Australia: Corrs High Vis: Episode 3 – Construction market forecast: 2017 and beyond

Construction activity and spend are forecast to contract over 2016-17. So where do the areas of growth lie? In this episode of Corrs High Vis, Partner Ben Davidson and Lawyer David Hastie consider the emerging trends over the next twelve months and beyond.

Corrs High Vis tackles the issues that matter in the construction industry. The podcast series, brought to you by Corrs' Construction team, offers views and analysis providing industry professionals with key insights to help them make smarter decisions.

These podcasts do not provide legal or other advice. Obtain legal or other professional advice as required.

TEXT VERSION

CORRS HIGH VIS PODCAST - EPISODE 3 - CONSTRUCTION MARKET FORECAST: 2017 AND BEYOND

Ben Davidson: Corrs Chambers Westgarth – National Practice Group Managing Partner

David Hastie: Lawyer

BEN: Hello and welcome to the third episode of Corrs High Vis – Corrs Construction's new podcast series. My name is Ben Davidson and I am Corrs' National Practice Group Leader and I am joined by lawyer David Hastie. Today we will be taking a look towards the trends that are coming and the issues that we forecast for the Australian construction market. First we are going to have a look back at the emerging trends from 2015-16 financial year then we are going to move to considering some of the issues affecting the industry going forward and finally we are going to have a look at the key considerations that will impact engineering construction in Australia in the short and the medium term. So David welcome.

DAVID: Thanks Ben.

BEN: So I understand you have been reviewing the Australian Construction Industry Forums recently released Australian Construction Market Report.

DAVID: Yes I have so the ACIF released their market forecast in November and quite an interesting read.

BEN: So let's start with a summary. How has the industry performed in 2015-16?

DAVID: Yes, well, I think it has performed well in terms of building and construction activity. It's measured in terms of the value of the work done and the three sectors in particular are residential building, non-residential building and engineering construction and the three totalled and they amounted to about $220 billion worth of activity in the financial year of 2015-16. Just breaking those down engineering construction we saw about $95 billion last financial year in activity. Residential building actually did well and it rose to about $90 billion nationally last financial year. Non-residential building it was hovering at around $35 billion so that's currently where it's at.

BEN: So they're big numbers. Are we likely to see an increase or a decrease in industry activity in the short term?

DAVID: Yes, Ben, well I don't think it comes as any great surprise to our listeners that the report is forecasting a decline of about 6% across the board. So we're looking at a fall from about $220 billion in activity last financial year to numbers in the realms of around $207 billion in 2016-17. I guess there has been somewhat of an economic transition and what we're seeing is residential building across the country but obviously in particular in the capital cities of Sydney and Melbourne, there has been an increase in residential building activity so it was at $90 billion - it's actually going to – it's forecast to increase by about 4% to $94 billion next financial year and obviously that's riding on the back of all the construction work we're seeing in apartment buildings and townhouses and that's acting as somewhat of a stop-gap. Obviously there is no more resources boom so something is having to pick up the slack and what we're seeing in the short term is that is residential building.

BEN: And were there any other issues we should be mindful of in a declining market that will impact either positively or negatively on the market year ahead?

DAVID: Yes well I think a really big issue for us in the legal market that we need to be particularly aware of is that with a decline of about 6% in activity forecast over the next 12 months, with that is going to come a decline in employment in the industry as a whole nationally. May be not so much in markets such as Victoria and New South Wales but there is definitely going to be a decline and there is going to be quite a bit of pressure I think financially put on big players just players in general in the industry so it's something that we really need to be aware of.

BEN: So we just heard that there is an overall fall in activity nationally around 6%. Talk to us about what you think is going to happen in the engineering construction sector.

DAVID: Yes well engineering construction, obviously as I've just mentioned, it's an important one. And given the fact that quite recently we experienced the once in a generation resources boom, naturally we have to come down off those highs and that's still playing out. So I mentioned earlier in the podcast that activity was at around $95 billion last financial year, now that was done 15% on the year prior and it's been a cumulative reduction of around 30% over the last two years to 2015-16 and essentially to answer your question, Ben, what we're looking at is a further 20% reduction projected over the next two years to 2017-18 so there is a still a fair bit of bottoming out to happen and the ACIF report actually forecasts that bottoming out at around $75 billion in 2017-18.

BEN: So there is a bit of red ink in there. Is there any -

DAVID: There is a little bit of red ink in there so I mean again I don't think it really is going to come as any great surprise to those listening but when you see it in hard copy under your nose in a report such as this it really does make you sort of sit up and take notice.

BEN: So are there any specific areas of decline that you think are more troubling than others?

DAVID: Yes well the report identifies electricity and pipeline work. Significant declines there. And again, no surprise, heavy industrial there are declines forecasts and heavy industrial obviously includes mining. There's other areas such as water and sewerage they're actually relatively steady in terms of the short to medium forecast so I think for the players in the water and sewerage areas less to worry about as opposed to may be electricity and pipeline work and when we're talking about pipeline work we're thinking of those huge projects that we've seen in Queensland for example.

BEN: So David there are a lot of areas of decline you've been pointing to here and areas for concern for the market. Are there any areas of specific optimism that you can point to?

DAVID: Yes well in times like this you do really need to look to the positives, don't you? Areas of projected growth: it's definitely roads and there is, for sure, there is an air of conservative optimism there when you read the report in depth. You know the government budget increases obviously are going to be funding this. We're looking at about $68 billion worth in government coffers nationally and that's money that we're currently seeing being spent in NSW - that spending has already begun. The ACIF's – it's forecasting the spread of the remainder of this planned and funded roads construction work over the next several years and it's going to be peaking at around $20 billion in terms of activity by 2019-20 and that represents a 10% lift in activity over the next four years. So when you look at it in those terms there is definitely an air of conservative optimism.

BEN: So beyond roads, what else have you seen that has some air of optimism about it?

DAVID: Yes, look, telecommunications, I think, is an area of growth. Not huge growth but steady growth in the short to medium term. Obviously we're seeing an increased spend as a result of the rollout of the NBN nationally but the other one we can't forget about is the rollout of the 5G mobile network and that's going to be taking place in probably the shorter to medium term, I guess, over the next, maybe, four to five years we're going to be seeing that spend coming into effect. Other areas too include bridges, railways and harbours. There's going to be money to be spent there, especially in Victoria. And this sort of activity will definitely be propping up engineering construction, definitely in Victoria but especially in the short to medium term which is important given the winding back of the spend in residential building.

BEN: And what about rail? So we've seen all of the Melbourne and Sydney Metro projects up and running and talk about Brisbane Metro. Do you think there's some air of optimism there or do you think the market's kind of burnt through there?

DAVID: I think you've just summed it up quite nicely yourself there, Ben. There's definitely – obviously we're seeing for example in Victoria the removal of the level crossings. That sort of work is happening and obviously we've got the Metro project which is still to happen and there's going to be considerable spend when that takes effect. I don't know, Ben. What's your take on the rail spend because obviously there is money there to be spent and we're seeing, for example, in Victoria – not to mention New South Wales but definitely in Victoria – money is being committed and it's definitely a good thing and it's extremely important.

BEN: Yes, I think interestingly what we are seeing is a series of rail projects, particularly up the east coast, that are very significant and are likely to actually stretch the market. So each of the States, with Brisbane to come, have committed to very significant projects and they're all basically happening at the same time. So it will be interesting to see how the market juggles that and allocates resources to make sure that there's not an LNG type stretch on.

DAVID: Now, I guess you – you've been hogging all the questions, Ben, so it's my turn to fire a question at you: what I'm interested to hear about is the forecast for engineering construction activity offshore. And I suppose a focus definitely would be Asia and South-East Asia. Ben, would you be able to give us some sort of a flavour or a taste of the work that is in the pipeline there and how that translates to us here in Australia and the nature of the work that will be performed in probably more the medium term, I'm guessing?

BEN: Yes, it's interesting. It's an interesting space because putting it into perspective, we saw just under a $200 billion committed on the Australian domestic LNG market over the last couple of years as the major LNG plants were constructed. That clearly stretched the market in terms of its ability to service all of those at the same time. In terms of international, and putting that into perspective, the current estimates are we are going to see something in the order of US$7 trillion deployed through South-East Asia in terms of major infrastructure spend over the next 7 to 10 years. So even amortising that on a straight line, it is such a significant amount of expenditure, there is no doubt that there is going to be a significant stretch for international and Australian domestic contractors to meet that market and service it over the next – even the short term, but certainly into the mid-term. It will be interesting to see how that is deployed and what mechanisms are used to try and do that, whether it is PPP models or something else. But in either event, whatever model is deployed, someone has to build these things. And it seems similar to the LNG story that you're going to end up with several countries competing for resources as they try and deploy the same level of infrastructure at the same time. So you'll see a number of countries try and deploy major roads and rail infrastructure at the same time and similarly to do ports and airports and the like. So it will be interesting to watch whether the Australian contracting market looks up to Asia as an escape route from a declining market.

DAVID: Yes, definitely. Those numbers make your eyes water when you talk about the spend that we're potentially looking at in South-East Asia. It's, I guess, watch this space Ben. So Ben, before we finish, I guess the key takeaways that we should really note is that firstly industry nationally is in a state of economic realignment. Secondly, residential building can't prop up the industry forever. It is going to wind up and it's going to wind up soon. But we can enjoy the fruits of that while it does last. Thirdly, the end of the decline in engineering construction is close. There are areas like roads, like we've talked about, for example, or telecommunications: there is definitely work there to be done here in Australia. And finally the industry is facing its own challenges, especially us in the legal world need to be aware of and we need to be aware of these sensitivities.

BEN: I agree entirely, David. Thank you for your time today. It's been fantastic to chat to you.

DAVID: Thanks Ben.

BEN: So my name's Ben Davidson. Thank you for listening. I'm looking forward to you joining us for the next edition of Corrs High Vis. Til next time.

This podcast does not give legal or other professional advice and its contents should not be relied upon as such. Formal legal and other professional advice should be sought in particular matters.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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