Australia’s development and construction sector will face several challenges in 2023, industry leaders say.

During a recent webinar hosted by CreditorWatch, five leaders in property and construction outlined their view of opportunities and challenges going into the new year.

Speakers included Patrick Coghlan, CEO of CreditorWatch, Sarah Slatter, CEO of property, infrastructure and construction advisory firm Slattery; Ginette Muller, Director of risk management advisory firm GM Advisory; Michelle Aizenberg, Chief Data & Research Office at BCI Central; and Adam Di Marco, CEO of The Urban Developer. The session was moderated by freelance finance journalist Ail Cain.

During the session, panellists were asked about the outlook for 2023.

Four themes stood out.

(1) Construction challenges remain despite supply pressures easing.

According to Coghlan, challenges for construction contractors remain notwithstanding a recent easing in global supply pressures, material delivery times and labour shortages.

Freight costs remain far above pre-pandemic levels whilst the costs of some materials such as steel are still high despite a recent easing in prices. In addition, availability remains constrained for some product lines.

This remains problematic for those who are locked into fixed price contracts and who now face severe margin pressures amid the need to absorb higher costs without being able to raise prices.

Added to that, builders now face additional pressures as inflation and rising interest rates impact demand whilst poor weather has led to severe delays.

All this, Coughlan says, comes on top of regular factors which make construction traditionally a risky business. These include large and complex projects, slim margins and limited room for error. Indeed, he points out that construction features regularly in the top three industries in CreditorWatch’s monthly Business Risk Index from a viewpoint of insolvency, likelihood of default and payment speed.

Slattery agrees that pressures are easing but adds that supply and prices remain volatile.

Supply bottlenecks in steel, copper, nickel and aluminium facades have plateaued, she said. Meanwhile, prices for structural steel, reinforcing steel, timber and copper (which affects materials such as piping and cabling) are now well below their peaks after having previously surged across 2021 and the first half of 2022.

In addition, shipping costs are easing notwithstanding that transport costs remain high.

All this, Slattery says, is seeing prices normalise.

Going forward, she expects cost escalation in the vicinity of 4-6 percent in 2023 followed by further escalation of 3-4 percent in 2024 across major cities and states. Elsewhere, cost escalation could be higher in places such as Western Australia and Tasmania on account of the lower economies of scale in those markets.

Turning to pricing strategies, Slattery says major contractors are seeking to rebuild project pipelines but are also trying to restore margins and are pricing more realistic margins into their bids following a period of intense margin pressure.

2. Modest Expectations for Development Activity

From a development viewpoint, Di Maco expects reasonably challenging conditions and modest activity levels over the next two years. This follow a spurt of activity which in turn followed projects being temporarily put on hold at the start of COVID.

Whilst the level of interest rates remains reasonable by historic standards, Di Marco says the speed of rate increases in both the US and Australia has taken many by surprise.

Speaking of residential development, he says homebuyer demand has been impacted as rising rates and higher living costs have led to constraints on affordability and borrowing capacity. Meanwhile, investor demand is being affected as Inflation is impacting rental affordability and restricting level of rental return which landlords can achieve.

Turning to commercial property, Di Marco says higher rates will impact valuations and will increase the level of yield which investors seek on new assets. This in turn will place a cap on what can be achieved from a development viewpoint over coming years.

On this score, Di Marco talks of a two-tier market.

At the upper end, he says valuations for high quality strategic assets across commercial, retail and industrial property have thus far held up reasonably well despite the higher rates. Going forward, he says this may well continue and these assets may continue to perform well.

However, Di Marco says greater vulnerability in valuations for secondary assets such as vacant industrial land, B or C grade office space and underutilised retail space.

Such asset classes may be challenged from a development point of view, he said – as may some at the super high-end luxury residential parts of the market.

In addition, Di Marco expects an increase in the number of development projects that will be delayed or mothballed – something he says it already occurring as can be seen by a rising number of market listings of approved development sites being put onto the market.

This is occurring as developers who previously purchased sites and obtained approval have found that their intended project is no longer viable on account of higher interest rates and higher construction costs.

In some cases, Di Marco says this will create opportunities in new emerging sectors. Sites that were once billed to sell residential developments on Melbourne’s fringe are being snapped up by build to rent developers. In areas of soft demand, sites that were once considered to be retail or commercial in nature may reposition into life sciences.

Despite challenges, Di Marco says Australia’s market remains reasonably well positioned overall.

“Taking a fundamental step back, Australia is in good nick,” he said.

“We’ve got low unemployment, reasonably low interest rates from a historic point of view and strong economic growth,” he said.

“We are in a good place in a challenging environment that will see some pockets of opportunity and some pockets of risk.”

3. Ongoing Challenges for Small Builders and Subcontractors

Notwithstanding easing cost pressures, Muller challenges for smaller builders and subcontractors are ongoing.

For smaller builders, the need to maintain sensible and sustainable margins remains.

For subcontractors, challenges remain in receiving payment for monies owed.

In one case, Muller says a subcontractor was expected to deliver very quickly yet was typically paid only 45 to 60 days later and even then was drip fed – at times receiving only 20 percent of their amount invoiced.

Other concerning practices include developers and/or builders using subcontractor retention money as part of their capital funding options along with back charges on invoices and partial withholding of payment advances.

Meanwhile, subcontractors can face severe consequences in the event of builder and/or developer collapse.

Nevertheless, Muller says there may be encouraging signs.

Speaking of her home state in Queensland, Muller says a lower level of fallout compared with what had been expected in recent contractor collapses may indicate that government measures to protect subcontractors may be having a positive impact. These measures include the introduction of project bank accounts on major construction projects, minimum financial requirements as a condition of builder licensing and audits from the Queensland Building and Construction Commission.

Potentially, Muller says that these measures may be leading to a tendency for contractors who come under financial pressure to act more quickly in terms of external administration and other measures.

This may restrict the degree of fallout when insolvencies do occur.

4. Technology and Data is King

In addressing current challenges, Aizenberg says the importance of technology and data should not be underestimated.

According to Aizenberg, applications for use of data and information in construction include:

• Specific project and stakeholder information for individual project management
• Economy and sector-wide information (market conditions etc.) to enable firms to make informed strategic decisions about where to best position their business.
• Sector specific construction technology/information to enables businesses to expand their network, diversify their market and strengthen their forward work pipeline.
• Use of information and data to improve efficiency by developing a more strategic business management approach.
• Use of information and technology to provide greater transparency and an expanded view of options for products and services which are available – something Aizenberg says is particularly important now as availability is still somewhat constrained and costs are still high.

Aizenberg says technologies which are useful vary according to different project team members.

For suppliers and manufacturers, project lead sourcing and management solutions can help not only to expand their client base but also to have the right data and tools to keep their products specified as projects move through to construction. This helps to prevent situations whereby they become involved in projects during design only to miss out on the potential orders when materials are actually purchased during construction.

Turning to architects and engineers, BIM software and 3D design is critical for design detail whilst the right product information to specify the best possible materials which are most suitable for the job in question is also important.

For builders and subcontractors, early stage and tender data along with technology solutions such as e-tendering platforms to enable them to win more work (with greater efficiency) and to solidify their forward work pipeline.