2010 Regional Roundup
Friday, 15 January 2010Welcome to 2010. This week we look at what we can expect around the regions, and how the changing fortunes for construction will unfold. In contrast to the fear and uncertainty of early 2009 there now seems to be considerable optimism for recovery during 2010. The government stimulus package of handouts, first home owners boost, and schools building programs did much to offset the downturn in private sector construction. This together with the improving outlook for resources projects driven by rapid recovery in Asia is encouraging for construction jobs and investment.
Public sector works on roads, tunnels, hospitals and schools will continue to provide support to the construction sector during 2010 even though commercial private construction and multi unit residential are likely to languish. Coupled with the ending of numerous private projects the market will remain tough and competitive during at least the first half of the year.
Finance is still tight and developers are grappling with a raft of issues including lengthy development approvals, infrastructure charges, environmental regulations land release and limited sales. These are tough times for private developers with little relief in sight. Margins are tight and overheads will continue to be scrutinised by private builders and developers. Those involved in the public sector are able to retain margin and even increase it to cover the increased risk pushed back onto the contractor by the Building the Education Revolution contract provisions.
After huge spikes in costs of construction materials in 2007/08, construction material prices have slowed, but recently there has been a recovery in commodity prices, some of which will feed into the construction sector. According to the Australian Bureau of Statistics the price index for materials in house building for the September quarter 2009 decreased by 0.8%.
However concrete suppliers have flagged some major increases during 2010. Higher energy prices in 2010 will drive this for crushing, manufacture and delivery of concrete aggregate. Steel prices tumbled in early 2009 and this bought reinforcement and structural steel costs back down to earth in March. Then global steel prices recovered with considerable restocking in Asian economies.
Australia has yet to see higher steel prices as the Australian dollar has shot up towards parity with the US$. This in turn will keep prices of imported building materials, whitegoods and equipment down for longer. Delayed recovery in the US economy and continued low interest rates there will reinforce the yield on Australian denominated deposits and keep the Australian $ strong during much of 2010.
Major projects such as Gorgon LNG will start to impact construction during 2010. Final investment decisions for up to 4 coal seam methane projects in Gladstone are due in 2010 although it appears unlikely that 4 plants will be built. With a price tag of several billion per LNG train it seems likely that the projects would merge into one or two joint ventures. Given that forward multi year orders for the gas are in place the outlook is promising. Similarly with commodity prices recovered new nickel copper and gold projects look promising. The LNG sector together with a resurgent resources sector will by 2011 start to create capacity and skill shortages reminiscent of 2007-8, with engineering, management, trade skills and equipment all in strong demand.
Gold Coast
The Gold Coast has had a substantial downturn but the Building the Education Revolution and new government funded affordable housing projects have injected some much needed life into the Gold Coast construction industry. Two years ago $32.8 billion worth of work was underway on the Gold Coast compared to $27.7 billion now.
More than $10 billion worth of work has been boosted into infrastructure including upgrades to the Pacific Motorway, social housing ($144 million) and the Gold Coast Light Rail project ($949 million). The Gold Coast light rail project is the 1st of its kind in Australia and will create a much needed boost to the Gold Coast’s economy, creating some 6300 jobs. The Gold Coast Rapid Transport project is scheduled to commence operation in early 2014.
The $126 million redevelopment of the Gold Coast Stadium will provide up to 950 full-time jobs during construction and approximately 700 jobs once it is operational. The 2500 seat AFL and sports stadium at Carrara is forecasted to generate $415 million of economic activity into the Gold Coast over a 10 year period.
Work has started on Stage 2 of the Government’s Stage 2 Social Housing programme. This will create 543 new homes in Ashmore, Palm Beach, Southport and Waterford. Stage 2 is expected to cost $144 million and is to be completed by 2010. There will also be almost 1500 new homes built at North Coomera after the council approved a $750 million development plan. Construction will start on the development 2010.
The Gold Coast office market vacancy rate increased from 18% to 20.1% in the six months to July 2009. While the Gold Coast office market is currently unstable, a slowdown in the rate of new supply offers hope that vacancies will stabilise in the medium term and decrease in the long term. Robina and Southport have had significant growth in this area, a good sign that a recovery may be on its way.
Construction costs have had fallen by up to 10% over the year. 2010 is predicted to remain flat with little or no rise at all.
Brisbane/Queensland
Building approval Statistics from the Australian Bureau Statics showed a continued decline in activity for Queensland. Seasonally adjusted number of dwellings commencements had fallen 9.7% in the June Qtr 2009 compared to a national drop of 3.7%. Commercial building in Queensland with the value of work completed in the June Qtr 2009 remained steady at just over $1.7 billion, however the value of commercial work commenced is lower at $1.2 billion, indicating that the commercial market is still falling.
The GFC has caused a drop of 50% in the number of medium density dwelling approvals this has been largely due to developers having trouble accessing credit to commence projects. The short term outlook for the residential sector is for limited growth as fears of unemployment increase; however the first home buyers grant will support construction in this area. In the long term, Queensland’s population growth is predicted to grow rapidly over the next ten years so demand levels should increase in this sector.
Gas and mining developments in North Queensland should provide substantial investment development over the next few years, along with investments in railway and harbours to assist in transporting of these minerals for export. Major mining developments currently under construction for Queensland include the Clermont open cut black coal project ($1.57 billion), Queensland Gas Pipeline running from Wallumbilla to Gladstone ($112 million), Moranbah Ammonium Nitrate Project ($935 Million) and the Yarwun Alumina refinery expansion stage 2 (near Gladstone)($2.2 billion).
According to the Property Council, Brisbane CBD and fringe office markets have reached their highest vacancy levels since January 2004 with levels sitting at 10.7 for the CBD and 11.6 for the city fringe areas. The Brisbane City and fringe market will face a supply challenge over the next 18 months with a total of 39 532 m² due on the market of which 47% is pre-committed, and another 14 929m² will come on-line in 2010.
During 2009 construction prices fell by up to 3%, 2010 should see construction costs stabilising. Brisbane has seen significant falls in reinforcement, steel, aluminium and curtain wall systems over 2009 these have been offset by minor increases in concrete supplies and imported goods. Brisbane and Queensland have experienced falls in labour costs, mainly due to lower margins at the contractor and sub contractor levels, however these costs now seem to be increasing.
Sydney
Sydney developers and builders have experienced some quiet times since the onset of the economic downturn. However some builders believe the construction market is again beginning to pick up. Apartment building has climbed for the first time since early 2008. Sydney’s industrial market has emerged as the most resilient in the country, with prime warehouse rents having fallen by just 3.2% during the downturn. The transport and logistics sectors appear to be the prominent users for this industrial space.
Industrial and commercial projects worth $2.87 billion are currently on the drawing board for the NSW Hunter region, with the majority planned for the Newcastle local government area. Construction has also begun on the $1 billion, 60 hectare expansion of Port Botany in South Sydney. This will be one of Australia’s largest infrastructure projects to commence. New South Wales mining sectors is a major driver for construction activity across the state, as well as road, electricity and water investments, some of these include the Tarcutta Bypass Hume Highway ($225 million), Bulahdelah Bypass, Pacific Highway ($310 million), NCIG Export Terminal at Newcastle ($1.3 billion), and the Colongra gas fired power station ($289.7 million).
Enterprise bargaining agreements have seen labour costs rise in Sydney. Contractors are absorbing these costs by reducing their profit margins. Construction costs have stabilised, with an increase of 3% is predicted for 2010.
Melbourne
Roads and rail projects has been fast tracked to boost construction activity in Victoria. Investments for major infrastructure projects have reached an all time high with construction activity up 3.4% for the June Quarter 2009. Engineering construction, and the residential markets have both increased, engineering figures were up 9.5% (June Qtr) and residential 3.7% (June Qtr).
Melbourne is leading the way with green design construction with Australia’s Pixel Building being first carbon neutral building under construction. The $6 million four storey office building will deliver a 100% score on the green star rating system and is expected to be completed by March 2010. There are also many urban renewal and regeneration projects underway across Melbourne including the $12 billion development of Melbourne Docklands which includes the $1.7 billion Victoria Harbour Project.
The Melbourne region is expecting migration of 80,000 in 2009/10 so the demand for housing and apartment dwellings is currently outstripping supply. This is forecast to continue for some considerable time yet. The residential construction sector for Melbourne looks positive in the next few years. Construction costs in Melbourne declined by 3% in 2009. Prices are expected to stabilise throughout 2010.
According to the Property council there is still demand for office space in Melbourne. This trend is set to continue with 181,009 m² of office space entering the market during 2009/10. Of this 91% is pre-committed. Demand for office space at Melbourne’s Southbank precinct is at an all time high with vacancy rates decreasing from 10.9% to 5.8%.
Adelaide
Construction costs in Adelaide have declined by 3% since the beginning of the year as building activity slows.
From late 2008 and into early parts of 2009, contractors reduced their margins within a highly competitive tender environment in a bid to win work from a rapidly diminishing construction sector. Confidence in this sector seems to be returning however with the building the education revolution stimulus package. Infrastructure projects such as rail upgrades and the new $1.83 billion desalination plant will also increase activity.
While it seems some material costs have fallen, such as steel, others have risen. Some developers are looking at stalled projects and options, (while material costs are low) including residential apartments. The beginning of 2009 construction costs declined but these have since increased and are forecasted to increase by another 3% for 2010.
Key drivers of growth in South Australia include the Port Adelaide Regeneration project and the $10 billion defence project for submarines and air warship destroyers on the Port River. New port infrastructure is to be developed by BHP Billiton to support its massive expansion of the Olympic Dam Mine at Roxby Downs. Unlike other states, South Australia has not experienced any mine closures as a result of the GFC. Over the 12 months a further 4 to 5 mines are expected to be approved. Among them is the Jacinth-Ambrosia mineral sand project ($420 million) to begin operation in 2010.
Western Australia
Economic Prospects for Western Australia are looking up again as business confidence and consumer confidence grows and interstate and overseas migration continues.
Western Australia saw a significant slowdown in the housing market after outstanding gains throughout 2006/07, but despite a slowdown in the residential sector Western Australia leads the way with construction activity. The amount of construction work done in the June quarter 2009 for Western Australia was 80% above the decade average with activity still growing.
Engineering construction work done increased in the June quarter by 22.8%, the value of engineering work yet to be done is $20.6 billion, which is approximately equivalent to a full years worth of construction activity.
Australia’s single biggest resource project the Gorgon Liquefied Natural Gas Project ($43 billion) will create 3500 direct construction jobs on Barrow Island. Major construction of the project is due to commence early 2010. First gas is planned for 2014.The Gorgon Gas project is expected to increase state gross product by 4% and will boost Australia’s gross domestic product by more than $60 billion. Other major developments in Western Australia include the $955 million Binningup Desalination Plant and the Worsley Alumina Refinery Expansion (total expansion cost $2.5 billion).
Overall construction prices for Perth fell due to reduced labour rates as both main contractors and sub contractors reduced their margins to win work. Contractors and sub contractors in the industrial, retail and smaller commercial office sectors were hit hard and rates fell quite significantly. Perth’s construction costs remained stable throughout 2009 with increase of 2% forecast for 2010.
Canberra
The ACT is currently experiencing significant growth in the construction industry. In 2009 more than $5 billion worth of investment construction was underway or planned for the ACT. Major engineering works including the $350 million Canberra Airport upgrade, the water pipeline from the Murrumbidgee River to Googong Dam and the Cotter Dam enlargement were several projects which got underway during the year. Other major projects include the new ASIO headquarters and the duplication of the Gunghlin Drive extension.
The local residential construction sector also received a boost with the construction of 10 new defence houses funded by the government's economic stimulus, injecting almost $2.7 million into the sector. The ACT government has also invested around $300 million for additional work over the four years including new schools, multistorey parking for the Canberra hospital and road improvements around the airport. An additional $500 million will be invested into capital works with plans to build a $2 billion gas fired power station and a data centre in the ACT.
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