According to Rider Levett Bucknall’s (RLB) Forecast 111 report – New Zealand Trends in Property and Construction – there are emerging signs of recovery in construction demand.
While the sector’s outlook appears positive, construction demand remains weak. Building sector firms report optimism about the general economic outlook, even as they face subdued demand within their businesses during the December quarter.
RLB Director Grant Watkins commented, “Consent issuance suggests a tentative recovery in construction demand, but the pipeline of building work remains subdued. Construction firms are now more positive about the outlook ahead.”
“Construction cost inflation has continued to decline, easing capacity pressures within the sector. While cost pressures are reducing, pricing power remains weak and profitability in the construction sector remains subdued. These trends suggest that construction cost inflation may further decline over the coming year,” he stated.
Construction activity trends
In the September 2024 quarter, New Zealand’s construction activity continued to decline, with residential construction falling by 3.5% and non-residential construction dropping by 2.8%. This was particularly evident in major North Island cities, including Auckland, Waikato, and Wellington, due to the impact of prior interest rate hikes on construction demand.
Concrete sales, particularly in Wellington, reflected this downturn, with ready-mixed concrete production decreasing by 7.3% over the past year. Public sector cutbacks further eroded confidence and investment in construction.
Despite these challenges, Auckland remains a critical driver of construction activity and has shown some signs of recovery, particularly in standalone housing consents. However, there remains caution regarding large-scale developments. The government’s introduction of the Residential Development Underwrite (RDU) aims to alleviate financing barriers for developers and potentially speed up recovery in key areas.
Looking ahead, while dwelling consents plateaued at 33,609 (12% lower than the previous year), there are signs of recovery expected, especially in Auckland, supported by lower interest rates and improved labour availability. Non-residential construction, particularly in the industrial sector, continues to face challenges, though recovery is expected in regions like Wellington and Canterbury.
Outlook for construction activity
The near-term outlook for construction in New Zealand remains weak, but there is optimism for a recovery in demand post-2025, driven by lower interest rates. Recent data from the NZIER Quarterly Survey of Business Opinion indicates that 29% of building sector firms expect improved economic conditions, a notable shift from earlier expectations of deterioration.
Although firms are more optimistic, weak demand continues to place downward pressure on prices and contribute to ongoing profitability challenges. However, easing cost pressures indicates a potential reduction in construction cost inflation over the next year.
According to the New Zealand Infrastructure Commission’s September 2024 report, the value of infrastructure projects stands at $143.6 billion, with $45.7 billion currently under construction and $9.9 billion in procurement. Notably, 17 mega-projects worth over $1 billion comprise 15% of this pipeline. The infrastructure pipeline saw a $3.4 billion decline compared to the previous quarter, mainly due to reduced project values and project completions.
Transport infrastructure dominates the pipeline, totalling $78.5 billion, followed by water and energy projects at $25.6 billion and $9 billion, respectively. Around $13.7 billion is projected to be spent in 2025, with three-quarters of the pipeline expected to be used within the next six years.
Transport spending is expected to remain significant, exceeding $4.5 billion annually until 2030, while water infrastructure spending is expected to range between $1 billion and $2.4 billion annually until 2032 before declining.
Trends in building consents
While consent issuance for office buildings sharply increased for the year ending November 2024, this was offset by broad declines in consent issuance for storage buildings, education facilities, accommodations, and retail outlets.
Overall, demand for non-residential construction remains soft.
Regional building consent trends
In the past year, Waikato and Bay of Plenty saw significant declines in non-residential construction demand. In Waikato, this drop was largely due to a substantial decrease in demand for storage buildings, driven by broader economic weaknesses despite recovering global dairy prices. In Bay of Plenty, reduced consent issuance for healthcare facilities and retail outlets contributed to the decline in non-residential construction.
Conversely, Wellington and Canterbury have seen increases in non-residential consent issuance. Despite challenges from public sector cutbacks, Wellington’s growth is driven by rising demand for office and industrial spaces. Recent surveys indicate a rebound in business confidence in the region, bolstered by lower interest rates, which are expected to boost demand further.
In Canterbury, lower interest rates have contributed to increased demand for non-residential construction, particularly for social and industrial buildings, driving robust growth in consent issuance over the year.
Non-residential construction costs
According to RLB, non-residential construction cost inflation eased further in September 2024. A 0.7% increase over the quarter brought annual inflation to 3.2%.
This easing of non-residential construction cost inflation reflects a reduction in capacity pressures, with 87% of building sector firms citing weak demand as the primary constraint on their business in the latest NZIER Quarterly Survey of Business Opinion.
Grant Watkins concluded, “We forecast non-residential construction cost inflation to continue easing over the coming year, given the weak near-term pipeline of non-residential construction.”
The NZIER QSBO also points to ongoing weak pricing pressures in the building sector. However, with expectations that non-residential construction demand will pick up after 2025, we anticipate this will support a recovery in non-residential construction cost inflation in the longer term.
RLB forecasts annual non-residential construction cost inflation to ease to around 1.5% over the coming year before rising again the following year.
FURTHER INFORMATION:
