Understanding the shifting gears of Queensland's construction market
What comes next?
With a number of large engineering construction projects in Queensland approaching completion, one might be wondering what is in the pipeline to replace them.
In light of the approaching completion of a number of large engineering construction projects in Queensland, in particular the Santos, QGC and APLNG gas plants, one might be wondering about what is in the pipeline to replace them. The three projects have a combined value of $63bn, with the QGC plant commenced loading its first cargo in late December 2014, and all are scheduled to complete over the next two years.
There will be reduction in total construction spend over the next five to 10 years, although not as much as you might expect. The most recent Deloitte Access Economics forecasts show a lift in private housing investment partly offsetting the reduction in engineering construction activity over the next decade. However, that lift is dependent on improved population growth in Queensland, which has slowed recently due to soft interstate migration and is currently at its lowest rate since 1999. A lift in population growth will also help to drive demand for services such as health and education.
There are also other drivers that will counteract the downward shift. The Federal Government intends to deliver $35.5bn worth of infrastructure across Australia over the next six years to fund major road and rail projects. These projects include the $1.8bn Toowoomba Second Range Crossing and $1.4bn Gateway North project.
Queensland housing and commercial construction investment
Our key takeaways from the forecast size and mix of the Qld construction market, not to mention the pace to which that change in mix will likely occur, are:
1. Businesses overly exposed to the mining and gas engineering construction sector are already experiencing a slowdown and margin squeeze. This is not dissimilar to what mining services businesses have experienced, however hopefully not as pronounced
2. Other markets (e.g. residential) that are experiencing resurgence have an opportunity to improve their margins and pipeline
3. Those that have a diversified/flexible market exposure will handle the shifting gears with less disruption.
In fact, our Deloitte Real Estate team is beginning to see early signs of recovery through tenders managed on behalf of our clients. Tenders received from builders in the residential apartment space indicate pipelines are beginning to fill as an increased number of developers are obtaining approvals for medium to high rise apartment projects. While this would indicate a large number of new projects to commence construction in the short term, we would caution that in many cases several of these projects will fail to meet the conditions precedent for funding and never eventuate as we have seen in past cycles. This highlights the need for builders to be cautious about committing resources to projects that may never commence construction and focus on experienced development teams with strong channels to meet the pre-sales requirements to trigger funding.
On the flip side, developers will need to ensure they maintain strong relationships with builders to capture competitive pricing. As builders are presented a large number of opportunities to tender on, their competitiveness in margins and pricing will be softened to lesser known clients. This can result in the potential for an increase in construction costs and we would caution developers seeking pre-sales prior to having their construction costs finalised for fear of margin compression, which could result in a failure to meet funding pre-conditions or increase the amount of equity required to commence the project.
Deloitte Access Economics publishes a number of publications providing national and state based perspectives and outlooks on the Construction market. In particular:
Investment Monitor: The quarterly Investment Monitor lists around 900 Australian investment projects, each valued from $20 million. Projects are divided by state, sector and status. The publication also contains commentary on industry trends, and company contact details for those companies involved in the projects.
Business Outlook: This quarterly publication analyses prospects across 22 industries and each of the Australian States and Territories. It provides facts, figures and forecasts on Australian and world growth prospects. The Business Outlook looks specifically at the Construction Sector, amongst others.
The information provided in this article reflects the September 2014 quarter publication.