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NZ construction activity to 'remain strong' even as population growth slows, RLB says

Friday 9th March 2018

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New Zealand construction activity is expected to remain strong in coming years even as population growth slows, as the sector plays catch up after record levels of tourism and migration, according to a property consultancy.

Rider Levett Bucknall's report on trends in property and construction for the first quarter of 2018 notes that record high net migration has shown signs of turning in recent months, as the number of people moving to New Zealand eases and more Kiwis leave the country. However, it says the surge in population in recent years should continue to support underlying construction demand over the next few years, given population growth has outpaced growth in house-building and other construction activity.

"It typically takes around two years for the full effects of population growth to flow through to construction activity, with some catch up likely over the coming years. Hence we expect a solid pipeline of construction activity," according to the report prepared for Rider Levett Bucknall by the New Zealand Institute of Economic Research. 

Despite a rebound in construction activity recently, construction cost inflation has moderated, both in Auckland and other regions across New Zealand, the report said. 

Non-residential construction cost inflation fell to an annual 5.2 percent in the third quarter of 2017, from a 5.5 percent rate in the second quarter and 5.4 percent in the first quarter, according to Statistics New Zealand data quoted in the report. NZIER forecasts non-residential construction cost inflation will moderate to 4 percent by the end of 2018 and ease to around 3.5 percent by 2021 as capacity pressures in the construction sector ease.

"Despite the solid construction growth outlook for the next few years, we do not expect the inflation to be as strong as the mid-2000s given that the lower inflation environment limits the extent to which rising costs can be passed on quickly, and strong net migration is alleviating skills shortages in the building sector," the report said. 

"Construction sector firms report it being slightly easier to find both skilled and unskilled labour, with migrants helping to alleviate labour shortages in the building industry," the report said. "Although the new government has indicated it is looking to reduce net migration, we expect the slowing in the number of skilled migrants coming in to work in capacity constrained sectors such as construction will be modest. This means migrants will still likely help to fill skills shortages in the construction sector over the coming years."

The report noted relatively high construction cost inflation in Auckland indicates capacity pressures in the Auckland construction sector remain acuter than in other regions. However, it said construction cost inflation in Auckland would continue to ease as capacity in the Auckland construction sector increases to meet growing demand. 

"We expect further moderation in construction cost inflation across New Zealand in the coming years, as labour shortages and bottlenecks in the supply of materials ease," the report said. "However, strong construction demand means that despite some easing we expect construction cost inflation will remain relatively high."

Non-residential construction activity lifted in the September 2017 quarter after declines over the first half of the year.

"We expect further growth in non-residential construction over the coming year," the report said. "Continued strong tourism activity continues to drive demand for new hotel developments, while demand for industrial buildings is lifting as businesses feel more optimistic about investment."

The report cited demand for offices to accommodate the higher number of white-collar workers, public sector spending on education and healthcare facilities, new accommodation buildings in response to the continued high numbers of international visitors, as well as strong domestic tourism activity, and earthquake strengthening activity.

Despite some slowing in mid-2017, Auckland continued to lead growth in non-residential construction demand over the past year, the report said.

"Growth has been particularly strong in demand for new accommodation buildings, reflecting the acute capacity pressures in the Auckland tourism sector. Strong growth in hiring in the professional services sector is also boosting demand for new office space in the region."

Non-residential construction demand has also increased in neighbouring regions Waikato and the Bay of Plenty over the past year and was likely to continue for these 'halo' regions over the coming years, it said.

In contrast, non-residential consent issuance in other main cities such as Wellington had eased over the past year, it said. Although demand for accommodation and healthcare facilities increased, this was offset by lower demand for retail outlets and office buildings in the region.

Non-residential consent issuance in Canterbury continued to drop on lower demand for healthcare and education facilities over the past year, the report said. Post-earthquake rebuild activity should continue to underpin non-residential construction demand, although the level of activity is likely to continue to ease over the coming year. 


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