A global construction cost sentiment survey recently completed by leading global construction and property consultancy, Rider Levett Bucknall confirms a softening of cost was experienced in most construction markets over the first quarter of 2009.
Completed by Dr Andrew Wilson, Rider Levett Bucknall's Senior Economist, the survey's key focus was to identify and analyse changes in global construction markets over the past 3 months. Thirty-eight of the firm's global offices were surveyed.
"Globally, the majority of respondents report continuing deteriorating general economic conditions. Signs are however emerging of improvement in mainland China. International civil and infrastructure market conditions are holding up reflecting extensive government stimulus programs. Other construction markets however remain under pressure," commented Dr Andrew Wilson.
Hong Kong and Singapore construction, with the exception of infrastructure projects, remain depressed. In Singapore, continuing steep falls in building costs are evident and expected to continue. This reflects the boom and bust characteristics of the islands building cycle.
UK construction markets are showing no signs of improvement with Sheffield in particular reporting a continuation of deteriorating conditions. Tender markets remain highly competitive. Although overall costs continue to fall, some materials price rises are being reported as a consequence of exchange rate differentials on imported goods.
The United States, as with most global markets, reports generally subdued and deteriorating construction market activity, particularly in regard to housing and apartments. Civil infrastructure is however holding up as a consequence of government policies ramping up in this sector. There is an indication that East Coast construction markets, in particular Boston, Washington DC and New York maybe stabilising.
New Zealand construction markets remain subdued with no indications of a revival in activity. Wellington is reporting deterioration in housing and apartment markets and together with Auckland, a continued lowering of building costs. By contrast, Christchurch is expecting stable construction costs through 2009.
In Australia, Rider Levett Bucknall reports significant softening in construction costs during the March 2009 quarter in most capital cities.
Rider Levett Bucknall expects the cost of construction to continue to fall in most states. "This fall in cost is a consequence of decreasing industry workloads and an increasingly competitive tender market exerting downward pressure on contractor, subcontractor and supplier margins," commented Dr. Andrew Wilson, Senior Economist at Rider Levett Bucknall.
"Perth recorded the largest decline in construction costs of the quarter (6%), whileMelbourne and Adelaide recorded a 1% drop, and Brisbane a slightly higher 1.1% drop in construction costs. Sydney, Canberra and Darwin's costs stabilised, showing no movement during the quarter," he said.
All capital cities confirmed increased government spending such as the first home owner's grant and the Federal Government $42 billion stimulus package on infrastructure and education will provide a significant uplift in future work prospects and sustain the industry for the next 2-3 years.
Perth has enjoyed a very buoyant construction market for some time but the "good times" have clearly come to an end and the extent and rate of change has surprised many industry participants. There are still pockets of stronger activity but the general trend is declining work loads and more competitive prices.
Mr Alastair McMichael, Director Rider Levett Bucknall, Perth commented, "Overall prices are falling due in part to reduced labour rates and as a consequence of reduced margins at both sub-contractor and main contractor levels. "
"Although there is little evidence yet of falling material prices, labour costs have fallen. The extent of the fall varies across sectors and is probably least significant for those trades and sub-contractors actively involved in office buildings, as several major developments have a long way to completion and in the health sector, with several major new committed hospitals," he said.
Contractors and sub-contractors in the industrial, retail and smaller commercial offices sectors are already hurting and rates have fallen quite significantly.
The rate of change in the tender market has caught many contractors by surprise with a considerable gulf between the lowest and highest bids on recent tenders.
Rider Levett Bucknall is forecasting Perth's construction costs to stay stable for the rest of 2009, with an increase of only 2% in 2010.
Peter Tulla, Director Rider Levett Bucknall Adelaide commented, "Although the market has deteriorated somewhat, it has been very modest. The Fed Government stimulus package is about to kick in and will impact on the construction industry, with the Government spend being significant in the Infrastructure area."
While some material costs have fallen in Adelaide, such as steel, others have risen.
Although Adelaide's construction costs have declined 1% for the March 09 quarter, Rider Levett Bucknall is forecasting a 3% increase in costs for 2009 and another 3% in 2010.
A significant number of commercial office projects are still in their construction phase in Brisbane, with future projects difficult to prove financially viable. A large number of proposed retail projects have been put on hold or scrapped.
"In Brisbane, there have been significant falls in reinforcement, steel, aluminium products and curtain wall systems which have offset minor increases to concrete supply and imported goods. Minor falls in labour costs have been experienced in the past few months but are expected to increase during the year," said Paul Megram, Director Rider Levett Bucknall Brisbane.
"The main reason for large falls to date is lower margins at the contractor and sub-contractor levels," he said.
Brisbane's construction costs declined 1% in the March 09 quarter. The city's construction costs are forecast to decline this year by 3%, with a year of stabilisation in 2010.
The number of available projects for commencement is decreasing and contractors are taking steps to secure work wherever possible.
Bob Richardson, Managing Director of Rider Levett Bucknall Sydney said, "Although Labour costs have risen due to agreements on enterprise bargaining agreements, contractors are absorbing them by a reduction of profit margins. This reduction is also an attempt to secure work in the short term and maintain cash flow through the business in order to service debt and survive through the current business cycle."
A number of commercial projects that were on "temporary" hold have now been reclassified as on "permanent" hold. One counter to this is the redevelopment of the Barangaroo site where it is expected the successful tenderer will be announced next quarter. Relifing/retrofitting of existing CBD commercial assets is expected to be provide activity in this sector as there are very few new sites or inclination for development of new commercial offices.
Sydney's construction costs are currently undergoing a period of stabilization. Further moderation in costs for this year will be effected by the workload resulting from the stimulus package with an increase of 3% predicted in 2010.
Melbourne's construction costs declined by 1% in the March 2009 quarter, with Rider Levett Bucknall forecasting a 3% total decline for 2009, followed by a period of stabilisation in 2010.
The Darwin market has become more cautious and competitive. There is a lot of work coming out due to govt. stimulus package and being a small economy this has real impact and makes up for shortfall in potential commercial activity. A few large scale commercial projects have stalled but as they were only in the planning phase it has not affected the market esp. as other projects have come on board.
Speculative high end apartment activity has declined but activity is increasing in the lower end. This is made up by more govt. social housing and remote indigenous community activity arising from the intervention. Overall market unchanged, some opportunities are gone but others are opening up.
Although no increase in costs in the March 09 quarter, Rider Levett Bucknall is forecasting an increase of 4% in 2009 and 6% in 2010.