OPINION: AS the Australian construction sector enters a much-needed period of stabilisation, it’s tempting to think that the commercial property development market has nothing but smooth sailing ahead, but some areas of uncertainty remain.
The latest data from Altus suggests that we can expect a rocky ride for the remainder of 2023, even if there are certain indicators that the country’s construction sector will finally begin to recover next year. In the interim, fast-tracked approvals will help to keep things rolling along smoothly, as will careful cost management.
Indeed, cost management is paramount at present, despite prices for a range of building materials levelling out after the turmoil brought on by the COVID-19 pandemic. But the stabilisation of materials in the construction industry hasn’t played out evenly across every class of building commodity.
While material prices for items such as structural steel and rebar have eased, prices for concrete-based structural components and internal fittings continue to rise. Concrete is notoriously volatile because of its dependence on energy and transport costs, as well as its raw material supply chains, meaning the price of concrete is still on an upward trajectory.
Likewise, the brick market has seen robust price increases over both the quarter ending June 2023 and the corresponding financial year, a trend that goes some way to reflecting the notably small pool of brick suppliers in Australia.
Copper has also been subject to elevated prices, as has diesel, an all-important commodity that makes building material transport and construction requiring heavy machinery possible.
On the upside, materials like plasterboard and structural timber have joined steel and rebar in seeing prices stabilise and, in some cases, decrease — even if only slightly.
But of course, the price of materials cannot be used in isolation to determine the cost of construction and property development overall, and rapidly rising labour expenses in Australia are working to counterbalance any potential savings that might be made possible by the easing of prices for some materials.
Not only has a shortage of skilled labour seen expenses rise, background economic pressures are also leading to the rise in labour costs. The country’s consumer price index (CPI) rose 0.8% in the June quarter, and by 6.0% over the 12 months to June 2023, putting pressure on wages.
So it should come as little surprise that building construction prices rose 1.0% in the June quarter and 6.5% over the past 12 months – strikingly similar to the shifts in CPI over the same time frames. It should be noted that these increases were, in large part, driven by labour shortages, with demand for tradespeople putting upward pressure on output costs.
These factors are putting some pressure on the market, given that demand for both materials and labour have remained high due to the ongoing activity in the non-residential market, as well as the residential and infrastructure sectors.
And although general market uncertainty has moved from prices to future projects, a strong pipeline will help to prevent major ongoing disruptions to the industry as a whole and help to shore up future developments. Much of this is in the hands of state and federal governments, however.
You see, dwelling approvals, which are a leading indicator of construction industry trends, have shown a downward trend, both when compared to the previous quarter and the same period in the previous year, according to some of the latest Australian Bureau of Statistics (ABS) data.
But we know from history that government intervention can lead to lasting follow-on effects. After the Global Financial Crisis, for instance, government stimulus delivered an immediate spike in building approvals. Although this was initially followed by an easing in activity, it ended up leading to a quick recovery and a period of steady and consistent growth.
With that in mind, the property development market could see significant activity ahead, most likely from 2024 onwards. Such a recovery, however, is dependent on governments guaranteeing their project pipelines and prioritising planning reforms.
With interest rates at a high point, the duration of a project has the potential to become a significant cost centre for any developer, with hiked interest repayments on borrowed money eating into profit margin. This is just another reason why fast-tracked approvals are key to stimulating the market and delivering returns on investments.
With so many variables dictating the ability of property developers to protect profit and commercial real estate players to manage costs, a data-driven approach to business is more important than ever.
From calculating the price of building materials and managing labour costs to tackling rising interest rates, the best way to determine the feasibility and ongoing financial health of any project is to dig deep into the data by applying industry-specific analytics to it. This way, commercial real estate developers can be better positioned to weather market instability and take advantage of the opportunities when they arrive.
By Niall McSweeney, President, Cost & Project Management, Asia Pacific at Altus Group.*
