Red-flag warning on cost inflation
Red flags are being raised about construction cost inflation.
They came as the Ministry of Business Innovation and Employment (MBIE) issued an optimistic report,
forecasting growth in the construction industry to steadily rise over the next six years rather than a boom-bust cycle.
But property consultancy Rider Levett Bucknall (RLB) forecasts construction cost inflation to lift to about 4.6 per cent in early 2019 before moderating to 4 per cent by the end of 2019.
‘‘Beyond that we expect annual construction cost inflation to ease to about 3.5 per cent in late 2020 as capacity pressures in the construction sector ease.’’
The exit of Fletcher Building from the construction of nonresidential buildings was increasing uncertainty over the degree of construction cost escalation.
RLB also questioned the capacity of the construction industry. The company’s Wellington director, Grant Watkins, said the fragmented nature of the construction sector meant that building firms were grappling with low operating margins, labour shortages and difficulty accessing finance.
‘‘Many smaller and mid-sized construction companies also face the challenge of cashflow issues, with delays in payment and completion of projects having a shortterm effect on their bottom line.’’
In the 2018 pipeline report, construction and building work is forecast to be worth $42 billion in 2023, three years later than forecast a year ago.
The 2017 report got it wrong on construction growth for that year. It fell by 0.3 per cent rather than growing by 10 per cent as the 2017 report forecast.
Construction growth from 2018-23 is now expected to be ‘‘moderate and sustained’’, the 2018 report says.
It was the sixth annual report since they began in 2013 and was commissioned by MBIE, the Building Research Association of New Zealand (BRANZ) and economic consultancy Pacifecon.
The reports looked at construction work in the residential, nonresidential and infrastructure sectors.
All regions except Canterbury were expected to grow consistently over the forecast period until 2023.
Auckland was a clear winner, with sustained year-on-year growth projected in the building of thousands of homes and multi-unit dwellings, offices, shops, hotels, accommodation and industrial buildings.
Canterbury’s post-earthquake construction boom had peaked and its residential and non-residential construction was forecast to decrease.
Wellington will see strong growth in residential building while non-residential will ease off.
Only three regions will enjoy growth in non-residential construction work in the six-year period, the report said. They were Auckland, Waikato and Bay of Plenty.
The rest of New Zealand was expected to see decreasing nonresidential work in the six years.
Wellington was expected to have the strongest residential building growth of any region, at 65 per cent, to $2.5b by 2023.
In Canterbury non-residential building peaked in 2016 at $2.6b and was expected to fall more, by 41 per cent, to $1.2b in 2023.
Residential building in Canterbury was expected to reduce further until 2020 and remain on a steady path until 2023.
In Waikato and Bay of Plenty non-residential building was forecast to grow by 26 per cent in 2018 and remain at this level until 2023. Residential building in the two regions was expected to grow from
2020 at about 7 per cent a year to
$4.6b in 2023.