Construction Sector Challenges
It would seem the construction sector is not out of the woods yet with further announcements of construction sector companies coming unstuck. With residential consents at a 45 year high, and commercial office, retail, industrial and civil activity rising, can the construction sector pull through and deliver?
In 2018, a growing number of construction companies became overextended, misjudging key elements of the development process, including capacity, access to appropriately skilled labour and perhaps most significantly, input cost assessments that left little room for appropriate margins in the face of market pricing realities. Further announcements this month indicate challenges linger for some. It would seem contracts and engagements entangled amongst previous obligations or out-of-sync market assessments are responsible. While there may be more to follow, there has been an increase in the number of successfully delivered projects in comparison to last year. Margins and more appropriate risk assessments on future projects seems to be a key criterion.
The latest NZIER Quarterly Survey of Business Opinion (QSBO) showed building industry respondents were more optimistic on margin potential this quarter. This was also supported by Statistics New Zealand data. The construction cost price index showed a slight decrease in cost inflation compared with previous years, now at an annual 3.7% increase in the June 2019 quarter for residential buildings and 4.3% for non-residential buildings. This is a positive, however, increases are almost double the two-decade average still and the chart on the bottom right indicates price inflation for construction companies is forecast to keep rising steadily and should remain top of mind.
Finding skilled and unskilled labour in the building industry continues to be a challenge. The latest NZIER QSBO survey showed the lowest net percentage results for unskilled labour since the survey began in 1975 (now at a net negative 45%). Finding skilled labour has eased a tad, but at a net negative 47%, it is still concerning and well above the 44-year average of a net negative 18%.