Q4 2023 Australia Report [Brisbane]: Residential construction, both house and land, and apartment developments have slowed considerably as increased construction costs negatively impact the feasibility of projects and rising interest rates have reduced demand and compressed sale prices.
Notwithstanding this, the demand for rental accommodation is at an all-time high and the lack of supply combined with the interest rate increases is exacerbating the situation. Investors have generally withdrawn from the market and build-to-rent is difficult to make feasible. The market desperately requires more labour resources to move to the State, however, housing opportunities are very limited.
The commercial sector remains active with the completion of 895 Ann Street and construction underway on 360 Queen Street, 205 North Quay and the Dexus Waterfront development. The hotel sector remains active due to new hotels under construction at the Queens Wharf integrated resort. The industrial sector remains active as demand for storage facilities and distribution centres remains strong.
Infrastructure remains strong with Cross River Rail, Brisbane Metro and the Inland Rail all under construction as well as two pedestrian bridges including Kangaroo Point bridge linking to the CBD. Significant upgrade works are also underway for the M1 north and south of Brisbane.
Construction costs have risen significantly since 2020 (>30%) which has impacted contractors and sub-contractors on fixed price contracts and as a result there have been several significant insolvencies. This has caused a ripple effect through the market, further impacting contractors that are not insolvent, but the loss of key sub-contractors results in financial stress on their affected projects.
The State Government is in the process of awarding up to 15 major hospital projects ($10bn) that is likely to put pressure on an already stretched pool of resources. This is likely to result in further construction cost increases in 2024 commencing with structural trades and progressing through the balance of the trades in 2025. In addition to the health program there is also a corrections program of $5bn and an education program of $3bn all to be followed by the Olympic Games venues and infrastructure.
As a result of high demand and lack of supply for resources productivity levels have fallen significantly and contractors are increasing project durations due to lower productivity. As a result, there have been increases in time related preliminaries and the pricing of risk through contingencies and margin.
Escalation insights
The rate of increase in escalation in 2023 has slowed due to the downturn in the residential sector however we expect this to be short-lived with the proposed health, corrections and education programs to be followed by the Olympic Games spend. These programs will test market capacity for tier 1 contractors, tier 1 sub-contractors and particularly the availability of skilled resources for key trades including formwork, ceiling and partitions, joinery, building services and vinyl.
The shortage of skilled resources remains the major challenge that will drive construction costs over the next decade unless there is a significant influx of workers from interstate or overseas. Loss of productivity and insolvencies also remain a major challenge to the industry.
Supply chain issues have eased with reduced freight costs and the significant increase in contraction costs over the past two years. Rising interest rates have seen a slow-down in activity in the residential sector, particularly apartments, although the right product in the right location is still in demand.
Photo: 360 Queen Street, Brisbane
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