Where Are the Best Construction Opportunities in Victoria?

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Wednesday, January 6th, 2016
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The construction sector in Victoria is currently performing well overall as record levels of approvals in apartments drove the overall dollar value of construction work done throughout the state up by more than four per cent in 2014/15 to reach its second highest level on record at $36.308 billion.

Going forward, there are positives as interest rates look set to remain low for at least a year, the relatively low value of the Australian dollar helps stimulate sectors such as tourism and retail and the state has the highest level of population growth out of any in Australia.

Over the near term, participants in the most recent Property Council of Australia Property Industry Confidence Survey are reasonably optimistic about the 12-month outlook for construction activity and employment within the state. They are also reasonably bullish about capital growth across most sectors of the commercial property market. Expectations of robust population growth (1.8 to 1.9 per cent per annum over the next four years, according to the Department of Treasury and Finance) should underpin respectable levels of demand for new housing.

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Structurally, the creation of Infrastructure Victoria and the process of setting up a 30-year plan is viewed by industry as a welcome development, while finalisation of the Plan Melbourne refresh process next year could help to promote confidence in the state.

Though uncertainty remains about the sale of the Port of Melbourne (necessary to finance a program of level crossing removals), recent announcements of a public private partnership arrangement for the Metropolitan Rail Link and federal funding for the Western Distributor project has provided a degree of certainty with regard to funding for large-scale infrastructure projects.

While there is ample work in the pipeline for now, however, the number of new high-rise developments coming through will probably drop back over the medium term amid moves on the part of the regulator to curb speculative investment in real-estate, new temporary restrictions on plot ratios and notions from commentators such as BIS Shrapnel that the high-rise segment of the market in Melbourne could be heading into oversupply.

More generally, Treasury expectations of sub-three per cent rates of economic growth over each of the next four years does not inspire confidence in underlying drivers of investment for new commercial property developments. While investment in transport is ramping up, that in facilities related to electricity and heavy industry is in decline amid an overcapacity of poles and wires and extremely weak commodity prices.

Because of this, the Australian Construction Industry Forum (ACIF) expects the overall dollar value of work done across all sectors to actually drop back 2.4 per cent to $35.444 billion in 2015/16 and remain relatively stable thereafter.

On a sector by sector basis, key areas of opportunity are as set out below:

Residential

As the state with the fastest-growing population thanks to strong levels of net overseas and interstate migration as well as a robust pipeline of work amid sky high levels of building approvals earlier this year, Victoria will break ground on more than 50,000 homes again in 2016 to the sixth time in seven years, the Housing Industry Association says.

Beyond that, activity will drop back to more normal levels as the market arrives at a roughly even balance of supply and demand and – according to some commentators such as BIS Shrapnel – the high-rise apartment sector moves into oversupply.

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Commercial Building

Having grown by around eight per cent in 2014/15 to reach respectable levels of $8.7 billion, commercial building activity overall will remain at around that level in 2015/16 before resuming further modest growth in subsequent years, ACIF says.

Thanks to a good range of projects, including Lend Lease’s Melbourne Quarter development at Docklands, a major office and retail development at Latrobe Street and the Armstrong Creek Western Industrial precinct at Connewarre, the dollar value of work done on construction of offices will rebound from $1.669 billion in 2014/15 to hit more than $2 billion by 2017/18.

As tourism numbers bounce back, meanwhile, hotels and accommodation facilities will be another area of growth, with the value of activity set to jump from $179 million to $302 million in 2015/16 as work starts on developments such as 80 Collins Street, a mixed use development at Freshwater Place and a Premier hotel and apartment development in Spencer Street.

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Civil/Engineering Construction

Although the overall dollar value of work done on civil construction or engineering construction will contract by 8.3 per cent in 2015/16 to come in at its lowest levels since 2008/09 amid slower volumes of work on power and electricity facilities as well as heavy industry according to ACIF, there are areas of opportunity.

Having dropped back this year, road construction activity will rise from $2.2 billion in 2015/16 to almost $3 billion in 2017/18 as the state government’s level crossing removal program ramps up and work gets going on the Western Distributor project followed later on by the Western Interstate Freight Terminal. Activity on bridges, railways and ports will pick up toward the end of the decade as work starts on the Metropolitan Rail Link. Telecommunications work will also offer opportunities due to work on the National Broadband Network.

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