Construction industry future looking confident for 2021

Listening to business leaders over the past few months, the general outlook for 2021 is: despite the challenges, including Auckland’s February lockdown, we should count ourselves lucky.

Time to read: 4 mins

Despite the earlier forecasts of significant losses due to COVID-19, Finance Minister Grant Robertson announced in early February that economic recovery is expected to cost the government $60 billion less than they budgeted for.

Leaving aside the tourism industry, which continues to struggle through border closures, business is buoyant. In the construction sector, consents are at their highest level in 40 years. In the December quarter, they reached a record 11,291, higher than our previous heyday in the 1970s. While we are still playing catch-up given our population has grown substantially over the past four decades, councils and the government are now realising the need to invest in infrastructure like drinking and wastewater, public transport and social housing to address years of underinvestment, which means even more work is likely.

Big commercial projects like Wellington’s One Whitmore Street are also pumping along. This is great news for builders, developers, and all New Zealanders, but it does bring up new challenges that could impact financial results and house prices as we move further into 2021.

 

Supply chain issues

Anyone who works in the construction sector will be familiar with the supply chain issues caused by international disruption to manufacturing. Everything from structural steel to kitchen appliances is now on a waiting list. This won’t only continue to spur skyrocketing house prices. Given the government’s plans to increase social housing development, accelerate big-ticket infrastructure and the redevelopment of schools, supply chain issues will act as a brake on all new development unless they are resolved soon.

The other potential impact will be cost. Delays cause project costs to overrun, and many businesses are already feeling the effects. To avoid seeing their margins eaten into by long waits, it pays contractors and builders to make the time to forecast on a regular basis and price accordingly. Taking into account all the changing factors will pay dividends in the long run.

These costs must be borne somewhere, however, and are likely to be passed on to the customer. We could therefore see major infrastructure projects reduced in scope or housing unaffordability increase if the manufacturing and logistics backlogs continue long into 2021. As a small country, New Zealand risks dropping down the order list further if there is another major disruption to manufacturing, so the challenge will be to meet the demand in a way that smooths out delays and resulting cashflow issues.

 

Labour supply

Government subsidies have helped many construction companies weather the initial disruption of 2020 and boosted financial results. A strong pipeline of work also means many are busier than ever. However, border closures have been affecting businesses’ ability to bring in new workers, including sub-contractors. This has led to a lack of capacity in the system for more new development and, like the supply chain issue, could see timeframes drag out and costs increase.

With unemployment below five per cent, there isn’t a lot of room to recruit from within New Zealand. The government’s border exemption for overseas workers to work on key infrastructure projects is a great way of keeping major developments going, but for the average construction business, 2021 will continue to present ongoing labour supply challenges. This is likely to end only with the widespread rollout of vaccines here and overseas.

 

Land costs and funding

The government’s announcement that it will replace the Resource Management Act with updated legislation is great news for those who have struggled with consent processes and delays, the high cost of development contributions, scarcity of land and lack of co-ordination between councils and other agencies. While the shape of the new legislation is unknown, and the process will take years to work through, it provides a real opportunity to get the settings right for the future.

It will be interesting to see whether banks and the government can also work together to address funding issues that can hold up new developments and infrastructure. For example, banks typically won’t lend the full amount of a new-build home, basing their finance on land only without the guarantee of an existing building. In the financial services sector, there are already indications that this is set to change. For example, PowerFinance is talking about making the process easier via new products and models that enable developers to leverage their own knowledge of how long and how difficult the build is likely to be and provide finance directly to customers.

If we see more new lending and development funding models arise in 2021, this will help support our construction industry to build new homes (and other infrastructure) faster, helping address housing affordability, transport and other issues.

 

The road ahead

Despite the many unknowns and undoubted challenges, it’s worth keeping these in perspective. We’re fortunate compared with many of our neighbours, in that business largely remains strong, we have a steady pipeline of new projects and moves are already afoot to address longstanding barriers such as the RMA.

Looking beyond the supply and resourcing issues of the next 12 months, New Zealand’s construction outlook is very positive indeed.

DISCLAIMER No liability is assumed by Baker Tilly Staples Rodway for any losses suffered by any person relying directly or indirectly upon any article within this website. It is recommended that you consult your advisor before acting on this information.

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