According to the Rider Levett Bucknall (RLB) Infrastructure Forecast report 002 – New Zealand Trends in Infrastructure Construction – infrastructure construction picked up over the past year, partly reflecting demand from strong population growth in recent years.
RLB Director Ed Cook said, “Whilst infrastructure construction has picked up, RLB has also seen an easing in capacity pressures in the construction sector more broadly, which has contributed to a slowing in construction cost inflation.”
He added, “Civil construction cost pressures have continued to ease. Activity indicators such as ready-mixed concrete production signal softer construction activity overall, which in turn is alleviating cost pressures.”
“Softer demand has led to lower prices in civil construction materials. Similarly, steady global steel production has helped ease infrastructure construction cost pressures, which is positive for New Zealand’s construction sector,” he noted.
Building sector remains pessimistic
Prepared by the New Zealand Institute of Economic Research (Inc.) (NZIER) exclusively for Rider Levett Bucknall (RLB), Infrastructure Forecast 002 has seen building sector firms remain pessimistic about the outlook.
NZIER’s Quarterly Survey of Business Opinion shows that the construction sector is still very downbeat regarding the economic outlook. This pessimism reflects continued weak construction demand, with building sector firms reporting a decline in output and new orders. This is weighing on pricing power and, in turn, profitability in the construction sector.
Despite these challenges, the infrastructure investment outlook presents a more positive narrative. Te Waihanga, the New Zealand Infrastructure Commission, reported in its Pipeline snapshot that infrastructure projects totalled $121.2 billion in March 2024. Of this, around $44 billion is estimated to be under construction and $11 billion in procurement.
Transport and water infrastructure projects in pipeline
Key sectors driving this investment pipeline include transport and water infrastructure. The Government announced in March its renewed plans for Roads of National Significance (RONS), and unveiled the September National Land Transport Programme which allocated nearly $33bn for transport projects including the reintroduction of the RoNs, a focus on road maintenance, alongside further public transport initiatives.
The Pipeline snapshot2 produced by Te Waihanga, the New Zealand Infrastructure Commission, shows that infrastructure projects totalled $143.6 billion in value for the September 2024 quarter. Of this, approximately $73.6 billion is under planning, $45.7 billion is estimated to be under construction, and $9.9 billion is in procurement.
Fast-Track Approvals Bill to speed up construction
Future procurement projects are expected to add $0.4 billion to $0.8 billion per quarter until 2027. The total investment for 2024 is projected at $12.1 billion, with $11.6 billion expected in 2025.
Key sectors driving the pipeline include transport (valued at $78.5 billion) and water infrastructure ($25.6 billion). Major projects include the Waitematā Harbour Connections, Auckland Airport expansion, and the Te Kaha Canterbury Arena. Additionally, 149 projects, including 43 infrastructure projects, are expected to benefit from the Fast-Track Approvals Bill, speeding up construction.
Construction cost inflation set to stabilise in 2025
Following the Official Cash Rate (OCR) cuts since August 2024, the 0.2 per cent increase in civil construction costs in the 2024 September quarter saw annual civil construction cost inflation ease to 1.5 per cent from the same quarter last year.
RLB expects construction cost inflation to stabilise at lower levels over the coming year, reflecting the continued easing of capacity pressures in the sector.
Forecasts indicate a continued easing of labour cost inflation and a near-term decrease in oil prices, plus a similar trend for commodity prices over the next few years. Consequently, annual inflation will continue to fall over the coming year.
Drop in interest rates forecast to improve economic conditions
Ed concluded, “We forecast annual civil construction cost inflation will trough at 0.8 per cent at the end of 2024. Beyond that, we expect civil construction cost inflation to gradually pick up to just below 3 per cent over the medium term. “
“The upward revision to our longer-term forecasts reflects the more favourable economic conditions, driven by a decrease in interest rates,” he added.
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