The outlook for non-residential building construction in WA is weak but the impact on each business will depend on where they sit in the construction cycle.
ARCHITECTS and builders wondering why the pipeline of new work opportunities seems to have dried up need only look at the latest forecasts for non-residential building commencements.
After hitting a record high of $6.4 billion in the 2009-10 financial year, BIS Shrapnel estimates building commencements in Western Australia will tumble to $3.5 billion in the current year and fall further to $3.1 billion the year after.
The forecasts continue the volatile pattern of recent years, when commencements have been wildly affected, first by the global financial crisis then by artificial government stimulus measures such as the schools building program.
Add in the impact of the resources boom and a concentrated surge in office construction and the net result is a pattern that makes life hard for business development managers trying to plan ahead.
The Australian Industry Group’s latest ‘Performance of Construction Index’, out this week, confirms the downturn is being felt across the country.
The index fell to 40.2 points in January, the eighth consecutive month it has been below the 50-point level that indicates a contraction in activity.
Businesses that reported a decline in activity attributed this to work stoppages caused by the floods, continuing tight credit conditions, higher interest rates and diminishing work from school building projects.
AIG director public policy Peter Burn said: “The immediate outlook for the sector is not encouraging with new orders continuing to fall albeit at a slower rate than December”.
Dr Burn said the flooding on the east coast had weakened activity.
“As the post-flood rebuilding takes hold over coming months, the sector is likely to see a pick-up in activity in some regions,” he said.
“However the nationwide pick-up in construction will be moderated by the recently announced deferral of some major infrastructure projects.”
Access Economics’ latest Investment Monitor, released last week, agreed the short-term outlook for WA was weak but painted a more nuanced picture.
“Stimulus spending on education and health facilities has largely come and gone, and interest in the sector is again stagnating,” the Access report stated.
It added the latest approvals data painted a “bleak picture” for the short term.
“High interest rates are certainly not helping, nor is the $AUS when it comes to tourism,” it said.
However, Access also noted some positives, with engineering construction expected to surge for some years, driven by major resources projects.
“Non-residential building activity is less healthy, but solid nonetheless, and performing better in Western Australia than most other states,” the Access report stated.
Overall, it expects non-residential building to remain “pretty flat”.
This conclusion is supported by the Construction Forecasting Council’s latest projections, which focus on the value of work done and are therefore much less volatile than the commencements data.
The value of non-residential construction work in WA rose consistently over the past decade to a high point of $4.6 billion in 2008-09 (see graph).
The largest contributor was the surge in office construction, as CBD projects such as 100 St Georges, Alluvion, one40William and Raine Square went ahead.
Activity has tapered off since then and is expected to bottom out at $4 billion in the 2011-12 financial year, before rising again.
BIS Shrapnel managing director Robert Mellor agreed that the trend in work done was much smoother than for commencements.
He also emphasised that looking past the volatile annual commencements data provided a better perspective on market conditions.
That is particularly the case for recent WA data, which was inflated by two factors.
The federal government’s Building the Education Revolution program delivered a 440 per cent surge in school building commencements to $1.4 billion in 2009-10.
The start of construction on the Fiona Stanley Hospital added a further $1.7 billion to commencements.
“That’s dominated what’s been going on in non-residential building,” Mr Mellor said.
“Take those projects out and it would have been a much more modest recovery.”
In terms of work done, most of the school projects are either complete or rapidly approaching completion, whereas work on Fiona Stanley Hospital will be undertaken over at least three years.
Mr Mellor said averaging out the annual data showed the strength of the WA economy.
Over the four years to June 2007, the value of work done averaged $1.95 billion per year. Over the next four years, it was more than double that, at $4.25 billion.
“That shows you the magnitude of what’s been happening in the west in mining and other developments,” he said.
Interestingly, the Construction Forecasting Council’s latest projections show activity over the coming four years (to June 2015) holding around the $4.2 billion mark.
The biggest driver of activity will be office construction; it is forecast to not just recover, but to stabilise at record levels of $1.3 billion per year.
That seems at odds with the Property Council’s latest commentary.
“No major new office project is planned for Perth beyond the completion of projects currently under construction,” the council’s WA executive director Joe Lenzo said last week.
Mr Mellor said there were modest signs of recovery.
“The good news, if you look at data for the last six months, is that we are starting to see some recovery in retail construction,” he said.
“Warehouses are showing early signs of picking up over the next 12 months, and also hotels we are fairly positive about.”
Looking further ahead, he said a key variable would be the resources boom.
“The worst of it’s over on the commercial/industrial front, but we’re not going to go back into boom conditions quickly,” Mr Mellor said.
“The critical thing is the mining development and the flow-on effects to Perth.
“That will be what drives things, and I think to a degree our view is that has been overstated.”
