Economic malaise fails to slow major city builds - SPECIAL REPORT

28/04/2015 - 09:36

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The commercial construction sector is emerging as a bright spot amid all the doom and gloom in WA. Click through to see the special report, with details of Perth's biggest construction jobs.

Economic malaise fails to slow major city builds - SPECIAL REPORT
COMPETITION: Julian Ambrose says national contractors will be interested in WA opportunities. Photos: Attila Csaszar

The commercial construction sector is emerging as a bright spot amid all the doom and gloom in WA. 

For more on our Commercial Construction feature, click here to see the Special Report.

Somebody needs to tell Western Australia’s construction contractors the state is meant to be heading into a recession.

While all the headlines are about job cuts, the falling iron ore spot price, cost-reduction initiatives and even the spiralling price of a barrel of West Texas crude, Perth’s biggest builders remain bullish about their prospects.

Not even the state government’s fading financial capacity can faze them.

Over the past few years, the state government has provided a welcome boost to the construction sector, with major projects like the $2 billion Fiona Stanley Hospital, the $5.2 billion Perth City Link and the $1.2 billion Perth Children’s Hospital providing significant amounts of work for the city’s builders.

“For the past five years now I think we’ve been seeing an unprecedented construction boom in the city,” BGC Australia director Julian Ambrose said.

“Some projects have genuine merit and some have been fuelled by bullish expectations and predictions of Western Australia’s economic future.”

While there are a still a fair number of major government-funded jobs going on, including the $960 million Perth Stadium and the $360 million Midland Health Campus, there isn’t any expectation that the state government will add any significant jobs to those big-ticket items, aside from the $436 million new Perth Museum.

“The reality is the state government is being pretty careful about where it’s spending its money at the moment,” Pindan director of development Nick Allingame said.

“It’s spending on big infrastructure projects, which are certainly needed, but with that, all of the spending on commercial construction by the state government has dropped back from where it was previously.

“But there is work out there … but you have to do a lot of work up front to secure some of it.

“There are opportunities, you’ve just got to work hard to try to help the clients do that value adding up front.”

DIVERSE: Nick Allingame says apartments are a major part of Pindan's order book.

Nonetheless, Brookfield Multiplex regional managing director Chris Palandri told Business News he was confident the private sector would step into the breach.

“There is a shift going on from government spending to private sector spending and the timing is probably perfect, because there is quite a nice pipeline of work there in the future,” Mr Palandri said.

“It’s just not government work, which is fine. It just gives me the confidence around the private sector taking over from where the government has been over the last five years.

“I’m comfortable that there’s enough work coming through the pipeline to keep us all busy.”

Mr Palandri also said the slowdown in resources spending was having a positive effect on the construction sector in Perth, in terms of labour availability.

“Labour is a lot less of an issue than it was two or three years ago,” he said.

“With the labour around and the people who are available as subcontractors and builders, there is less concern about the amount of labour supply, so that’s putting more and more pressure on the competitive side of the market, which is good news for clients.

“There is an opportunity for the speed of construction and the quality to go up as well, because you’re getting a better pool of subcontractors and labour in the market.”

One of the bigger private sector jobs piquing contractor interest, according to Probuild director Quentin Howell, is the continuing expansion of Perth Airport.

Perth Airport is in the middle of a $1 billion investment program, aiming to consolidate all air services into one integrated precinct.

“There’s certainly significant work being done out there,” Mr Howell said.

Perth Airport is focusing on slightly different methods of procurement to make sure the overall delivery is successful for all stakeholders, but we’d like to explore these new and exciting opportunities.”

CONFIDENT: Chris Palandri says private sector investment is providing strong opportunity for builders.

Office action

Along with a slowdown in government work, it would be fair to say that Perth is at the back end of an unprecedented period of office building activity.

Since 2010, Perth’s skyline has been not only transformed, with the development of Alluvion on Mounts Bay Road and the 46-storey Brookfield Place skyscraper, but it has also expanded north, with Raine Square and one40william.

There are eight major commercial buildings still under construction, which will add around 192,000 square metres of space to the office market, which totals 1.6 million square metres of lettable space.

The largest project, of course, is the $960 million Kings Square precinct, which will further change the dynamics of the CBD once it is complete by the end of the year.

Industry commentators are also expecting a big impact in the east end of the CBD, where the $280 million Mirvac Office Tower is also rapidly nearing completion.

Also nearing close is Brookfield Office Properties’ second tower at Brookfield Place, which is expected to be finished by August – around four months ahead of its original schedule.

Of the eight projects being built, just one will be still under construction in 2016 – Woodside Petroleum’s new headquarters at the old Emu Brewery site, Capital Square.

But that’s not to say the office construction sector is heading for a pause.

BGC is going ahead with a 22-storey office tower as part of its $500 million Westin Perth project, even without an anchor tenant in place to take up the space.

“The Westin development is a large, technically complicated project in its own right,” Mr Ambrose said.

“As both developer and contractor, the Westin represents a substantial financial commitment for BGC.

“Along with the development of the hotel by Adrian Fini at the Old Treasury Buildings, the new office tower by Mirvac, the City of Perth library and the new Church House, the Westin represents a significant rejuvenation to this previously neglected part of the city.”

There is also a raft of major opportunities looming at Elizabeth Quay, with the inlet expected to be completed by the end of the year.

Mr Howell said all of WA’s tier-one contractors would be looking closely at the upcoming jobs at Elizabeth Quay.

Mr Ambrose agreed, saying the interest in the upcoming projects would extend beyond the state’s borders.

“Construction companies across the country will be clamouring to get in on the action in WA,” Mr Ambrose said.

“Importantly, these are all flagship developments that deserve to maximise Western Australian involvement and employment.”

The biggest, and most certain contract looming is for the luxury Ritz-Carlton Hotel and apartment towers, which has been valued at around $400 million, according to City of Perth documents.
Developer Far East Consortium’s Ritz-Carlton project comprises a 204-room hotel and 420 apartments across three buildings, all fronting the Swan River.

A development application has been lodged with the City of Perth for the project, with a deal with a construction contractor expected to be finalised before the middle of the year.

But Mr Palandri said while he expected significant competition for the works, the pool of contractors with the capacity and experience to complete the job would be limited.

“It’s a big chunky contract but there are only a few companies that can really do justice to that project,” he said.

“It’s highly complicated too; the three basement levels are in the water, so you’re basically building a bathtub in the middle of the CBD.

“It’s not a simple, straight forward project that many of the builders in WA have the credentials to deliver.

“But it’s a competitive market of course and Far East will be wanting to drive the best result they can for themselves and their shareholders.”

The two other Elizabeth Quay jobs expected to attract major attention from construction contractors are not as advanced, but industry sources suggest there will be more certainty around them by the end of the year.

Oil and gas giant Chevron paid $64 million for a 6,795sqm site on the corner of Barrack Street and The Esplanade in 2013, and it has been reported the company is well into the design process to build a new Perth headquarters, despite renewing its lease at QV1 early in 2013.

Brookfield Office Properties is also understood to be looking closely at plans to build a major office tower, next to Chevron’s planned HQ.

The Canadian office landlord was announced in September as the state government’s preferred partner to develop the site, while it is also understood to be lobbying Rio Tinto to sign on as anchor tenant for the building.

Retail revival

Another growth area keeping contractors busy is WA’s thriving retail sector.

The state’s institutional shopping centre owners are collectively embarking on major expansion works, with AMP Capital planning around $1.3 billion of redevelopments at its Karrinyup and Garden City Booragoon malls.

Also in the works are expansions at Carousel Shopping Centre, Mandurah Forum and Morley Galleria, with the collective value of all of the redevelopments coming in north of $2.1 billion.

Mr Allingame said the builds had been facilitated by the 2010 removal of artificial limits on the size to which shopping centres could expand, a policy that had been a significant limiting factor on retail expansions for over a decade.

“The fact that there is now no longer a limit on floor areas, that’s made a big difference,” he said.

“But some of those aren’t without their challenges, because they have to do residential components as part of the expansions.

“The reality is the legislation we’ve got doesn’t really assist those guys with that, in terms of strata reform and title issues, so that makes it difficult.”

Probuild’s Mr Howell said WA’s high rate of population growth in recent years was also a key factor in driving the mall expansions.

“When you’ve got a growing population who travel extensively, people certainly expect a higher quality shopping precinct than what’s been available to date, inclusive of high end specialty retailers,” Mr Howell said.

“We come from a very strong retail background and are now starting to build some of the more significant shopping centres in Perth, which is a fantastic opportunity.

“We see ourselves as a strong tier-one contender and welcome the larger retail opportunities that will present themselves in the coming months.”

Mr Ambrose said the private sector spending, particularly in retail circles, was evidence of the continuing diversification of the state’s economy.

“With record investments in major shopping hubs like Garden City … there is demonstrated demand that can help to offset, or at least cushion, any transition in the economy away from resource development,” he said.

Doric chief executive Vince Mulholland said he also considered the expansions were a testament to the continued strength of the WA economy.

“The owners certainly wouldn’t be pumping that money in if they weren’t certain they would get a return,” he said.

“And some of the centres that we’ve done recently, like Warnbro and Harvest Lakes, when you go back and see the throughput of people going through them, from our point of view it looks like a sound investment.”

SOLID: Vince Mulholland says Doric is strongly focused on building its retail presence.

Mr Mulholland said the evolution of shopping centre builds was also quite clear in the new generation of malls, which had a large focus on hospitality and entertainment alongside traditional retail.

But the more significant change for construction contractors, Mr Mulholland said, was the rise of early contractor involvement (ECI) models, contract structures that had risen to prominence for large infrastructure and office projects.

“That’s only come in very recently, probably the last 12 months, where retail developers can see the advantage of bringing a builder in early and making it a two-stage process,” he said.

“For Harrisdale Shopping Centre we’ve signed an ECI and will work with (Stockland) for four or five months and then sign the fill contract.

“We’ve found that a really good way to go as well, because we can work with the designers on the details to get more money for the developer and more certainty for us.

“We welcome that approach very much.”

Multi-res mayhem

Also a once-dormant sector of construction in Perth, apartments have been much debated during the past 12 months.

After a long period of relative inactivity, apartment construction in Perth is rolling out at an extraordinary pace, prompting fears of an oversupply due to the vast amount of projects on developers’ drawing boards.

Research released earlier this year by Urbis showed there are 4,279 apartments currently being built in the Perth metropolitan area.

The future pipeline is huge, with analytics firm Y Research finding 256 projects were either being built, approved to be built, or progressing through the approvals process, which have the potential to add 20,227 apartments to the Perth market by 2020.

While not suggesting all of those projects would progress, Mr Palandri said the focus on multi-residential works, as well as retail, was a good indicator of the stage in the construction cycle.

“We’re moving from two sectors of construction works, (government and commercial), to some that have been neglected for a long period of time as well,” he said.

“There’s a whole series of residential projects that have been mooted around Perth, so it will be interesting to see how many of those get up.

“But there is a bit of momentum in that space, there is a lot more acceptance by the public in terms of infill development and high-rise and the like.

“There’s a lot greater acceptance of that now than there has been traditionally in WA.”

Mr Allingame was similarly bullish when quizzed about the prospect of apartments work providing significant opportunities for builders to bolster their books.

“Apartment construction is still ticking along, that’s keeping everyone busy,” Mr Allingame said.

“There are still a lot of people coming into the state, and with apartments, post-GFC there was a long period of undersupply.”

He also said he didn’t expect all of the vast range of mooted projects to progress to reality, with banks not willing to fund speculative construction.

“One of the benefits post-GFC is there is probably a bit more rigour that goes into the front end before it gets financial close,” Mr Allingame said.

“You have to get a lot more presales and that ensures you don’t get oversupply.”

Where he said construction contractors could help developers get projects across the line, however, was keeping costs down to ensure apartments were priced competitively.

“Pre-sales contracts have to cover most, if not all of the debt, so there’s probably a lot more due diligence before people start building an apartment project,” Mr Allingame said.

“We try to assist developers in value adding and driving savings into the structure.

“Buyers don’t want to pay for the structure, they want the stone benchtops or the common areas, so the more you can save construction costs in terms of the structure, the more the developer can put into those finishes that the buyers are looking for.”

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