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NZ construction demand strong but growth hampered by capacity, finance constraints, RLB says

Friday 27th July 2018

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New Zealand's construction sector is in a period of strong demand, underpinned by an expanding population and tourism activity, but growth is hampered by capacity and financing constraints, according to a report on industry trends.

"Underlying construction demand remains strong, but growth in construction is hampered by continued capacity and financing constraints in the construction sector," according to global property firm Rider Levett Bucknall's latest report on New Zealand trends in property and construction for the third quarter of 2018.

"The fragmented nature of the sector means that construction companies are grappling with low operating margins, labour shortages and difficulty accessing finance. Many smaller and mid-sized construction companies also face the challenge of cash-flow issues, with delays in payment and completion of projects having a short-term effect on their bottom line."

RLB said some developments have been put on hold as they no longer meet feasibility criteria. However, it said the government's ambitious Kiwibuild plan - to build 100,000 affordable dwellings over the next decade by underwriting the financing of housing developments - will ease some of the financing constraints in the construction sector and likely see some developments brought forward over the next few years. 

Nonetheless, capacity constraints remain in the construction sector and there is concern that labour shortages will become more acute with slowing migration levels, it said. 

Plans by major construction company Fletcher Building to restructure and pull out of “vertical construction” work once it has fulfilled its existing contracts highlight the difficult conditions many firms in the construction sector are operating in, RLB said. 

There remains a high degree of uncertainty in the wake of Fletcher Building’s exit from “vertical construction” work over who will have a sufficiently large balance sheet to lead the construction of high rise and commercial or government buildings, it said.

Demand for social buildings is the top driver of growth in the non-residential construction demand over the past year, according to Wellington RLB director Grant Watkins.

"Added to that, improved confidence in the agriculture sector is flowing through to a recovery in on-farm investment, with growth in demand for industrial and farm buildings as a result. In contrast, demand for accommodation and office buildings have declined over the past year," he said. 

Population growth, while moderating, and tourism demand will underpin many of the longer term trends such as offices for the higher number of white collar workers, and new accommodation buildings in response to strong domestic and international tourism activity, he said. 

Watkins noted that concrete usage had fallen across many regions, including Auckland and Canterbury, pointing to an easing in construction activity in those regions. In contrast, concrete usage had risen in the 'halo' regions of Waikato and Bay of Plenty, indicating strengthening construction activity in those regions.

Auckland continued to lead growth in non-residential construction demand over the past year as a decline in demand for office buildings was offset by much stronger demand for social, cultural and religious buildings, as well as storage and industrial buildings.

Although consent issuance for accommodation buildings fell over the past year, RLB said it expects a recovery given continued capacity pressures in the Auckland tourism sector.

Growth in non-residential construction demand in Waikato was broad-based, reflecting the effects of population growth and recovery in on-farm investment as dairy income improves.

There was a sharp drop in non-residential construction demand in Wellington, driven by reduced demand for new office space and retail outlets.

"Pessimism amongst Wellington businesses in the wake of the new government taking office has the potential to further weigh on investment in new commercial buildings over the coming year," RLB said.

Non-residential construction cost inflation rose to an annual 4.3 percent in the first quarter of 2018, from a 4 percent rate in the fourth quarter, according to Statistics New Zealand data quoted in the report. New Zealand Institute of Economic Research forecasts included in the report say non-residential construction cost inflation will lift to 4.7 percent in the first quarter of 2019, before moderating to 3.9 percent by late 2019 and easing to around 3.5 percent in late 2020 as capacity pressures in the construction sector ease.


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