Construction activity indicators point to a rebound in activity under Alert Level 1

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According to the Rider Levett Bucknall (RLB) Forecast 95 report – New Zealand Trends in Property and Construction – activity indicators point to a rebound in construction activity as New Zealand moves down the alert levels and restrictions are relaxed.

Prepared by the New Zealand Institute of Economic Research (Inc.) (NZIER) exclusively for Rider Levett Bucknall (RLB), Forecast 95 found that NZTA heavy vehicle traffic count shows a strong rebound in heavy vehicle flows in the wake of the move to Alert Level 1, with transport activity up to around 90% of the levels prior to the outbreak in many main centres.

Positive signs in the construction industry

RLB Director, Grant Watkins said, ‘Given heavy vehicle flows tend to reflect underlying demand in the economy as it captures the volume of freight being moved around, this rebound points to a recovery in demand in recent weeks.’

He added, ‘This is a positive sign for the construction industry following the government’s enforced Alert 4 lockdown of the economy in late March and subsequent shutting down of construction sites, which greatly impacted our industry. As we slowly moved down the alert levels and restrictions were relaxed, we are seeing construction demand slowly pick up.’

According to RLB, consent issuance provides another good indication of the pipeline of construction activity. Not surprisingly, the lockdown did disrupt the consent issuance process, with issuance falling in March and April. These declines halted the recent run of strong issuance in the preceding months.

Demand for townhouses and flats remains strong

Whilst the overall number of issuances have fallen, the demand for multi-unit dwellings such as townhouses and flats remain particularly strong, reflecting the shift towards medium and high-density housing. This trend is likely to continue given the scarcity of centrally located land in the main centres. Nonetheless, standalone houses remain the most popular form of new dwelling in New Zealand.

In contrast to residential construction demand, there had been some signs of easing in demand for non-residential construction, which faced headwinds from a tightening in access to finance, with the RBNZ survey of credit conditions showing banks’ reduced appetite to lend for commercial property, corporate and institutional and agriculture sector.

Decline in non-residential construction

Grant continued, ‘Despite the decline in non-residential construction demand, construction costs appear to be holding up. RLB expects on balance, a sustained period of soft construction cost escalation. The forecast annual construction cost inflation is to ease below 2.5% by the end of this year, and track just over 2% through to 2022.’

‘Beyond that, as supply adjusts to the weaker demand, RLB expects a pickup in construction cost escalation towards 3%,’ he said.

Long-term effect on universities unclear

Impact of the Alert Level 4 lockdown includes a sharp drop in demand for social buildings, education facilities and retail outlets. The short- and long-term effects on universities resulting from the significant reduction in international student numbers are still to be determined, and will depend to some extent on how long border restrictions are in place.

The lockdown has seen people adapt to working from home and shopping online. As restrictions were relaxed, people returned to work and shopping malls, but many have now chosen to work from home for at least part of the week.

Working from home changing demand for office buildings

According to RLB, whether these changes in behaviour will become permanent will determine longer-term demand for office buildings and retail outlets. The factors driving demand for office space is mixed. While some businesses may look to cut costs by requiring workers to remain working from home, or in cheaper and less central locations, some may require more office space given social distancing preferences and risks of contagion from activity-based working.

Reduced commuting into the central business districts may shift demand for retail space out into the suburbs. Although banks are more cautious about lending in the agriculture sector as a result of the upcoming implementation of increased capital requirements, the increased global demand for New Zealand dairy, meat and fruit should drive demand for new farm buildings over the longer term.

Building consents by region

Grant concluded, ‘Non-residential construction demand has fallen sharply in Auckland and Canterbury over the past year. In Auckland, this was largely driven by reduced demand for retail outlets, social buildings and education facilities.’

Non-residential construction demand in the Bay of Plenty was also lower over the past year, reflecting broad-based weakness across the sectors. Border restrictions will have a negative impact on its tourism sector. However, there should be some offset on activity in the Bay of Plenty from increased global demand for fruit exports, which the region, as a key producer of kiwifruit, should be well-placed to meet.

In contrast, non-residential construction demand increased in Otago over the past year. This increase was on the back of stronger demand for accommodation and retail outlets. Given tourism makes up a substantial proportion of the Otago economy, we expect border restrictions will have a negative impact on non-residential construction demand over the coming year.

RLB New Zealand Trends in Property and Construction Q2 2020

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