Opportunities in Australia’s construction sector are shifting to non-residential building and infrastructure construction as higher costs and surging interest rates smash the outlook for home building, new forecasts show.

In its latest report, Australian Construction Industry Forum (ACIF) has provided forecasts of activity for the nation’s construction sector across all states and territories and across 20 subsectors.

Not surprisingly, the forecasts paint a subdued outlook overall.

After expanding by 1.6 percent in 2022/23 (forecast), the dollar value of work done across Australia’s construction sector is expected to contract by 1.4 percent in 2023/24 to go from an expected $255.0 billion in 2022/23 to $251.4 billion in 2023/24.

Beyond that, activity will contract by a further 0.3 percent to bottom out at $250.7 billion in 2024/25.

Moreover, ACIF says it is a ‘very challenging time to be a builder’ as pressures associated with interest rates, costs and margins continue to mount.

(source: ACIF Construction Market Forecast, May 2023)

However, the report also highlights a shift in focus in terms of opportunities.

This will see opportunities for builders move away from residential construction and toward civil infrastructure as well as some sectors of non-residential building.

Not surprisingly, the main focus of the slowdown revolves around residential construction, where the dollar value of work done is expected to fall from $108.8 billion in 2021/22 to bottom out at $102.6 billion in 2024/25.

The decline will be seen in both new home construction and existing home renovation.

It is being driven by higher interest rates and rising build costs, which are impacting not only consumer borrowing capacity and affordability but also developer project feasibility.

Evidence of the decline can be seen in data for residential building approvals, lending for home construction and sales of new homes – all of which are at or near their lowest levels in more than a decade.

Nonetheless, the report points to opportunities in parts of the non-residential building and civil infrastructure sectors.

In non-residential building, ACIF says that the sector is expected to remain resilient in spite of rising interest rates and higher build costs.

Whilst challenges persist in some subsectors, the outlook for others is more promising.

In particular:

  • The value of work in education is expected to hold up at reasonable levels as some projects that originated from COVID stimulus spending remain in the pipeline, state governments are seeking to create modern and flexible spaces and to accommodate needs in growth areas, and universities are likely to cautiously consider resumption of building programs with foreign students returning.
  • In health and aged care, a surge in building approvals for new and upgraded hospitals is expected to drive un uplift of work in 2022/23 and 2023/24 that is expected to be carried forward until at least 2025/26.
  • In the industrial sector, elevated levels of activity are expected to remain following a long-term increase which has been evident since the middle of last decade.

Meanwhile, strong opportunities remain in civil infrastructure – particularly in transport and energy projects.

In transport, ACIF says the value of work done will continue to grow over the next five years on account of the pipeline of massive road and rail developments.

These projects will keep activity rolling on notwithstanding that the scale of the longer-term boom may be curtailed should a review of the Commonwealth project pipeline lead to some projects being cancelled or delayed.

Meanwhile, elevated levels of activity are expected to persist in relation to energy related construction on account of the pipeline of clean energy projects.

That said, ACIF cautions that the extent of the boom in this sector should not be overstated. A significant number of projects may not come to fruition amid competition for funding, it says. Meanwhile, the high level of imported components on these projects means that their overall impact may not be directly proportional to their investment size.

Speaking of the overall outlook, Bob Richardson, chair of the ACIF’s Construction Forecasting Council, stressed that builders are facing unprecedented challenges.

“There are several challenges in the outlook,” Richardson said.

“The costs of key materials for building whilst beginning to soften are still high and have not fallen back in line with preCOVID-19 levels.

“Builders are facing unprecedented challenges due to the high cost of materials and labour, with the effects worsened for builders with fixed price contracts.”


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