Construction sector not out of the woods yet

Colliers International’s New Zealand research report for September 2019

New Zealand’s property development pipeline is growing but there are signs the construction sector isn’t out of the woods yet, according to a new report.

Colliers International’s latest monthly New Zealand Research Report, released today, looks at the current state of the construction and infrastructure sectors.

Chris Dibble, Research and Consulting Director at Colliers, says the woes of 2018 aren’t behind us yet.

“Recent news that more construction sector companies have come unstuck suggests challenges linger for some.

“The industry went through a year of reckoning in 2018, when a growing number of construction companies became overextended.

“These companies misjudged 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.

“With the latest company woes, it would seem contracts and engagements entangled amongst previous obligations or out-of-sync market assessments were responsible.

“While there may be more difficulties 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.”

Dibble points to the latest NZIER Quarterly Survey of Business Opinion (QSBO), which showed building industry respondents were more optimistic on margin potential.

This is partly 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 per cent increase in the June 2019 quarter for residential buildings and 4.3 per cent for non-residential buildings.

“This is a positive, however, increases are almost double the two-decade average still and price inflation for construction companies is forecast to keep rising steadily and should remain top of mind.”

Dibble notes that 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 per cent.

“Finding skilled labour has eased a tad, but at a net negative 47 per cent, it is still concerning and well above the 44-year average of a net negative 18 per cent.”

The latest Ministry of Business, Innovation and Employment (MBIE) National Construction Pipeline report projects construction activity will grow to $43 billion by 2021, before decreasing to $42 billion in 2024.

“While a decrease is projected, capacity constraints are unlikely to ease substantially over the next few years,” Dibble says.

“Compounding this is the likelihood that some key projects were not included in the forecasts such as the recently announced $92 million Hamilton to Auckland commuter rail service and new initiatives in the KiwiBuild reset.

“With 2020 being an election year, there is the possibility for further unforeseen project announcements.

“Therefore, with no clear, major rise in new migrant or existing labour pools, the timeline for an easing in labour constraints should be assessed as more medium than short-term at this stage. This adds to the sector’s challenges.”

The MBIE report notes residential and infrastructure construction projects show the largest rise in activity, offset by non-residential activity which is expected to stabilise, especially in Auckland and Canterbury, after a strong run.

“These figures and current market dynamics show the construction sector faces a number of challenges still, but companies that have market appropriate risk assessments, are able to enact new pricing strategies and have capacity sorted will provide a much-needed boost in confidence to the sector and deliver projects successfully,” Dibble says.

“However, this will not come cheaply, and residential and non-residential project pricing will likely remain high to negate unfavourable outcomes.”


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