Construction cost escalation forecast across Australia and New Zealand

July 10, 2018.

According to RLB’s 3rd Quarter 2018 Oceanic Report, the current volume of work being undertaken across Australia is fuelling construction cost pressure.

Ewen McDonald, RLB’s newly appointed Oceania Chairman said, ‘Both shortages of skilled labour and rising material costs are adding pressure on costs across the country. Over the past five years we have seen the economy experiencing strong building growth (4.5% p.a. compounding) together with engineering (excluding heavy industry & power) growth of 3.5% p.a. (compounding).’

‘With above GDP growth in the residential, non-residential, roads and rail sectors over the past five years, pressure on labour availability is seeing escalation rates generally increasing across the country during 2018 over 2017 levels,’ he added.

Large new projects coming to Adelaide
RLB’s Oceania Report noted that Adelaide is experiencing increases in both material supply and labour costs associated with concrete, reinforcement and formwork trade. There are many new large projects anticipated to enter the market this year including the defence sector’s next phases of Air 7000, the expansion of the ASC Site for both the Offshore Patrol Vessel and Frigate and the Submarine projects, which should provide an abundance of work for tier 2 and tier 3 contractors. It is anticipated that price increases for both material and labour costs will occur, as both head and trade contractors become busier.

Non-residential work increasing in Brisbane
Brisbane escalation almost halved in 2017 from its 2016 peak of 7.2% per annum. Looking forward, the 2018 forecast appears very stable at 3.0% p.a., with a movement to 4.1% p.a. from 2019 onwards. The increase from 2019 results from the anticipated commencement of a number of significant projects within Brisbane. The State Government has announced major hospital expansions at Logan and Caboolture, two inner-city vertical schools, expansion of Capricornia prison (Rockhampton) as well as the Townsville stadium that is currently under construction, all adding to the increasing volume of non-residential work being undertaken.

Business confidence and activity increases in ACT
The Australian Capital Territory is enjoying high levels of business confidence as activity increases in infrastructure and related urban renewal projects. Subsequently, an increase in escalation rising to 3.5% is forecast over the 2018 period. However, we expect this to stabilise over to next few years.

Darwin market still weak
The current market in Darwin is generally weak with spare capacity at all levels of the industry and with very low levels of private investment. The few Government projects on offer are bid very competitively keeping a lid on price escalation.

Gold Coast hotel developments on the rise
According to the RLB Oceania Report, the Gold Coast economy has now plateaued following the very successful hosting of the Commonwealth Games. The housing, apartments, industrial and civil sectors have declined and retail has peaked. New hotel developments are on the rise with the Jewel now under construction, two new hotel projects about to commence construction and at least three new proposed hotel developments in the planning phase. Overall, there is an insufficient volume of new projects on the Gold Coast to push the future tender price index higher than forecasted CPI which is in the 2.0%-2.5% p.a. range for 2018.

Victoria experiencing record population growth
Ewen continued, ‘The Victorian economy is experiencing above national levels of growth, fuelled by record population growth. General escalation in Melbourne is forecast to be relatively stable over the next three years at slightly above inflation rates.’

‘While construction in the residential sector appears to be easing, investment in non-residential buildings and infrastructure have been ramping up. Government infrastructure investment is forecast to average $10.1 billion per year for the next four years, more than double the previous 10-year average (FY 2006 to FY 2015). This will lead to pricing pressures seeing higher rates of escalation, offset by the reduction of apartment volumes,’ he said.

Perth showing signs of economic recovery
The Perth economy is showing signs of plateauing from the bottom of the ‘boom/bust’ cycle with the early emerging signs of an economic recovery. There are signs that the second half of 2018 will see slightly higher construction volume on the back of some confidence returning to the Perth market but significant escalation increases are not anticipated until 2019.

Strong level of development approvals for Sydney
For Sydney, the outlook for the remainder of 2018 continues to remain positive for all sectors due to the strong level of development approvals in the last quarter of 2017. Despite increased opportunities, contractor’s margins remain tight and competitive.

The availability of labour resources to all sectors of the construction industry continues to be an issue. From April 2018, material price rises have occurred in concrete, brick, cement, formply, selected steel products and residential windows. These increases are in the range of 2% to 10%.

Townsville activity continues in civil infrastructure
With Townsville being the largest regional centre in Queensland, the port, defence base and university sectors saw continuing activity. For conventional construction activity (outside civil infrastructure) there remain challenges ahead. The market remains competitive; with current and pipeline projects thinly spread compared to years past. Competitive rates are being seen throughout the majority of trades.

New Zealand escalation forecast to fall by 50%
Ewen said, ‘Across New Zealand, escalation forecasts for 2018 remain elevated with all regions forecasting TPI increases above current CPI levels (2.0% per annum). Moving forward, expectations are that escalation will decline in all cities. Auckland and Wellington’s escalation is forecast to fall 50% by 2021 to 3.0% p.a., while Christchurch’s escalation will remain constant at 2.0% p.a. from 2019 onwards.’

‘Construction sector firms continue to report acute labour shortages. Skilled labour is particularly hard to find, although shortages have eased slightly from levels seen in mid-2016. Migrants have helped alleviate labour shortages, with the number of technicians and trades’ workers moving to New Zealand on a work visa in recent years. Planned reductions in migration may impact on future escalation rates if skilled trade labour demand is not met,’ he concluded.

Download PDF: RLB Oceania Construction Market Intelligence Report Q3 2018

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About RLB

With a network that covers the globe and a heritage spanning over two centuries, Rider Levett Bucknall is a leading independent organisation in cost management and quantity surveying, project management and advisory services.

Our achievements are renowned: from the early days of pioneering quantity surveying, to landmark projects such as the Sydney Opera House, HSBC Headquarters Building in Hong Kong, the 2012 London Olympic Games and CityCenter in Las Vegas.

We continue this successful legacy with our dedication to the value, quality and sustainability of the built environment. Our innovative thinking, global reach, and flawless execution push the boundaries. Taking ambitious projects from an idea to reality.