Q4 2023 Australia Report [Sydney]: The Sydney construction market continues to be centred largely around continued government led hospital, school and infrastructure projects, with residential and commercial sectors subdued due to interest rates and inflation, and oversupply issues.
Steady demand continues across aged care, student accommodation, and the private health sectors.
Building approvals, work done, and commencements continue to be offset by the considerable work at hand in the engineering sectors. However, recent reallocation of infrastructure spending has seen +$1bn of future infrastructure spend reallocated which will influence market activity in the medium to long term. WYTBD and the value of projects under construction continue to grow.
Project durations remain extended by approximately 20% beyond general expectation, due, in part, to low resource availability and reduced productivity. Additionally, contract negotiation timelines remain extended as parties struggle to agree on risk allocation and terms.
The volume of available work in hand in the residential multi-unit sector has generally remained steady during the last quarter. However, due to recent legislative changes, the tier 2 contractor pool are generally hesitant to take on residential work. This reduced competition in the sector has led to a level of unpredictability in feasibility and tender pricing. Residential development site transactions continue to diminish as the gap between vendor expectations and market value continues to widen.
As expected, the rejuvenation of existing and aging B & C grade assets has commenced following the influx in premium grade offerings within the CBD and its surrounds. Owners are considering adaptive reuse of these assets to maintain relevance within the current market.
Build to rent has cemented a foothold in the Sydney market, with the first tranche of projects commencing and future projects being considered.
Major projects in the long-term pipeline include Castle Towers, Ryde and Cumberland Hospitals, Powerhouse Museum, and the Metro West Stations including the over station developments located at Hunter Street in the Sydney CBD, Pyrmont, Paramatta and Sydney Olympic Park.
Escalation insights
Tender pricing has surpassed expectations having remained on an upward trend throughout the year and will likely lead to marginally higher than average escalation through 2024. This trend has been pushed by continued higher rates of insolvencies, general labour shortages, high inflation and continued EBA negotiations.
The prolongation of construction programs across all sectors has seen time related preliminaries increase, suggesting that contractors expect the longer durations to continue at least soon.
Additionally, we are seeing evidence that contractors are actively seeking to recoup previous losses through COVID-19 and are less open to risk generally. This has led to increased margins beyond expected industry norms.
Reduced competition is being seen within the residential sector. Contractors and subcontractors continue to be selective as more favourable sectors continue to offer builder’s opportunities to “fill their books” and, due to recent legislative changes, push more risk into the residential development process.
The above factors have offset the stabilisation of material and shipping prices, seen throughout 2023, following the stabilisation of commodity prices in early 2023. It should be mentioned, however, that the growing demand for green materials has seen a premium on such products. This is driven both by client targets for “net-zero” by 2030/2050 and the activation of the new Sustainable Buildings SEPP in October 2023.
Photo: Brookfield Place Sydney
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