Survey Says: Aussie Construction Holding Stable

Construction costs in Australia remain stable compared to the rest of the world while Sydney rated as the most expensive place in Australia to build.

According to Turner & Townsend’s International Construction Market Survey 2017, Sydney positioned as ninth most expensive place to undertake construction activities out of 43 markets around the world. The 2017 survey also ranked Brisbane at 22, Melbourne at 20, while Perth took 21st spot.

The International Construction Market Survey 2017 also analysed input costs such as labour and materials and charts the average construction cost per square metre for both commercial and residential projects.

Turner & Townsend Managing Director Anooj Oodit said the report showed that globally construction costs are reasonably well contained with Australia showing little variation.

"The improving commodity prices are set to help resources countries like Australia benefit from higher commodity export royalties.

"This in turn will provide confidence to invest especially in further infrastructure," he said.

“Low interest rates have encouraged strong growth in domestic apartment construction markets in several regions worldwide, especially Australia. Looking forward, Brexit and the election of President Trump may add some uncertainty to some construction markets, however the Australian government is committed to its $75 billion infrastructure spend over the next ten years.”

“The recent announcement by the Federal government to build Badgerys Creek airport and the Inland Rail project adds further strength and commitment to the construction market in Australia,” Mr Oodit said.

The surveys over the past three years (2015 – 2017) highlight there was an upswing in residential apartment construction on the East Coast which was now coming to an end, except in Sydney.

Current construction costs increased a little above general inflation, and on average were up 5.5 per cent over three years, whereas price inflation is up only 3.5 per cent over three years.

Sydney residential construction spend has grown by 54 per cent since the 2015 international report. Over the same period construction costs are showing an average 9 per cent increase, while non-residential construction (hotels, offices and retail) activity increased by only 6 per cent.

“The question is what comes next after the apartment boom?" Mr Oodit said.

"Some of the shortfall will be met by major infrastructure projects. The time is now ripe to capitalise on the apartment boom slowdown and use the resources to boost Australia’s infrastructure projects and keep the economy strong.

“Global construction costs are set to rise by 3.5 per cent in 2017, reflecting steady growth in the global economy but also increasing labour shortages and low productivity within several key markets.

"The main exceptions to this rule lie in commodity reliant markets where falling prices for raw materials have contributed to a cooling in construction cost inflation,” Mr Oodit said.

“Against a backdrop of rising cost inflation and labour shortages, policymakers, contractors and clients in all markets need to tackle low productivity, embracing innovative technologies, new methods of construction, as well as using data and better programme management to boost input,” he said.

Mitchell Brandtman Partner Michael Ivey said that given the large volumes of work being undertaken across the East Coast of Australia over the last few years, construction costs escalation has remained remarkably constrained.

He said while cost per square metre make good headlines, the devil is in the detail.

"The biggest driver for increases in per square metre rates in the residential construction space haven’t come from labour and materials, they have come from changing product mixes, increases in quality, and increases in amenity.

"The last few years has seen the market adjust from a race to the smallest unit footprint for investors, to creating ‘lifestyles’ where people can see themselves living, and this comes at a cost.

"Competition, including interstate moves for previously border-locked Contractors and Developers, have kept us in a relatively low margin environment, which has helped projects get off the ground but doesn’t create a the basis for a sustainable long term market," he said.

He said the surge in residential apartments softened the landing from the decline in resources investment, but there is a looming gap in the market for those small to mid-tier players who are unable to take part in the large nation building projects being put forward.

"We are already seeing contractors struggling across the East Coast and you can expect to see more headlines in the coming months."