Around the globe
Australia and New Zealand
General economic overview
Australia and New Zealand both recorded strong growth in 2021 and this is set to continue throughout 2022. Australia’s economy grew by 4.3 percent in the year to Q4 2021 and New Zealand’s grew by 3.1 percent.
Unemployment is at 3.9 percent in Australia and 3.2 percent in New Zealand. With such low levels of unemployment, staff shortages are widely reported and temporary business shutdowns common. Australia and New Zealand had some of the strictest restrictions on interstate and overseas people movements during the pandemic. As both countries are highly reliant on overseas workers, labour shortages have worsened.
Inflation is increasing with higher transport and fuel costs, driving up the prices of common items. Higher housing costs are being driven by record low interest rates and a desire by people to live in better, more spacious accommodation when working from home. Australian inflation jumped to 5.1 percent in March 2022 and in New Zealand it is 6.9 percent. At these rates, the Reserve Banks are lifting interest rates and watching to see whether a high inflation mindset is being established long term.
Higher interest rates will have the effect of dampening growth, especially as the level of mortgage debt has risen. The average new loan value in Australia reached AU$620,000 in December 2021 and AU$800,000 in New South Wales.
Construction sector performance
Total construction reduced in 2020 but recovered strongly during 2021 to close to pre-pandemic levels. Australia and New Zealand are seeing higher construction costs driven by higher material prices, labour shortages and extended projects schedules.
The construction sectors in Queensland and West Australia are operating at full capacity and reduced competition is pushing prices higher. Regional Queensland is especially short of capacity. In Sydney and Melbourne there is some market capacity and contractor pricing remains more competitive than in other states at present. The various state governments have indicated a willingness to delay projects start dates to utilise construction resources more evenly and prevent spikes in costs.
All regions have similar issues with respect to higher materials costs. Prices of steel, electrical cabling, roofing materials, timber, and plastic pipes have all increased, and with lump sum contracts still common the risk to lead contractors is increasing.
Housing construction trade skills have been in great demand, since 2020, when many home-based workers sought renovation works, to the present, where new house construction is strong.
Top-performing sectors
High volumes of transport infrastructure continue with major transport projects underway in most state capitals. These include the AU$12bn Sydney Metro with 85 stations, Melbourne Metro Tunnel AU$11bn, Brisbane’s Cross River Rail AU$5.4bn, Western Sydney Airport AU$5.3bn and Melbourne Airport link AU$5bn. The east coast regional cities of Australia are being connected by the construction of the Melbourne to Brisbane Inland Rail AU$9.3bn, which will move agricultural produce, minerals and other freight.
In Auckland, the NZ$4.4bn City Rail Link is the largest infrastructure project, set to double the rail network passenger numbers and requiring a 3.45km tunnel beneath Auckland City.
Brisbane has been awarded the Olympic Games for 2032 and there will be a new stadium, the Brisbane Arena, built at The Gabba, as well as 30 other new or rejuvenated sports facilities.
The commercial sector saw projects put on hold at the start of the pandemic, but many are now re-starting. A $1bn redevelopment on the Brisbane Waterfront is to be started by Dexus in 2022, and an even larger AU$2.5bn commercial tower project is planned for Central Station in Sydney.
Progress of the environmental agenda
In May 2022, Australia elected a new pro-environment government who have committed to reinstate the department of climate change shut down by the previous government. This is likely to lead to the announcement of multiple new environmental initiatives.
Solar projects are progressing rapidly in Australia with approximately 25GW of PV power now installed and providing up to 10 percent of Australia’s energy needs. The sector is progressing quickly with new projects announced regularly.
A major project being assessed is the Sun Cable project which aims to create the world’s largest solar farm and battery storage facility in the Northern Territory with an undersea cable link to export energy to Singapore. This project is currently in the planning and capital-raising stage, with a planned go-live in 2027.
Across Australia and New Zealand, there is a lot of activity in establishing green hydrogen projects. Fortescue Future Industries recently announced the construction of a plant in Queensland to build equipment which produces green hydrogen including electrolysers and wind turbines. This, in conjunction with a AU$3bn investment in a wind solar and battery farm should help kickstart Gladstone in Queensland as a major hydrogen exporter.
Future outlook
Inflation is likely to increase further in Australia and New Zealand and interest rate rises are likely to dampen domestic demand and take some of the heat out of the housing market. Overall, however, economic prospects look solid.
There are numerous long-term infrastructure projects underway and a significant number of private sector projects. Construction projects in defence, health, education and a resurgence of the commercial sector should keep the construction sector strong.
Over the course of this year, some of the key drivers of inflation should abate as supply chains improve. Steel and other building materials prices should stabilise and return to more normal levels. Tourism and international migration numbers are set to increase again, and this will boost the air travel and hospitality sectors whilst also easing construction skills shortages.
Current tendering condition
Future market outlook
“Australia and New Zealand are seeing higher construction costs driven by higher material prices, labour shortages and extended projects schedules. The construction sectors in Queensland and West Australia are operating at full capacity and reduced competition is pushing prices higher. ”
Matt Billingham, Managing Director WA
Construction market
metrics
Top three regional
construction challenges
of respondents said that rising costs of construction had a significant or high impact on the delivery of construction projects
of respondents said skilled labour shortages had a significant or high impact on the delivery of construction projects
of respondents said that excessive lead times had a significant or high impact on the delivery of construction projects
Regional construction
cost performance
© 2022 Turner & Townsend