Construction may be heading into a downturn, but the jury is out on whether the cost of construction will go up or down.
Government support for the construction sector might not be enough to stop prices dropping, according to a recent report by construction project consultants Rider Levett Bucknall.
But there were multiple factors at play, it said.
Price falls could occur if demand and supply got out of line, particularly for non-infrastructure projects, if the Government spend-up on ”hammer-ready” vertical construction was insufficient. It would not be clearer until the end of May.
Another key factor was falling consumer confidence, which could dent demand in the housing market and see companies vying for simple projects.
But a ”race to the bottom” approach would be unsustainable in the medium term and would lead to company failures.
However, it was also possible construction costs could the other way. One of the biggest risks was ”shrinking capacity,” both in terms of skilled labour and demand.
”The construction capacity has already likely fallen during the lockdown and will likely continue. Skills will be lost and a sharp pickup in demand, particularly in the infrastructure sector, may lead to increases in the medium term,” the report said.
With the loss of temporary immigrant skilled workers and the costs of a quarantine period even when the borders were loosened, overseas skilled workforces would come at a premium.
Extra health and safety requirements could also push costs higher, particularly if there was a second wave of Covid-19, which could delay work.
The cost of materials, which were about 35 to 40 per cent of a large-scale standard project, was also swayed by supply chain disruptions and the exchange rate.
A softer New Zealand dollar, particularly against the Chinese yuan, could force prices up.
Using prefabrication could be more expensive in the short-term, although it would be more efficient longer term.
”Prefabrication needs consistent pipeline to succeed, though, and this has been notoriously fickle in New Zealand,” RLB said.
Also adding to the cost could be contractual arrangements. Procurement models put forward by the Construction Sector Accord for horizontal and vertical social infrastructure would see more ”alliancing, cost plus or open book contracting”.
”These approaches focus more on delivery drivers and time and quality but may come at a price premium,” it said.
Horizontal construction, or infrastructure, is largely funded by the Government, while ”vertical” or commercial construction is largely privately funded but includes some Government-funded social infrastructure, such as schools.
RLB is forecasting that over the next year, a drop of 4 to 6 per cent in cost growth could be on the cards in residential and commercial.
”For horizontal infrastructure and for complex large vertical projects, we anticipate an increase in escalation is more likely of between 2 to 4 per cent.”
That was because of the lack of large project capacity from Tier 1 contractors, Covid-19 productivity and delivery risks in the near term, increasingly fragmented sub-contract layers and less price-focused forms of Government procurement
In the office, retail and industrial sphere, Colliers head of research Chris Dibble said there were also some interesting trends developing.
With many people still working from home, the future of the office market and its demand profile continued to be a main point of interest, and Colliers was doing a survey in this area.
A key matter at present was the fact that the Government was actively considering measures under which parties to a commercial lease would be expected to consider rent concessions, for a period where the response to Covid-19 had a material impact on a tenant.
Justice Minister Andrew Little, who oversees the Property Law Act, is understood to have ruled out rent subsidies or freezes but rate rebates or rent reductions were an option.
In the office and retail space, there was growing pressure for a code of conduct to force landlords and renters facing financial difficulties to negotiate.
Auckland Chamber of Commerce chief executive Michael Barnett has called for an immediate six-month moratorium on lease cancellations and recovery action by landlords.
Other factors that could influence the market in future months include the prospect of a trans-Tasman bubble. New Zealand has many commercial property investors from Australia.
A negative official cash rate could also affect borrowers, although Westpac economists said it would not necessarily lead to lower lending costs overall.
Rising unemployment rates would likely have an impact on office sector space occupancy and absorption rates, but Dibble said it remained unclear as to the extent.
”Record low vacancy rates in many office markets nationally are seen as a key insulator, and will likely assist with future market strength.”
The sector also had a moderate pipeline of supply compared to previous downturns which would help balance demand and supply over the medium term.
Tenants expected to benefit from the situation included those from the Government, IT and health sectors, with ”resilience in insurance, legal and accounting sectors,” Dibble said.
Travel, retail, hospitality and other associated occupiers would feel the greatest challenges.
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