Companies operating in building and construction could collapse over the next six months as the impact of the coronavirus spreads, a leading forecaster has warned.
In an online conference held last week, BIS Oxford Economics Associate Director – Construction and Maintenance Adrian Hart said coming months will be difficult for builders as a slowdown in work associated with COVID-19 results in significant margin pressures.
According to Hart, margins recovered during 2019 after previously touching as low as six percent in 2018.
Going forward, however, this may change as builders become desperate for work.
“My concern going forward is that depending on how severe the contraction is over the next three to six months, we may get to the situation where companies will start bidding for whatever work they can and being prepared to take on more risks,” Hart said.
“We may see more failures in the construction industry. All of this (activity disruptions) points to pressures on margins in the near term.
“That’s going to be the challenge. How do companies just stay afloat through this next three to six months before we start to see the recovery on the other side of this?”
Hart’s comments come as BIS said COVID-19 will hit the industry hard.
Previously, the expectation had been for an already subdued market in residential building to be balanced by stronger activity in civil and commercial construction.
This has now changed, however, amid the likelihood that projects in these sectors will be delayed.
“We were already suffering a weak construction growth story because of the downturn in residential (building),” Hart said. “That was to be balanced in some ways by the pickup in non-residential and engineering construction.”
“Now because of COVID-19, what we are starting to see is the likelihood that we will be pushing out projects – particularly in that non-residential space, particularly in those sectors that are right at the front line like accommodation, aged care and education in the private sector. We are likely to see that cause an issue in FY21 at the same time as we were already anticipating the residential market to be bottoming out and starting to come back.”
“Similarly, with engineering construction, there are parts of the privately funded market where we are concerned about how quickly we will be able to move into the next phase of projects. We do anticipate that publicly funded projects will proceed – there could be some stimulus added into the mix as well. But when you add them all together, what you essentially end up with is probably a weaker FY21 than what we have got in this (forecast) chart.”
I would say that FY21 is going to be the big challenge – particularly the first half of it – before things start to recover.”
On the positive side, Hart talked of a strong recovery beginning in FY22 as what was already anticipated to be a strengthening residential market will be further supported by catchup and stimulus measures in civil and commercial markets.
As well, Hart says maintenance work will remain strong courtesy of a need to maintain existing assets along with work associated with the bushfire recovery and potential stimulus measures.