Market Report: WA Construction Activity Set to Fall

Tuesday, January 6th, 2015
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The building and construction industry in Western Australia is set to see a significant period of decline as the boom in resource sector investment draws to a close.

In its latest forecast, Australian Construction Industry Forum (ACIF) says that after surging from $22.780 billion in 2005/06 to a peak of $54.968 billion last financial year, the annual value of work done on building and engineering sector construction projects throughout the state is set to contract by 8.2 per cent to $59.664 billion in 2014/15 and to drop to less than $40 billion by 2017/18.

Reasons for this are not hard to understand. With mammoth projects like Chevron’s Gorgon and Wheatstone now around 80 per cent and almost half complete respectively and little in the way of new developments coming through, the massive pipeline of investment which boosted resource sector construction work over recent years is now receding.

The impact of this will feed into other parts of the economy and construction sector as slowing tenant demand from resource companies impacts requirements for commercial office space and a slowing rate of population growth impacts demand for new housing. These forecasts come despite the fact that the state’s Chamber of Commerce and Industry expects the overall rate of economic growth rate to edge up slightly to around four per cent in both the current financial year and 2015/16.

Below is an outline of current market conditions and the outlook for the state regarding residential construction, non-residential building, engineering construction, and construction industry employment and construction industry tender prices:

WA - commercial

Housing/Residential Construction

Following a significant downturn in 2011/12, housing starts within Western Australia surged by more than 63 per cent to come in at 10-year highs of 29,050 in 2013/14 amid a combination of low interest rates, reasonable levels of pent-up demand and the highest level of population growth of any state in the country.

Going forward, the Housing Industry Association (HIA) expects another strong year in 2014/15 as an easing in commencements of new detached housing is partly offset by a peaking in multi-residential starts. The HIA says, however, that the number of commencements will subsequently fall to 22,740 over the years to 2017/18 as activity on multi-residential construction drops back. An anticipated slowing in population growth as the mining boom fades may contribute to this, so might a possible monetary policy tightening cycle toward the end of next year.

In the short run, approval data is promising: in the first 10 months of this year, the number of new houses and apartments approved for construction was up by almost 15 per cent compared with the same period in 2013.

Meanwhile, in housing renovations, the dollar value of investment will peak this year at a red hot $7.371 billion before dropping back to just over $6 billion by 2017/18, according to the HIA.

WA - housing

Commercial/Non-Residential Building

From a relatively high level, ACIF expects the dollar value of work done on commercial buildings throughout Western Australia to continue to drop back from respectable levels of $5.3 billion to $4.634 billion in 2014/15 before falling further to below $4.0 billion by 2017/18. Soaring levels of office vacancies amid falling demand for space from resource clients is not exactly helping in the office sector.

Activity on industrial buildings will fall, as will that on health and aged care as work on hospital projects in Perth drops back.

wa - non res

Engineering Construction

Likewise, after peaking at $41.902 billion in 2012/13, engineering construction activity is expected to drop from $41.159 billion last financial year to $37.415 billion this year before dropping further to below $30 billion by 2016/17 as resource construction work winds back.

Reasonable levels of activity will, however, are observed in roads and telecommunications, with work on the Gateway WA project keeping the former sector motoring on and that on the National Broadband Network doing likewise for the latter.

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At the moment, amid the boom in housing construction along with the still strong resource levels of resource investment, employment within the industry is running hot and the state’s building sector is employing nearly 20,000 more people than it did two years ago.

Going forward, ACIF expects the employment numbers within the sector to drop back to around 136,000 by 2017/18, or just over 10,000 less than today, as work on engineering construction and commercial building drops back.

wa - employment

Tender Prices

Perhaps surprisingly, given expectations regarding levels of activity, quantity surveying firm WT Partnerships expects a modest level of upward pressure on construction tender prices to intensify slightly going forward, with prices to rise by 2.8 per cent in 2015 followed by three per cent in the two years thereon after.

In its most recent report, WT said pricing pressure across most trades remained relatively subdued, tier one contractors were finding costs increasing in bricklaying and formwork trades as a result of a shortage of skilled labour and tier two contractors were seeing increases in ceiling and partition as well as demolition subcontractor costs.

wa - tender

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