Forecasting Construction’s Future after Covid
Trying to speculate what a post-COVID-19 world will look like is difficult enough. Predicting how Australia’s construction industry will shape up, based on possible scenarios likely to play out in each state and territory, is considerably harder. Luckily, we don’t have to with an exclusive preview of what’s coming in the latest ACIF Industry forecast.
At the inaugural Be Summit, ACIF Chief Forecaster Kerry Barwise and the panel, gave a preview of what can be expected in the full November forecast and shared their thoughts on the industry’s biggest challenges ahead.
If you missed the live session, or would simply like a recap, here are the leading points that came out of the session:
The Pandemic Problem
The pandemic “poses the greatest challenge to the Australian economy since the Great Depression”, stated Kerry Barwise in his opening of the ACIF Forecast Preview.
With GDP falling by 7% in the early stages of the crisis and job losses eclipsing the losses of both the Great Depression and the Global Financial Crisis, which according to Kerry was rumoured to have peaked at a true figure of 15% during the hardest months of the lockdowns, even essential services like construction weren’t immune to the fall out, with contractions across all sub-sectors and regions.
Despite this, there is still a strong sense that an economic recovery for Australia is on the horizon with growth expected to recover to 4.75% in 2021 and beyond.
Governments, at all levels, have played a big part in cushioning the fall and supporting industry. Amendments to bankruptcy and insolvency regulations have eased pressure on business and long-term projects have been brought further down the pipeline, all of which have helped soften economic contraction to a predicted 1.5%. And while this figure is still high, it is comparatively better than other developed nations, including our neighbours across the ditch. We take a look at what is driving these numbers.
Population growth is a key demand driver for dwellings and infrastructure and underpins the anticipated requirement for future investment in new dwellings.
Over the past decade, Australia has seen strong growth in migration and population, which has buoyed the construction industry. However, as borders closed, and the pandemic took hold, Australia’s net migration plummeted across the east coast states, falling by up to -1.4% in June 2020, which will leave a lasting impact on new dwelling investments in these states.
There is an expected bounce back when the borders and opened in 2022 and the nation welcomes back international students and other essential migrants, but there is an expected plateauing of growth, particularly in the larger population states of Victoria and NSW who are anticipated to see the largest changes in growth patterns.
Residential building was already was experiencing a downturn before Covid, however, the pandemic has accelerated the fall of ‘new other’ or apartment and townhouses which was already in the process of an adjustment after the rapid growth it has seen in the early 2010s.
The sub-sector already had concerns with oversupply and a dwindling pipeline, but the pandemic has well and truly burst the bubble, with foreign investors now exiting the market and reduced immigration further weakening the demand.
According to the report, this is also suggested that the pandemic has lessened the appeal of high-density living. Stand-alone housing offers more space and more bedrooms, and the introduction of working from home has started to shift the priorities for commuting and access to workplaces.
In the following panel discussion, Nerida Consibee, Chief Economist for REA Group cited figures from JLL indicating that office vacancy has trebled since the start of the pandemic, with the City of Melbourne experiencing the biggest slump, after its second wave.
Nerida also identified that the story for residential growth is different around the country, with WA and the ACT performing well from house price conditions and that regional Australia has been a surprising player in the residential space. Like dwellings, the pandemic and the change in working lifestyle has forced investors to think about dwelling demand and location requirements have shifted, with northern NSW in particular, seeing a surge in residential investment.
Meanwhile, it’s not all about new buildings with evidence to suggest that the increase to large and small renovations will account for a significant share of the value and the level of employment in building activity in the short term. Certainly, the government stimulus to boost development and alterations has already contributed to the queues at Bunnings, all of which helps the balance of overall growth for the sector.
The report also predicts that the industry will see a sharp return to new house building over the next 2 years.
Non- Residential Building
Like residential building, non-residential building is closely linked to population expectations and while in the early stages of the pandemic, there was a surge in activity that kept a lot of builders in work, the outlook shows that approvals and major projects in the pipeline down and businesses are deferring or cancelling non-essential capital investment.
The is also a question over the impact of e-commerce on bricks and mortar retail and thus investment in future development. Similarly, entertainment investors and developers are rethinking their futures, as they start to map out what their future will look like in a covid-normal world.
Accommodation is predicted to take one of the biggest falls. Activity was booming with new developments in the works right up until the arrival of covid. But now with the uncertainty around the relaxation of international and even domestic borders and thus tourists, investors are having to rethink the structure changes to their organisations, and pausing any planned building or expansion work until there is a clearer path for their sector.
Surprising industrial and miscellaneous growth has been growing on the back of e-commerce businesses, with increased requirements for warehousing and distribution centres.
Overall the picture for non-residential building is mixed.
“The majority of the sub-sectors are all declining to their lowest levels in the next few years, commented Sarah Slattery, Managing Director of Slattery Australia in the panel discussion.
“But these sub-sectors are coming of a lot of highs in recent years – so [Covid] might just be accelerating the adjustment for these sectors,” she added.
An increase in both state and federal government investment in infrastructure projects is expected to drive a +6% in the value of work done. In the following panel discussion, Andrew Scott, Head of Industrial Equity Research, Morgan Stanley, noted that the engineering sector was relatively pleased with the recent budget measures.
“It’s pleasing to see that governments aren’t just banking on the mega project announcements that sound fantastic but don’t lead to activity on the ground for a number of years,” he added. “The smaller ‘shovel ready’ projects will help small to medium size contractors (Tiers 2,3 & 4) that need the support the most at this time to survive through this.”
Even with the contraction of the mining boom of the early 2010s, subdivision indications continue to provide strong results, and are a good indicator for the future resilience in the infrastructure sector, which driven by the $89b the infrastructure surge is predicted to increase in the coming years despite the recent covid challenges.
Covid’s crystal ball
“This year has been like no other, and there is considerable margin for error around these forecast for the time being,” said Kerry, who also added that there are many variables, not all of them negative, to consider when predicting the new-normal.
Birth-rates are increasing across the nation and existing restrictions could be lifted early or later. The withdrawal of government support such as job keeper and job seeker will also be monitored closely for its economic impact. And there’s still the promise of a vaccine which will help open up borders and drive the growth more quickly than anticipated.
Due to the relative success that Australia has achieved in regards to managing the pandemic, and in curbing its second wave, we will continue to be viewed from an international perspective as a safe place to do business which will support not only import/export markets but foreign investment back into the economy.
And in the large part business has adapted and adopted new ways of working and this may lead to an increase in productivity output, not a decrease as was originally thought at the start of the pandemic, a sentiment shared by all the panelists.
However, Andrew cautioned that “those segments that have a challenging outlook [accommodation and commercial/retail] will find future financing very difficult” with ongoing uncertainty around working and lifestyle habits and whether changes like working from home and limited capacities were here to stay.
The pandemic has made us all look at and realise that the industry and our economy is capable of large scale societal change with Sarah identifying that, “There’s a large opportunity for federal governments to invest in social and affordable housing.” Something that was alluded to by the Victorian Treasurer earlier in the day – you can read a synopsis of that session here – and that innovation and sustainability might be able to take a forefront in post-pandemic construction and boost future investment in all sectors.
Bob Richardson, Managing Director, Xmirus (MC)
Kerry Barwise, Managing Director, FTI Consulting and ACIF Chief Forecaster
Nerida Conisbee, Chief Economist, REA Group
Sarah Slattery, Managing Director, Slattery Australia
Andrew Scott, Head of Industrials Equity research, Morgan Stanley
A big thank you to our speakers for being a part of the first Be Summit! Subscribe now to receive upcoming event and industry news straight to your inbox.
The full ACIF Industry Forecast will be available from November 5th 2020. To find out more about obtaining a copy, please contact Be Summit Partners ACIF here.