BER grants. Ordinarily, this category records between 0.8 and 1.0 billion in work approved per quarter, which shows the size of the impact that the government stimulus package is having on this area.

Cuts to official interest rates by the RBA have helped private home buyers. The owner-occupier housing market has also been boosted by the additional first home buyers grant, taking the amounts on offer to $14,000 for first-time buyers of existing homes and $21,000 for first time buyers of new homes. However, the boost to the grant ended on 30 September 2009. Nine years ago, the first home buyers grant for new houses was cut from $14,000 to $7,000. History shows that the number of first homes being built went through a mini-collapse after the expanded grant was withdrawn in 2000. We expect a similar pattern of behaviour to follow the ending of the expanded grant this time as well. Further dampening the short-term outlook for residential building will be rising interest rates, with the RBA tipped to continue increasing the official cash rate from its current level of 3.5 per cent back towards more normal levels of around 5 per cent over the next two years.

The long lag times due to the large size of engineering construction projects mean that the levels of construction are expected to remain steady in the short term, as the existing pipeline of projects is completed. However, these same long lag times mean that the impacts of the GFC are yet to be felt in the engineering construction sector, with a moderate downturn expected in the next couple of years. In the longer term, the green renewal of the energy sector and additional roads, water and telecommunications infrastructure to meet the needs of a growing population will ensure that engineering construction will continue to grow.

Australia has avoided recession despite the global financial crisis. One major factor in this has been the resilience of the Australian labour market. The unemployment rate has defied all economic forecasts to remain below 6 per cent (as at November 2009) and this has helped to give consumers the confidence to continue spending throughout the downturn. Underlying the better than expected employment figures is atrend towards shorter working hours and a greater prevalence of part-time work, reflecting that employers across the economy have preferred to cut back on hours worked rather than reducing total staff numbers in this downturn. KPMG Econtech is still forecasting a soft 12 months ahead for the Australian economy and the construction industry as economic conditions slowly return to normal.

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Residential Construction highlights>>

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Engineering Construction highlights>>

Highlights of Forecast for Residential Building top

• Residential building has shown some signs of recovery during the past 12 months after 5 years of relatively weak growth. Consumer confidence has also recovered after the initial impacts of the GFC, helped by record low interest rates and a boost to the government first home buyers? grant. However, the outlook for medium density residential development remains weak, facing the same the difficulties of obtaining financing for new developments as non-residential building categories. Part of the Government?s stimulus package in response to the GFC has been the announcement of $6 billion in funding over the next 4 years for up to 20,000 new social housing units and the refurbishment of 60,000 existing social housing units across Australia. This will support residential building activity in the short term.
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• Since the initial impact of the GFC in September 2008, new house construction has slowly recovered to similar levels to 2005/06. House approvals bottomed in the December quarter of 2008 but have grown steadily throughout 2009 in response to record low interest rates and encouraged by relatively benign increases to unemployment and the boost to the government?s first home buyers grant. However, the ending of the boost to the grant on 30 September 2009 is likely to see a drop off in the number of dwellings approved, in a similar pattern to 2000, which was the last time a boost to the first home buyers grant ended.
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• New other residential includes townhouses, units, etc. This type of building activity tends to fluctuate more than houses over the economic cycle, since new units and townhouses tend to have longer construction pipelines. Typically, construction of new units and townhouses is generally driven by commercial developer activity. With the global financial crisis resulting in an end to cheap and easy credit conditions, the pipeline of new medium density developments has all but dried up. Therefore we expect to see a sharp fall in other residential construction levels in the remainder of 2009/10, with the weakness continuing in 2010/11 before recovering in 2011/12.
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• Alterations and additions is expected to remain solid in the short term, thanks to a high level of renovation and refurbishment work being done of the stock of government housing nationwide. The funding for this refurbishment work is being rolled out as part of the stimulus package aimed at modeerating the negative impacts of the global financial crisis. In addition, privately funded alterations and additions are expected to remain solid as home owners opt to extend or renovate rather than ?trade up? to a larger dwelling during this period of rising unemployment and falling incomes.
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Highlights of Forecast for Non-residential Building top

• The outlook for Non-residential building activity has been severely impacted by changes to financial markets in the wake of the GFC. Credit conditions are no longer easy and open with the independent lenders no longer able to raise funding on capital markets. This has particularly affected the outlook for the construction of office, retail and industrial buildings.
  
  At the same time, the outlook for the government funded portion of the non-residential building sector is strong. The government funded schools building program has driven activity levels for education building to record highs. The outlook for construction of health and aged care facilities is also solid thanks to planned hospital developments on the Gold coast, in Perth and in Adelaide.
  
  Evidence from the most recent building approvals figures supports this general story. The value of approvals for office, retail and industrial building have fallen back between 40% and 60% over the past year, but approvals for education building have hit all time highs driven by the government stimulus spending. This pattern is expected to continue over the next 12-18 months until the privately funded non-residential sector begins its recovery.
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• Consumer spending has been surprisingly resilient through the economic downturn thanks to government stimulus handouts and better than expected labour market results. Despite this, Retail building dropped off sharply as retailers revised their short term profit expectations downwards. This has resulted in very little work entering the pipeline over the past 12 months. The latest outlook is more positive, with Westfield boss Frank Lowy indicating that his group is considering bringing forward some of its future construction plans. However, the timeframes involved in getting retail building projects started mean that the level of new retail construction is expected to remain weak until a solid recovery commences in 2012.
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• Office building has collapsed in the wake of the GFC. Many large office projects have been being put on hold as a result of the weaker profit outlook for most businesses and the difficulty in obtaining credit. As with retail and industrial building, very few new office projects have entered the pipeline since September 2008. Therefore, the outlook for 2009/10 is that office construction activity will be very weak, and this weakenss is expected to persist into 2010/11 before we see a recovery in 2011/12.
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• After more than doubling in the period 2001/02 to 2007/08, Industrial building has also plunged due to the impacts of the global financial crisis. Higher costs of borrowing in today?s financial markets have particularly affected the level of activity in this sector. Approvals for new projects in 2008/09 were 40% lower than 2007/08, foreshadowing a collapse in the level of work done for 2009/10. Activity will remain weak throughout 2010/11 before recovering in 2011/12. In the longer term, the level of building activity for industrial building is not expected to return to the same highs as we saw in 2008 with much of the one-off upgrading of transport and warehouse infrastructure now completed.
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• Educational building activity has boomed as the Federal government has ramped up spending on its schools building programme. The value of education construction work done was just 2.3 billion in 2004/05. The most recent quarterly approvals figures (September quarter 2009) were an incredible $7.6 billion for the quarter alone. With the government set to spend around $16 billion on ?building the education revolution? over the next three years, construction in this area is expected to be an area of strength during an otherwise sluggish period for non residential construction.
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• Health and aged care building activity is also remain solid during a difficult period for non residential building as governments continue to spend money on new hospitals. Construction on the new Gold Coast hospital, the new Fiona Stanley Hospital in Perth and the new Royal Adelaide Hospital are all expected to commence soon. Over the longer term, this type of building activity is expected to continue to grow solidly as the sector meets Australia?s needs for additional medical and aged care facilities due an ageing population.
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• Accommodation building will be weak during throughout 2009/10 and 2010/11 as the fallout from the global financial crisis continues to impact negatively on business travel and a high australian dollar discourages international tourists coming to visit Australia. Poor business conditions have meant that many corporate organisations are reassessing their need to travel in light of a weaker short-term economic outlook. Furthermore, with unemployment on the rise both domestically and internationally, we expect that leisure travel will be weak in the short term. This means that construction of Accommodation buildings will remain weak, with no recovery expected until 2012/13 at the earliest.
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• As a result of the global financial crisis, lending conditions for businesses have tightened dramatically. Even with risk premiums on credit markets normalising worldwide, the ability of businesses to borrow has been affected by the departure of the independent finance companies from the market. As a result, the construction of office, retail and industrial buildings ? the bulk of the private non-residential building construction ? is expected to remain weak during the remainder of 2009/10 and 2010/11 before a recovery commences some time during 2011/12. Backed by government finances, construction of education and health buildings is expected to grow solidly in the next few years thanks to the schools building projects and the construction of new hospitals.
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Highlights of Forecast for Engineering Construction top

• Engineering construction work done has now peaked, with the onset of the global financial crisis and the moderation in commodity prices meaning that the flow of large mining related engineering projects is over for the time being. However, long project lags in the sector mean that work done has continued to hold up as the pipeline of existing projects has been slowly completed. Therefore, the main impacts of the GFC are yet to be seen in the engineering construction work done figures. These impacts are expected to flow through over the next 12-18 months. In the longer term, population growth will continue to drive demand for the utilities provided by water and electricity infrastructure, and transport services provided by road and rail infrastructure.
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• Although the funding provided under the Austlink and ?Roads to Recovery? initiatives has now been used up, Road construction activity is expected to continue to be solid for the next few years. Both federal and state governments boosted spending on infrastructure as part of their economic strategy to combat the effects of the global economic downturn, with spending on roads being one beneficiary. The most recent federal budget announced funding for several large projects, including the $1 billion Ipswich motorway in Queensland, and the Hunter Expressway in NSW.
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• Bridge, railway and harbour construction is primarily driven by railway construction. There are several large urban and regional rail projects across the nation either already underway or in the advanced stages of planning. These include the $4.6bn Victoria Regional express and the $4.8bn Sydney CBD Metro project. The $2bn Oakajee rail and port project and the Darwin Port project were also given nudges in the most recent Budget. As a result, construction levels of Bridges, Railways and Harbours is set to be strong over the next few years as the nation?s rail and port infrastructure is upgraded and expanded.
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• Electricity and pipeline construction is set to be a major growth area over coming years thanks to a combination of the development of Australia?s natural gas deposits in Queensland and on the North-West Shelf, the need for replacement of our coal-fired electricity generation network, and a desire to replace these with ?greener? electricity generation. Miners tapping into the natural gas deposits will need to lay billions of dollars? worth of gas pipelines to transport the gas, which is development that is set to take place over the next decade. The replacement of our existing network with ?cleaner? energy generation methods has seen the plans developed for gas fired turbine power plants in NSW and the ACT, and dozens of medium to large wind farm projects across Australia. The Government?s budget initiatives included over $3 billion in new funding for ?clean energy? ? four carbon capture and storage plants and four ?pilot? solar towns, the locations of which are yet to be decided.
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• Water and sewerage construction activity has surged as governments have moved to address the inadequacies in Australia?s water infrastructure highlighted by the ongoing drought. Ongoing infrastructure development aimed at securing Australia?s water supply, such as desalination plants in Victoria ($3.1 billion), South Australia ($1.4 billion) and WA ($1 billion) will maintain activity in this type of construction at a high levels over the forecast period. Even though the Traveston dam development in Queensland has been withdrawn due to environmental concerns, premier Anna Bligh has indicated that the state government will need to consider other forms of water infrastructure, such as desalination plants, in order to ensure that they can meet the water needs of Queensland?s growing population (forecast to grow at over 100,000 persons per year in the coming decade).
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• Telecommunications construction activity has risen strongly over the past few years due to the the roll-out of Telstra?s the Next G network. Now, the roll-out of the Government?s National Broadband Network is set to sustain the solid levels of spending in telecommunications infrastructure well into the next decade.
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• Mining construction peaked in 2008/09 at close to $26 billion, making it almost as large as all types of non-residential construction combined. However, with global commodity prices moderating, the number of additional new developments entering the pipeline has also slowed. Also, due to the revision in commodity prices, some large projects for which companies already have firm plans have been postponed, such as the Olympic Dam expansion in SA, which has been put back to 2013. While the existing pipeline of work is still solid, Mining construction is forecast to cool rapidly in the medium term before construction related to gas developments in WA and Queensland commences.
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