Regional Analysis 2018 Australia and New Zealand

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Australia Market Review - section updated Sept 2018

Overall, construction activity increased by approximately 2% in the third quarter when compared to the same quarter of the previous year. Declines in general building (down 0.3%) and residential (down 3.2%) have been offset by gains in non-residential (up 5.7%) and in engineering (up 4.9%).

The above trend is forecast to continue through 2018 and into 2019, as the housing boom is already being referred to in the past tense. The housing market’s landing has been relatively soft to date; however, its resilience will only be truly tested over the course of the next 12 months. As supply gradually catches up with demand (especially in the multi-unit Residential sector), Government-imposed restrictions on overseas investment will begin to impact on developers presales. Should the much talked about and continuously deferred RBA interest rate hike be implemented in the second half of this year as now predicted, 2018 could well be the perfect storm for the Australian economy’s one-time star performer.

Declines in general building and residential have been offset by gains in non-residential and engineering, up 5.7% and 4.9% respectively.

Further Government intervention in the form of major urban transport infrastructure projects (rail and road) will see the Engineering sector continue to grow in the short to medium term. However, the latest boom in the Australian construction market brings its own difficulties. Companies are stretched to keep up with soaring demand for skilled workers and raw materials such as concrete, steel and asphalt. Historically, bottlenecks caused by varying demand across sectors have been alleviated by contractors diversifying and refocusing their attention, and workers upskilling to meet the markets requirements. Whilst this process takes place, rises in material, plant and labour costs are likely to be evident in the short term.

Commercial office activity remains consistent. Low vacancy rates, and in turn rising rents across Sydney and Melbourne, have many tenants sitting on their hands. A move is likely to result in increased rents, so many are waiting to see out their current leases and/or focusing on maximising the efficiency and flexibility of their existing space. This trend is likely to continue until the next tranche of supply comes on stream in 2019/2020.

Across the states and territories, confidence and construction activity remains elevated in New South Wales, Victoria, Australian Capital Territory and Tasmania. A bounce in the price of commodities is improving confidence in the resource states of Queensland, South Australia, Northern Territory and Western Australia. The effect of this should result in increased construction activity towards the later half of 2018 and continue into 2019.

Lastly, it is expected that tender prices will increase by between 3% and 4% in 2018 for Melbourne and Sydney, with the remaining capital cities between 2% and 3%.

Contributors: John Carleton, Rémi Chalon, Albena Spasova