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Construction recovery needs private capital to replace government

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Construction recovery needs private capital to replace government ...

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									      Construction recovery needs private capital
       to replace government “pump priming”
More than 75,000 construction jobs could be lost due to a sharp fall in building activity, according
to the latest forecasts from the Australian Construction Industry Forum’s Construction Forecasting
Council (CFC).
Despite a swift upturn in residential building and the federal government’s spending boost,
construction industry cash flow is forecast to contract by almost $12 billion over the next two years.
“Spending on residential building is forecast to turn around in 2009/2010, following a four percent
fall in the 2008/2009 financial year,” said CFC Chair Peter Verwer.
“The first home owners grant and government stimulus packages have halted the recent decline in
residential building expenditure.
“The CFC predicts a very strong recovery in stand-alone housing and in the alterations and
additions market, driven by pent-up demand, low interest rates and net population growth.
“Apartment building is more likely to remain in the doldrums until 2011/2012, with a 15 percent fall in
spending forecast,” he said.
The CFC says the outlook for commercial building – offices, shopping centres, hotel and industrial
facilities – is grim.
“Private spending on commercial property is not forecast to fully recover for three years,” Verwer
said.
“However, the overall picture for non residential building is likely to be offset by a boost to
government investment in schools and hospitals.”
“2011/2012 will see a sharp improvement in private and commercial property spending following a
contraction of nearly 40 percent on current construction expenditure.
The CFC forecasts a sharp decline of 22 percent in infrastructure spending in 2010/2011, following a
one percent contraction during 2009/2010.
Infrastructure spending is slated for a cyclical downturn following unprecedented levels of activity,
particularly mining-related construction, which is expected to fall by 60 percent in 2010/2011.
“Mining-related construction spending is quite solid for the next 12 months; however, weakening
commodity prices are expected to result in the postponement of very large projects and a sharp
drop in construction activity in 2010/2011,” said Verwer.
The CFC forecasts, which are prepared for ACIF by KPMG Econtech, assume a 1.2 percent fall in
GDP over the next 12 months and an increase in unemployment levels to 7.1 percent.
“However, while the economic downturn has dampened demand, the market fundamentals are
quite different from the recession of the early 1990s,” said Verwer.
“There is little evidence of the oversupply that delayed the recovery of construction spending
following the last recession.
“Indeed demand for residential property is strong and spending on commercial buildings is slightly
below the historical average,” he said.
“The flow of new capital will directly determine the shape of the construction industry recovery –
which means debt markets will need to recover quickly if job losses are to be contained, given the
Government’s limited capacity to continue with pump-priming programs.”
Contact:
Peter Verwer, Chief Executive, Property Council of Australia
Phone: 02 9033 1926, mobile: 0407 463 842, email: pverwer@propertyoz.com.au
website: www.propertyoz.com.au
Peter Barda, Executive Director, Australian Construction Industry Forum Ltd
Phone: 1300 854 543, mobile: 0418 438 550, email: peterbarda@bigpond.com.au
website: www.cfc.acif.com.au
About ACIF: ACIF is Australia’s peak construction industry consultative organisation. Membership is open to any Australian
building or construction industry association which has a national structure and focus, whose principal membership is
comprised of individual persons and/or private sector business enterprises and which serves the interests of its members in
one or more of the residential, non-residential, engineering or investment property sectors.
Members of ACIF are:
Air Conditioning & Mechanical Contractors Association of Australia (AMCAA)
Association of Consulting Architects - Australia (ACAA)
Association of Consulting Engineers Australia (ACEA)
Australian Institute of Architects (RAIA).
Australian Institute of Building (AIB)
Australian Institute of Quantity Surveyors (AIQS)
Construction Industry Engineering Services Group(CIESG)
Engineers Australia (IE Aust)
Facility Management Association of Australia (FMAA)
Fire Protection Association of Australia (FPAA)
Master Builders Australia (MBA)
Planning Institute of Australia (PIA)
Property Council of Australia (PCA)
About the CFC: ACIF’s Construction Forecasting Council produces twice-yearly forecasts of building and construction
activity in Australia. These forecasts are based on modelling of the economy by KPMG Econtech, and include short-term to
long-term forecasts (10 years), derived from the National Accounts and Australian Bureau of Statistic building approvals,
building and construction industry data from Reed Construction Data, plus input from representatives of industry, unions and
government agencies




                                                              2
                                              CFC sector forecasts, Australia wide, 2008-09 to 2017-18
                                               2008-09 2009-10 2010-11 2011-12 2012-13 2013-14           2014-15   2015-16   2016-17   2017-18
RESIDENTIAL BUILDING
Total residential building        $ million    66,958    68,499    75,802   86,886    98,965   103,817   108,141   118,683   128,829   140,458
                                 % change         -4%       2%       11%      15%       14%         5%        4%      10%        9%        9%
New houses                        $ million    24,065    24,288    28,292   31,446    33,750    33,260    32,858    34,408    35,464    35,661
                                 % change         -6%       1%       16%      11%        7%        -1%       -1%       5%        3%        1%
New other residential             $ million    10,195     8,794     8,657   11,479    14,721    16,689    17,401    18,964    21,187    22,697
                                 % change         -6%     -14%        -2%     33%       28%       13%         4%       9%       12%        7%
NON-RESIDENTIAL BUILDING
Total non-residential building    $ million    29,790    25,472    25,809   28,779    30,281    31,733    33,713    35,805    38,069    42,724
                                 % change         -6%     -14%         1%     12%         5%        5%       6%        6%        6%       12%
Retail/Wholesale trade            $ million     5,560     4,031     3,488    4,466     5,089     5,396     5,621     5,907     6,280     7,140
                                 % change         -7%     -27%      -13%      28%       14%         6%       4%        5%        6%       14%
Offices                           $ million     6,151     4,052     3,607    4,050     4,545     5,262     6,021     6,702     7,378     8,369
                                 % change       -19%      -34%      -11%      12%       12%       16%       14%       11%       10%       13%
Other commercial                  $ million     1,231       947       804      836       916       972     1,011     1,057     1,129     1,280
                                 % change        17%      -23%      -15%       4%       10%         6%       4%        4%        7%       13%
Industrial                        $ million     4,379     3,065     2,716    3,141     3,538     3,987     4,418     4,786     5,097     5,668
                                 % change       -16%      -30%      -11%      16%       13%       13%       11%        8%        7%       11%
Educational                       $ million     3,720     4,229     5,240    5,641     5,135     4,729     4,827     5,004     5,237     6,230
                                 % change          9%      14%       24%       8%        -9%       -8%       2%        4%        5%       19%
Health and aged care              $ million     3,045     3,781     4,607    4,900     4,783     4,693     4,817     4,990     5,215     5,664
                                 % change          5%      24%       22%       6%        -2%       -2%       3%        4%        5%        9%
Entertainment and recreation      $ million     1,967     1,897     1,921    2,038     2,209     2,349     2,419     2,457     2,515     2,637
                                 % change         -5%       -4%        1%      6%         8%        6%       3%        2%        2%        5%
Accommodation                     $ million     1,393     1,026       939    1,120     1,322     1,443     1,532     1,704     1,841     1,945
                                 % change          1%     -26%        -8%     19%       18%         9%       6%       11%        8%        6%
Miscellaneous                     $ million     2,344     2,443     2,486    2,586     2,743     2,903     3,047     3,198     3,378     3,790
                                 % change          8%        4%        2%      4%         6%        6%       5%        5%        6%       12%
                CFC sector forecasts, Australia wide, 2008-09 to 2017-18
                                                        2008-09 2009-10       2010-11   2011-12   2012-13   2013-14   2014-15   2015-16   2016-17   2017-18
ENGINEERING CONSTRUCTION
Total engineering construction              $ million    69,403      68,532    53,411    57,314    68,076    73,702    76,775    78,973    81,850    86,285
                                           % change         14%         -1%     -22%         7%      19%         8%        4%        3%       4%        5%
Roads                                       $ million    16,017      14,989    14,029    14,509    15,730    16,875    17,715    18,443    19,374    20,522
                                           % change         27%         -6%       -6%        3%       8%         7%        5%        4%       5%        6%
Bridges, railways, harbours                 $ million      6,141      5,732     5,716     5,362     5,772     6,310     6,748     7,154     7,678     8,448
                                           % change           7%        -7%        0%       -6%       8%         9%        7%        6%       7%       10%
Electricity, pipelines                      $ million    11,198      12,243    11,663    11,172    11,555    11,885    11,818    11,907    12,284    13,102
                                           % change         20%          9%       -5%       -4%       3%         3%       -1%        1%       3%        7%
Water and sewerage                          $ million      6,869      6,172     5,531     5,917     6,529     7,038     7,436     7,844     8,321     8,363
                                           % change          -7%      -10%      -10%         7%      10%         8%        6%        5%       6%        0%
Telecommunications                          $ million      4,673      5,205     5,211     5,412     5,615     5,384     4,702     4,502     4,543     4,731
                                           % change           5%       11%         0%        4%       4%        -4%     -13%        -4%       1%        4%
Heavy industry incl. mining                 $ million    21,316      21,516     8,794    12,259    19,743    22,630    24,463    24,967    25,140    26,146
                                           % change         10%          1%     -59%       39%       61%       15%         8%        2%       1%        4%
Recreation and other                        $ million      3,187      2,676     2,467     2,683     3,131     3,580     3,893     4,156     4,511     4,973
                                           % change         37%       -16%        -8%        9%      17%       14%         9%        7%       9%       10%




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DETAILED ANALYSIS
Engineering construction (roads, ports, railways, telecoms, water and sewerage, mining
infrastructure) will remain solid in the short term, thanks to a pipeline of existing projects, but is then
forecast to fall sharply in years to come as current major projects are completed and no new
projects replace them – particularly in the mining infrastructure sector.
Residential building will fall in 2008/2009 due to low consumer confidence and poor availability of
credit for commercial developers. However, pent-up demand will drive a strong recovery
commencing in 2010/2011.
Non-residential building will fall sharply as the recession forces local businesses to put expansion
plans on hold. Developers will face difficulty in obtaining credit due to the GFC until credit markets
normalise later in 2010.
The rest of this document deals with each of these sectors in more detail.
NON-RESIDENTIAL BUILDING
The total private sector (retail, offices, industrial, hotels) will drop by around 40% over the next two
years. Retail, for example, was $6 billion a year at its peak and is going to drop to $3.5 billion.
While the private sector is going to be hard hit, the government sector (schools, hospitals, aged
care) will hold up relatively well due to a number of factors.
These include various stimulus measures, such as the Commonwealth Government’s Financial
Stimulus Package in February, along with the expectation that Building Australia funding will be
directed in part to health and other non-residential building, as well as structural changes occurring
in the health sector.
However, the public sector accounts for only 20% of non-residential construction spending, so even
if governments were to double their non-residential construction spending, it will not be nearly
enough to offset the declines in private sector spending.


Sector-by-sector:
Office building
The outlook for office building over the next few years will be very soft. Office construction is going
to be hit very hard, with many big projects that had already been approved now being cancelled.
Activity in this sector will fall to at least 2003/2004 levels, and probably will be worse.
Currently there is minimal lending for commercial building, and approvals are not translating into
“work done”.
Rental growth has been impeded by the global financial crisis, and cap rates will decompress. And
when investors can buy a building for less than half of the replacement cost, it simply makes no
sense to build new.
When this sector eventually recovers, Sydney will be the first to return. The issue for the other state
capitals will be that once lending resumes, there will be no sites ready to go, thereby delaying the
recovery.
Non-metropolitan non-residential activity will come back a bit earlier because these projects tend
to be slightly smaller, but even outside the state capitals, any recovery is still six to eight quarters
away.
Forecast changes in value of offices, work done, Australia
     UNITS    2008-09   2009-10   2010-11   2011-12   2012-13   2013-14   2014-15   2015-16   2016-17   2017-18

  $ million    6,151     4,052     3,607     4,050     4,545     5,262     6,021     6,702     7,378     8,369
% change        -19%      -34%      -11%      12%       12%       16%       14%       11%       10%       13%


Industrial
The big driver for this sector has been the transport and logistics business. Much of the building has
been carried out, and a lot of the demand has now been met in what has been huge structural
change over the past few years.
There has been a steep fall in activity in this sector which will continue until mid-2011.
Forecast changes in value of industrial, work done, Australia
     UNITS    2008-09   2009-10   2010-11   2011-12   2012-13   2013-14   2014-15   2015-16   2016-17   2017-18

  $ million    4,379     3,065     2,716     3,141     3,538     3,987     4,418     4,786     5,097     5,668
% change        -16%      -30%      -11%      16%       13%       13%       11%        8%        7%       11%




                                                       6
Hotels/accommodation
The value of hotel construction is forecast to drop by 33%. The massive decline in tourism means
that room yields are dropping, so building new hotels is not going to be an attractive proposition.
Recovery here is at least six quarters away.
Forecast changes in value of accommodation (hotels), work done, Australia
     UNITS    2008-09   2009-10   2010-11   2011-12   2012-13    2013-14   2014-15   2015-16   2016-17   2017-18

  $ million    1,393     1,026       939     1,120     1,322      1,443     1,532     1,704     1,841     1,945
% change         1%       -26%       -8%      19%       18%         9%        6%       11%        8%        6%


Education
There is huge spending coming up for Australia’s public school system: $13 billion over two to three
years boosted by the government’s stimulus measures.
Forecast changes in value of education, work done, Australia
     UNITS    2008-09   2009-10   2010-11   2011-12   2012-13    2013-14   2014-15   2015-16   2016-17   2017-18

  $ million    3,720     4,229     5,240     5,641     5,135      4,729     4,827     5,004     5,237     6,230
% change         9%       14%       24%        8%          -9%      -8%       2%        4%        5%       19%


Health/aged care
Massive structural changes are working their way through the system, with the mooted move from
state-based health systems towards a single federally controlled one.
It is expected that that Building Australia funding will be directed in part to this sector.
Structural changes have occurred over the past decade in education and in industry; they are
now going to happen for health.
Forecast changes in value of health/aged care, work done, Australia
     UNITS    2008-09   2009-10   2010-11   2011-12   2012-13    2013-14   2014-15   2015-16   2016-17   2017-18

  $ million    3,045     3,781     4,607     4,900     4,783      4,693     4,817     4,990     5,215     5,664
% change         5%       24%       22%        6%          -2%      -2%       3%        4%        5%        9%




                                                       7
RESIDENTIAL BUILDING
All the ducks are lining up for residential. The demand is there; the issue is getting the funding –
even the major developers, with strong balance sheets, can’t obtain funding for apartment
projects.
Again, a recovery in global capital markets will be the key to getting this sector moving.
The long-term prospects for all residential sectors are strong; it is only a question of timing as to the
turnaround point.
Nationally, there is currently an annual shortfall of around 30,000 houses.


Sector-by-sector:
Single dwellings
Over the next 12 months, single dwellings construction will show a slight decline, but a recovery is
set to start in the second half of 2010.
The CFC anticipates an 16% increase in construction in 2010/2011, compared with 1% growth in the
preceding year.
The banks are back and lending, and things are getting slightly better for single-home builders and
homeowners. Interest rates are low, and the first homeowners’ grants are driving new construction.
However, lending to subdivision developers is getting worse, and is likely to do so for the rest of 2009
and into 2010.
While there is substantial pent-up demand, availability of finance to developers is really holding this
sector back.
More than any other sector, residential construction forecasts for single dwellings show a very wide
variation across each state.
Forecast changes in value of new houses (single dwellings), work done, Australia
     UNITS    2008-09   2009-10   2010-11   2011-12   2012-13   2013-14   2014-15   2015-16   2016-17   2017-18
  $ million   24,065    24,288    28,292    31,446    33,750    33,260    32,858    34,408    35,464    35,661
% change         -6%       1%       16%       11%          7%      -1%       -1%       5%        3%        1%




                                                       8
Units/townhouses
This sector is very dire in the short term. It will be six quarters before this sector starts to pick up – mid-
2010 at the earliest.
Units/townhouses will not see a recovery for at least 18 months, and in the short term there will
probably be a 15% decline nationally in activity levels.
Projects are being pulled across the board, and some projects that have started are now not being
completed.
Developers are trying to get DAs/BAs on sites to then on-sell them, rather than to build on them.
The recovery will be gentle at first, and it will be delayed, and won’t really commence until credit
markets come back. But sooner or later the GFC will end, and there will be enormous pent-up
demand to satisfy.
Again, forecasts for apartments and townhouses show considerable variation between states, and
with any real recovery not occurring until 2011/2012 – at which point it is forecast to be very strong.
Forecast changes in value of new “other residential” (apartments & townhouses), work done,
Australia
     UNITS    2008-09   2009-10   2010-11   2011-12   2012-13   2013-14   2014-15   2015-16   2016-17   2017-18
  $ million   10,195     8,794     8,657    11,479    14,721    16,689    17,401    18,964    21,187    22,697
% change         -6%      -14%       -2%      33%       28%       13%        4%         9%      12%         7%




                                                       9
INFRASTRUCTURE/ENGINEERING CONSTRUCTION
Engineering construction in aggregate will fall over the next couple of years; currently it is still at
quite high levels. This collapse will mainly be due to a drop off in mining infrastructure investment.
This forecast drop is sharp – although it should be recognised that mining infrastructure investment
has been at unprecedented levels for the past three to four years, and will drop back to levels seen
as recently as 2005.
Outside of mining infrastructure investment, the outlook for engineering construction is significantly
brighter; we can be relatively optimistic about road construction, with a pick up in activity starting
to come through during 2011.
Other sectors will also remain at reasonable levels of activity over the next few years.
Government expenditure under the various stimulus packages is in part making up for the
withdrawal of the private sector.
In engineering construction, there has historically been approximately a 60/40 split of private/public
spending.
Governments will be trying to reverse that split over the next three to four years.


Sector-by-sector:
Mining investment
There will be a very sharp drop off in activity in this sector, from $22 billion a year, down to just $9
billion a year in 2010/2011. It will then start to pick up from 2011/2012.
There are very few major mining projects set to start in the next two to three years.
Right now, the mining industry is awaiting an improvement in the US economy, which in turn will
drive demand from China, India and Japan.
Forecast changes in value of new heavy industry (includes mining), work done, Australia
     UNITS    2008-09   2009-10   2010-11   2011-12   2012-13    2013-14   2014-15   2015-16   2016-17   2017-18
  $ million   21,316    21,516     8,794    12,259    19,743     22,630    24,463    24,967    25,140    26,146
% change        10%        1%       -59%      39%       61%        15%        8%        2%        1%        4%


Road construction
The outlook for this sector is reasonably good, save for Queensland and Western Australia where
substantial drops in work are expected in 2009/2010 as major projects close out.
After a spending spike in 2008/2009, spending will decline until 2011/2012, as much of the
government’s stimulus money will be going into road construction.
Forecast changes in value of new road construction, work done, Australia
     UNITS    2008-09   2009-10   2010-11   2011-12   2012-13    2013-14   2014-15   2015-16   2016-17   2017-18
  $ million   16,017    14,989    14,029    14,509    15,730     16,875    17,715    18,443    19,374    20,522
% change        27%        -6%       -6%       3%           8%      7%        5%        4%        5%        6%




                                                       10
Bridges, rail, ports
These will be patchy until 2012/2013 as projects currently under construction near completion.
Again, the government has been spending in this sector under its stimulus measures to make up for
the withdrawal of the private sector.
Forecast changes in value of new bridges, rail, harbours, work done, Australia
     UNITS    2008-09   2009-10   2010-11   2011-12   2012-13    2013-14   2014-15   2015-16   2016-17   2017-18
  $ million    6,141     5,732     5,716     5,362     5,772      6,310     6,748     7,154     7,678     8,448
% change         7%        -7%       0%        -6%          8%      9%        7%        6%        7%       10%


Electricity
We expect to see quite strong growth beginning in the next few years. There is a lot of aging
infrastructure that is coming up for replacement.
The big “X-factor” is the federal government’s emissions trading scheme (ETS) and potential
changes towards various forms of “green” energy (for example, there are a lot of wind farms now
coming on line).
There will certainly be more investment around “green” energy, but it is too soon to quantify this yet
until the ETS is finalised.
Forecast changes in value of new electricity and pipelines, work done, Australia
     UNITS    2008-09   2009-10   2010-11   2011-12   2012-13    2013-14   2014-15   2015-16   2016-17   2017-18
  $ million   11,198    12,243    11,663    11,172    11,555     11,885    11,818    11,907    12,284    13,102
% change        20%        9%        -5%       -4%          3%      3%        -1%       1%        3%        7%


Water and sewerage
Australia has a deficit of water infrastructure, and there is the prospect of several more desalination
plants – which will result in large “one-off” expenditures.
There is also considerable government funding to be spent on the Murray-Darling system coming
from the February Financial Stimulus Package, but this is likely to be spread over a number of years,
and as yet is too early to properly quantify.
Forecast changes in value of new water and sewerage, work done, Australia
     UNITS    2008-09   2009-10   2010-11   2011-12   2012-13    2013-14   2014-15   2015-16   2016-17   2017-18
  $ million    6,869     6,172     5,531     5,917     6,529      7,038     7,436     7,844     8,321     8,363
% change         -7%      -10%      -10%       7%       10%         8%        6%        5%        6%        0%


Telecoms
The push for a national broadband network means there will be significant spending in the next few
years; at present, its exact nature is still unclear.
Forecast changes in value of new telecoms, work done, Australia
     UNITS    2008-09   2009-10   2010-11   2011-12   2012-13    2013-14   2014-15   2015-16   2016-17   2017-18
  $ million    4,673     5,205     5,211     5,412     5,615      5,384     4,702     4,502     4,543     4,731
%change          5%       11%        0%        4%           4%      -4%      -13%       -4%       1%        4%




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