Falling bricks

Australia’s construction industry has grown strongly in the last five years as the property, mining and infrastructure sectors have boomed. But the global financial crisis has put a question mark over growth. IBISWorld general manager ROBERT BRYANT explai

By Robert Bryant

Industry trends construction

Australia’s construction industry has grown strongly in the last five years as the property, mining and infrastructure sectors have boomed. But the global financial crisis has put a question mark over growth.

The good times may be about to come to a screaming halt for Australia’s construction sector.

After almost a decade of riding the triple booms of the Australian economy – resources, infrastructure and property – the global financial crisis looks set to smash industry demand.

Across Australia, property projects are falling into the hands of receivers, as developers have watched their funding sources dry up. Mining and infrastructure projects have also been hit hard by the credit crunch. Time to fasten those hard hats.

IBISWorld estimates that the construction industry grew at an average annual rate of 5.9% over the five year period to 2007-08, thanks to increases in fixed capital expenditure by the private and public sector, population and immigration levels.

However, in the last few years, demand for residential constriction was hurt by rising interest rates, which dampened building activity in Australia throughout 2006, 2007 and into 2008. The financial crisis has resulted in a further drop in dwelling approval.

IBISWorld forecasts that this industry will grow at an average annual rate of 3.7% over the five year period to 2012-13. The outlook is dependent on a number of factors that look very hard to read in the current uncertain times. How will the levels of fixed capital expenditure by the private and public sector be affected by the current crisis? What will happen to population and immigration levels? Will falling interest rates give a boost to the housing market?

Despite weaker growth in private and public capital expenditure, revenue for 2008-09 will be supported by a decline in the housing loan interest rates, although a contraction in immigration levels and weaker growth in dwelling approvals will weigh on the sector.

Over the longer term, the big question marks are over dwelling approvals and immigration. Dwelling approvals are anticipated to fall in 2009-10, further damaging the housing market. Although a reduction in the housing loan interest rate should bode well for residential construction activity, revenue is expected to be affected by a strong fall in immigration levels.

In 2010-11, revenue growth is expected to be supported by anticipated growth in both private and public capital expenditure as the economy recovers. This economic turnaround should also help boost dwelling approvals.

Looking out to 2011-12 and 2012-13, revenue growth will be supported by considerably stronger growth in private capital expenditure, although rising interest rates are likely to reduce the volume of dwelling approval late in the outlook period.

 

Key success factors for operators in the industry

  • Ability to expand and curtail operations rapidly in line with market demand. Enables operators to alter the size of labour forces in good time to match the short term cycles, and the ability to hire high quality, productive workers, especially in times of low labour availability.
  • Having contacts within key markets. Enables strategic alliances and relationships with building and construction companies. This is critical for the services component, which contributes a large component of the gross product of the division.
  • Development of new products. Is particularly important for infrastructure projects such as with the development of “smart roads”. Also important will be the ability to pre-sell such developments.
  • Business expertise of operators. Should include excellent project management skills along with time, financial, labour and consortium management skills.
  • Having a good reputation. To meet time, quality and cost specifications aids in tendering for new projects and ensures repeat business.

 

Products and service segmentation

Major market segments

 

IBISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au

 

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