Fierce competition for construction work as sector shifts focus to public sector work

FROM office towers to hospitals, shopping centres to primary schools, commercial construction in Western Australia is rapidly changing.

From 2006 to 2008, before the global financial crisis distorted the economic landscape, the commercial construction sector was defined by a host of hundred-million-dollar central business district office towers and retail centre projects.

A commercial construction boom descended upon Perth and transformed the face of the CBD, with new buildings enex100, one40william and Raine Square changing the look of the city skyline.

Brookfield Multiplex’s $760 million, 47-storey City Square office tower is another major addition, its concrete and steel supports slowly rising out of the old Newspaper House site on St Georges Terrace.

Just outside the CBD in East Perth, apartment developer Finbar is also busy, delivering lofty high-rise projects including Altair, Westralian, Royale and Reflections.

Belmont-based Diploma Group also made an impact in East Perth, constructing the Saffron, Sky, and Rise apartment complexes.

But in 2010, as the wider economy brushes off the dust gathered during the GFC, the commercial construction sector has increasingly been defined by projects based outside of the city and funded by the public sector. Among these are the $2 billion Fiona Stanley Hospital and the $330 million Joondalup Health Campus expansion.

Master Builders Association WA executive director Michael McLean said that, during the past 12 months, commercial construction in Western Australia had been extremely competitive as the construction cycle entered a downward phase.

“Because the commercial sector is trending down, in fact we are expecting about a 25 per cent reduction in turnover for construction firms in 2009-10, it’s meant that there is excess capacity,” Mr McLean told WA Business News.

“Other than some builders that have got heavy workloads from either the Building the Education Revolution (BER) schools program or some large mega-projects, the rest of the industry is operating at less than capacity.

“That’s brought about additional builders on tender lists, and extremely fierce and keen pricing.”

Tough environment

The slowdown comes as banks in Australia are still reticent to fund property developments.

Eric Meyerowitz, state manager of Probuild, which entered the WA market just before the boom in 2005, said developers in the market had told him the availability of credit remained tight.

“I think the funding days of 2007 and early 2008 are over, the conditions are far more onerous and there are many more conditions to satisfy to prove that a project is worthy to the banks,” Mr Meyerowitz said.

“The banks are tightening up and putting on the clamps. They don’t want to see these highly geared projects anymore; they want it to be rock solid developments, to the point of it becoming risk free.

“It can’t ever be completely risk free, but the banks are looking for very low risk.”

Brookfield Multiplex director of construction and development Chris Palandri said a major contributor to the tightening of funds had been the exodus of international banks from the Australian market.

“Prior to the GFC we had a pool of 10 to 12 banks we could go and approach to borrow funds; that pool’s now down to the four major banks, so the lending capacity of the market has been curtailed,” he said.

“The law of averages tells you that as a result it’s harder to raise funding than it was when you had a greater pool of funders out there willing to lend for projects.

“But if the fundamentals of the project are sound, and you’ve got good sponsors sitting behind the project, you can still procure the finance, it’s just a little bit harder than it was a few years ago.”

According to Diploma Group managing director Nick Di Latte, as competition has increased while funding has tightened, profit margins have come down.

Diploma Group has about $400 million of projects in its development pipeline, having completed the Joondalup Gateway shopping centre redevelopment, and Sky and Rise apartment projects over the last financial year.

Because of the way the company is structured, Mr Di Latte said it could generate its own work.

“While we are a contractor for third parties, while we are waiting for opportunities there we’ve still got work on, so we’re not purely reliant on private sector work,” Mr Di Latte said. “It has dropped off, and certainly the level of private developer work is not what it was.

“A lot of it has got to do with the fact that developers now have to come up with around 35 per cent equity to get a deal off of the ground, and a lot of the private guys don’t have that.

“From our perspective it’s been a positive on the property side because it’s wiped out some of our competition, but on the construction side there have been fewer opportunities that have gotten off the ground to build.

“Once funding frees up a bit you may see increased activity in the private sector, but until that happens I think it’s going to be pretty lean.”

Private versus public

National construction giant John Holland’s general manager western region, Adam Harry, said his firm was anticipating some tough times in the market for builders unable to tap into lucrative public sector works.

“There’s not really a pipeline of projects, it’s going to be fairly lean times out there in the market,” Mr Harry said.

“I think the demand is there, but it’s how quickly you can push projects through.

“The government’s really got an issue with a resources sector that’s not going too badly, but I can tell you that everything’s been put on hold while this resource super profits tax gets looked at.

“What tends to happen is if the resources sector takes off, it tends to drag the construction sector along with it.

“I believe the market will take off again over the next year, but it will take a bit for Perth-based non-residential construction to kick in. It will happen, but there will be some slim pickings before then.”

The fall-off in private sector spending had resulted in a “feeding frenzy” of large contractors focusing on public sector work, Broad Constructions executive general manager Simon Amos said.

Broad Constructions recently achieved practical completion of $111 million Mounts Bay Road office tower Alluvion, and also announced completion of the next-generation $28 million Elders Street carpark.

The WA-based firm also has significant interests in other states, holding contracts for $240 million worth of BER work in Queensland, and a $200 million Strategic Indigenous Housing contract nationwide.

“All the private work has pretty much dried up; the banks have disappeared under their rocks to lick their wounds and the lending regimes of the past are no longer,” Mr Amos told WA Business News.

“The larger guys have pretty much had to re-steer the ship to public sector work, government-type work, until hopefully in the not-too-distant future the banks will realign and there’s some more confidence in the market.

“Most of our commercial work has largely been driven by tenant appetite, both in retail and in commercial office space.”

Mr Amos said that market was practically dead, which had forced Broad into the public sector sphere.

“We’re pretty flexible creatures, our project management skill sets are very flexible too, so where we’ve got one particular sector, it might be private sector work, but we can equally adjust to the requirements of the public sector as well,” he said.

“You want private sector work, but it’s about having a balanced portfolio of work. It’s been a bit of a feeding frenzy in the last six months with a lot of larger contracting companies focusing on public sector work.”

Education revolution

Much of that public sector work has come from the federal government’s BER program, which Mr McLean said had been a major contributor in providing work that wouldn’t have otherwise been there.

“It’s the traditional counter-cyclical capital works program, which not only benefits the builders but also the state in terms of infrastructure,” Mr McLean said.

“The timing has been really good, but it was an imperfect model because it was rolled-out very hurriedly, without giving people time to think about what they needed for their schools or how they would mange the contracts.

“I think in Western Australia Building Management and Works have done very well; the builders have been receptive to the procurement method, and a lot of the builders involved in those projects are not going to make much money out of it, but it maintains their workforce and it gives them turnover and cash flow.”

John Holland won the majority of BER work in WA, with $200 million in contracts, while last year Belmont-based Pindan Constructions was awarded $50 million in tenders, and Claremont-based builders Arccon Design and Construction won $27.2 million worth of work.

Mr Harry said John Holland had expected a drop-off in private sector work, and took a strategic view of the BER projects.

“We knew that even though it wasn’t going to be the most lucrative for us, it was going to be work to keep our people employed and also provide an opportunity to grow new talent,” Mr Harry told WA Business News.

“We’ve probably given 45-50 people white collar jobs that wouldn’t have ordinarily gotten the opportunity at John Holland working on the larger projects we normally deliver.

“We took a strategic view of the job and what it would mean to our business.

‘‘From the point of view of size, spread across so many locations, it’s a very complicated, complex job to deliver.

“It’s something that I think we’re doing reasonably well, it’s not easy. It’s not technically difficult work but from a project point of view it’s a very complicated way of having to deliver a project.

“It’s not something that we do very often, but we’ve got expertise and we’ve been able to put some really high-calibre, experienced people in there that would never normally deliver a project like a school building.”

Regional focus

As a result of the tightening metropolitan market, regional WA has emerged as a viable alternative for construction firms wishing to keep their order books up.

In the state budget, Nationals leader Brendon Grylls was allocated nearly $1 billion in Royalties for Regions funds to increase infrastructure and amenity in remote areas.

Part of the program is the delivery of Karratha’s first high-rise residential project, which could be built up to 10 storeys and will be developed by Finbar Group.

Other major projects in the regions include hospital projects at Kalgoorlie, Albany, Hedland and Karratha (see page 13), new sporting facilities at Dunsborough and South Hedland, and major foreshore developments at Busselton and Albany.

Pindan business development manager Scott Davison said regional work was a growth area the company would target.

“We’ve picked up a contract for refurbishment and replacement of indigenous housing, and it’s a five-year contract well in excess of $100 million,” he said.

“We see the Royalties for Regions funds will keep flowing, so we’re taking more of an active role in regional works.”