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Creation Date: Thu, 05 May 2011 GMT

Private sector struggles to fill stimulation gap

Rider Levett Bucknall’s Second Quarter 2011 Oceania Report confirms that construction remains largely subdued across most capital cities, with the private sector struggling to pick up where government stimulated building and infrastructure programs, aimed at buffering the economy from the effects of the downturn, left off.

Prepared by Rider Levett Bucknall Research and Development, the bi-annual Oceania Report (OR) found that private sector work done has tapered since the September quarter 2010, slipping 3.4% in the December quarter, while building approvals in the December quarter failed to indicate any immediate change in fortunes, posting 0% growth.

This was accompanied by consecutive quarter declines in public sector work done, with a combined 11.5% drop in the second half of 2010, although this was coming off historically high levels.

Oceania Report editor, RLB Head of Global Research Roger Hogg commented, “Prospects are less than positive for public sector activity, as the December quarter posted a year-on-year quarterly decline of 71.8%, indicating the degree to which government stimulated projects have washed through the system.”

The two largest cities, Melbourne and Sydney, both performed only moderately well, as their residential sectors posted stagnant levels of activity over the second half, while non-residential construction saw declines, as private sector recovery largely failed to materialise.

Melbourne non-residential building approvals did record a jump in the December quarter, suggestive possibly of growing optimism within the market. 

The RLB Oceania Report found that construction in the resource-rich states was also soft, as both Brisbane and Perth remain well below pre-GFC activity levels.  The Perth market saw significant declines in both residential and non-residential sectors, while Brisbane’s market saw modest gains, yet remains well down on its 2008 highs.

The upcoming re-building activity in Queensland, as a result of the recent cyclone and flood disasters, will undoubtedly spur activity, as will the proposed major LNG projects in the state’s north.

The relatively smaller markets of Darwin and Canberra showed significant strength in the second half of 2010, residential approvals having jumped enormously, while non-residential activity continued its steady growth in both locales. 

According to Rider Levett Bucknall, contractor concerns regarding diminishing workloads will increase through the remainder of 2011, with margins again being placed under pressure as competition for work is elevated. In the context of general levels of CPI, continued stable labour, materials and fuel costs will further enhance the cost competitiveness of building in Australia.

Mr Hogg continued, “Risk averse banks and lending institutions continue to demand high levels of pre-sales in order to satisfy their stringent risk criteria. Consequently, there are still large numbers of projects unable to gain access to finance. It is difficult to say when these conditions will ease, but much depends on the strength and speed of the global recovery and the confidence this will provide the larger lenders.”

However, the slowly strengthening US economy is restoring some confidence to global markets. This, together with sustained growth in the developing economies, should see the Australian economy generally, and more specifically, the construction industry, experiencing improved conditions towards the end of 2011 and into 2012. In its turn, this should translate into a rise in private sector building activity, as lending conditions loosen, demand intensifies and projects come to market.

According to Rider Levett Bucknall, tender prices increased in 2010 by 4% in Darwin and Melbourne, 3.2% in Canberra, 2.6% in Adelaide, 1% in Sydney, with no change in construction costs recorded in Townsville over the year.  Meanwhile, tender prices contracted by 1% in Brisbane and 1.6% in Perth.

The firm is forecasting increases in 2011 of 3.7% for Darwin, 3.5% for Melbourne, 3.2% for Canberra, 3.0% in Sydney, 2.5% in Perth, 1.3% in Adelaide, 1.0% in Brisbane and 0.5% in Townsville.

Source: Rider Levett Bucknell Website - viewed 05/04/2011