BY JOHN WILSON | MONDAY 16 SEPTEMBER 2024
The Australian construction market has certainly faced turbulence over the past 18 months. Rising material costs, labour shortages, and public commentary on the sector’s fragility have dominated discussions. However, these challenges are not without solutions, and there are encouraging signs that the industry is beginning to stabilise.
At the recent Property Council Summit, many of Australia’s largest developers discussed the rising material costs, challenges to attracting workers to the industry, high tax burden and the embedded Enterprise Bargaining Agreements (EBAs) that make all but the highest-margin projects harder to justify.
However, there are signs that recent rampant cost escalations have begun to ease, even though the fragile nature of the construction market is unlikely to change dramatically in the short term. Additionally, the so-called “bad contracts”, where the COVID-related cost spikes have turned fixed-price contracts to loss-makers for the builder, are slowly working through the system. Builders’ profit and loss statements continue to be exposed to the financial health of downstream subcontractors and suppliers, with significant lag between the onset of cashflow problems and insolvency.
In light of these conditions, a deep understanding and strong cooperation from the finance sector are critical for navigating the current construction environment.
At Wingate, our core focus is investing in construction debt alongside our development partners. We are well-versed in managing the myriad headwinds facing the industry and incorporate these factors into every transaction we assess. A thorough, in-depth evaluation of our development partners’ choice of builder remains central to our risk management. Now more than ever, the financial health and experience of our partners are crucial to ensuring they can weather any construction-related challenges.
Labour Shortages and Regional Pressures
The construction industry continues to suffer from a significant under supply of human resources, and there is fierce national competition for those limited resources. Housing Minister Clare O’Neil told the Property Council Summit that another 90,000 workers were needed “to get the houses built that we need”.
While foreign skilled labour immigration is an easy go-to for government intervention, it is somewhat of a catch-22, as such increased immigration immediately adds significantly to the demand for residential accommodation and in turn rental and homebuyer affordability.
The region most likely to encounter ongoing significant challenges is Queensland, particularly Southeast Queensland.
Across Australia’s major population centres, large public spending programs, often influenced by union agendas, are driving political priorities. This trend is most pronounced in Southeast Queensland, where substantial public sector investments in infrastructure—roads, transport, renewable energy projects, health, and preparations for the Olympic Games—have put significant
strain on the construction market.
Many tens of billions of dollars in public spending on infrastructure projects across Australia will continue to fill the workbooks of all major builders for decades. This investment has likely played a key role in keeping Australia out of recession. It is important to note that much of this public sector work is effectively being undertaken on a cost plus/construction management basis, where only the builder’s profit, overheads, and preliminaries are fixed, leaving input costs of materials and labour variable.
Given the construction industry’s significant role as a national employment driver, this has the likely impact of putting upward pressure on construction cost over the medium to long-term.
Consequently, the appetite for relatively high-risk private construction work is limited. We are currently experiencing, and will continue to experience, a significant shift in contractual risk from builder to developer. This shift to more balanced contractual terms is not necessarily negative, a reasonable level of risk-sharing can only be healthy for the market, generally speaking.
One natural consequence of these factors is that many private sector developments are likely to be shelved or delayed for the short term at least.
The enormous forward workbook in Queensland also has a likely unexpected effect of creating a vacuum for construction labour elsewhere on the eastern seaboard, where the ever-growing salary premiums will be enough to attract an increasing migration of domestic construction workers from other states. This shift could have adverse effects on productivity and contractor capacity in other Australian markets.
In the housing sector, house builder insolvencies will continue, along with a lack of consumer trust and confidence, leading to a continued subdued sales environment for traditional house and land packages in the short term.
Looking Ahead
On a brighter note, once there is some reliable easing and stabilisation of the current monetary policy cycle, demand is expected to improve at a rapid rate. However, this resurgence in demand will likely exacerbate affordability challenges due to continuing constraints on the delivery side.
Looking ahead, we expect the construction industry to stabilise into 2025. While only 160,000 dwellings were commenced in FY24, the recent Property Council Summit predicts this will increase to 180,000 in 2025.
The medium and long-term outlooks remain positive. Demand for all forms of housing products will continue to be very strong for the foreseeable future as Australia continues to be an attractive place to live socially, geopolitically and environmentally.
Though it’s hard to predict exactly when the challenges facing the construction market will ease, market forces will eventually correct the situation, creating a more sustainable environment that addresses the chronic housing under supply.