Building industry: are the positives trumping its negatives? Headwinds remain, prospects are mixed
All in all, the big picture outlook seemed positive. The Australian government both State and Federal has spent and is spending a great amount of money in the form of stimulus packages to support construction. There will be variations in spending in specific sub-sectors, States and cities according to their economies, but “overall 2014 was shaping up to be a good year for the construction industry in Australia”.
So said National recruitment agency Design & Construct – although other sources suggest the industry’s all-over performance in the next couple of years could slip very slightly (about 0.1%).
Be that as it may, how does SA feature in the big picture?
Percentage changes in gross State product forecasts for the years 2013-14 and 2014-15 embracing all sectors of the industry reveal SA at 1.3% and 1.8% respectively well below other states (with the exception of Tasmania).
According to MBA figures (June 2014) SA’s most encouraging expectation is that the 9,787 residential building commencements in 2013-14 will increase to 10,753 in 2014-15 – although indications are that figures for work done in the non-residential and engineering and construction sectors this financial year will not equal those for 2014-15(falling by 13% & 9% respectively in 2014-15).
The reality is that it has become and remains tough in the building and construction industry as confirmed by ASIC figures regarding external administration appointments.
The reality also is that in any competitive industry, a lack of work volume eventually leads to risk taking (particularly wrt margins) and underquoting to generate cash flow at the expense of profit, whilst ignoring the inevitability of debt accumulation. Thus in the absence of subsequently securing future profitable jobs there will be a day of reckoning. You can be great at doing the work but you cannot create the market that generates that work – that is a matter more often than not for governments.
In on-going surveys of Australia’s builders, while revealing some good news, also highlights major concerns that in the view of most construction companies are being dealt with inadequately and not fast enough by governments.
But good news comes from the latest available Australian Bureau of Statistics (ABS) figures that show there’s been a 30% increase in dwelling approvals during the past 14 months.
Banks and rates
Builders can thank the Reserve Bank of Australia (RBA) for keeping the cash rate low, and private sector banks (now engaged in an unprecedented home loan discounting war), where as much as 1.4 percentage points is being offered below advertised rates.
The bigger the loan the bigger the discount, but a borrower seeking $500,000 towards the cost of a $625,000 property can still get a more than 1 percentage point reduction on the standard variable rate.
A few moths ago a discount of 0.7 percentage points on such a loan was unheard of, and the extra 0.3 percentage points now available reduces annual repayments by more than $1,100.
Nonetheless an MBAA survey shows close to 70% of building and construction firms still rate lack of work as their most serious concern while about 50% of them rate both access to finance and the proliferation of red tape as major issues.
SA's state of affairs
Both State and Federal Governments have been spending beyond their means for years, SA’s debt position is not only the worst of the mainland States, but its net debt exceeds NSW’s, QLD’s, VIC’s and WA’s combined.
Thus, lacking direct means for budgetary stimulus, the SA Government’s decision to create Transport Oriented Developments (TODs) is a positive step towards promoting opportunities for residential, second and third tier commercial builders. (TODs can circumvent local planning restrictions to permit multi-storey constructions along transport corridors – for example on Prospect, King William and Goodwood Roads).
An encouraging answer to the what-next question after completion of the Adelaide Oval and new Royal Adelaide Hospital projects is twofold. The University of Adelaide will undertake the biggest single construction project in its history – a $120m medical facility next to the new hospital, and next year work will start on rehabilitation and expansion of the court precinct adjacent to Victoria Square.
And again, recent reports suggest BHP is again looking to expand at Olympic Dam, and when it’s decided to proceed, then this “would provide significant relief for the building industry, albeit that it may return us to the structural constraints faced before the GFC”. Whilst it remains parked, business sentiment will be hard to turn around.
More positive reports
Reports are being received from second and third tier builders suggesting not only that future growth may come from the smaller end of town, but that rewards stemming from it are more likely to stay in SA.
This largely anecdotal evidence is increasingly being supported by statistics.
A recent report of the Housing Industry Prospects Forum (HIPF) shows “a reasonable improvement in the outlook” for that sector, supporting a similar indication from the industry’s commercial sector.
The HIPF forecast of 8,880 housing prospects this year indicates a return near to underlying demand. However, its forecast of 9340 for next year exceeds underlying demand for the first time since 2010 – even though it was a year boosted by massive levels of government spending as part of the post GFC stimulus package.
Although ABS statistics show “the industry has had a few stutters” there’s a clear indication that “it’s heading in the right direction”.
A reasonable increase in numbers of first home buyer grants is accompanied by moderate increases in sales of existing dwellings – “no doubt with accompanying increases to mortgage levels” – the minimal counter to this for the industry, being a drop in alterations and additions that’s “not considered a significant issue”.
There are, however, significant negative issues facing the building and construction industry, which we’ll review in a subsequent newsletter.
Watch this space!
For more information, contact Macks Advisory on 08 8231 3323 or visit our office at Level 11, 99 Gawler Place, Adelaide SA 5000.
