Looking ahead over the next five years, the construction industry is expected to move towards water and energy projects, sustainability objectives and increased housebuilding
At a recent webinar hosted by CDE, Oxford Economics Australia head of construction & infrastructure Adrian Hart gave an overview of the current state of demands on construction materials in Australia and forecasts for where investment is expected to move in the coming years.
With an overall positive outlook, the demand for construction materials in the Australian market is expected to continue to grow over the next five years, though the drivers of investment will evolve, Hart says.
“Growth in investment in Australia is shifting from transport to utilities, and in both Australia and New Zealand, we’re seeing a strong pickup in housing,” he says.
“There’s a lot of uncertainty, and that’s presenting risk for global supply chains, but we are seeing higher levels of construction activity coming through, which will be sustained over coming years.”
What is driving changes in investment include an increased interest in sustainable practices and products and the passing of the peak of transport investment as utilities and energy generation take over.
“There are a range of policy objectives that governments are trying to achieve over the next few years, and this includes water security and meeting climate targets,” Hart says.
“We’re talking about big dam projects, defence, energy, water and manufacturing. The investment required for the Olympics will be a big driver of growth, particularly in Queensland.”
He says there will be greater investment from the private sector as the market moves away from the large government-funded transport projects in capital cities to energy, water and defence projects in more regional areas.
“In recent years there’s been a transport boom with road and rail investment, particularly in New South Wales and Victoria,” Hart says.
“These were the states that missed out during the resources boom in Australia, so when the resources boom finished around 2014, the Australian dollar fell, industries in New South Wales and Victoria benefited, and people started to invest in these states.
“Now, the question is, what happens next?”
Shift in investment
Hart says the economic focus regarding infrastructure moving forward is starting to shift towards large-scale investment in utilities, water security, energy generation and house building.
Australia is looking to expand its renewable energy capabilities to gradually phase out coal power stations and hit an emission reduction target of 43 per cent by 2050, while utility companies are expanding and renewing networks to address expanding populations, ageing assets and environmental pressures.
For example, Sydney Water’s capital investment program outlines an investment of around $34 billion on infrastructure and operational strategies through to 2050 to address population growth, ageing assets and environmental pressures.
In Queensland, a new dam wall has been proposed for Paradise Dam to secure water capacity for the Bundaberg region, while in Victoria the Marinus Link is underway, connecting clean energy resources in Victoria and Tasmania.
“There’s a lot of investment in transmission networks to connect new renewable energy zones that are going to be the mainstay of generation in Australia,” Hart says.
“Eventually, we will see coal fired power stations close as they become uneconomic.
“There’s also a big wave of water projects coming through, because we need to catch up on what we should have been investing in water and sewerage for a long period of time. This will be revealed in terms of big distribution upgrades, new wastewater treatment facilities and desalination plants like Belmont near Newcastle.”
He flagged that in mining there will also be ongoing investment in rare earths and other minerals needed to support new technology, while in the building construction market data centres will be a key area of investment.
“We expect data investment activity to continue to rise significantly in Australia in coming years,” he says.
“This is going to support the whole non-residential building market, because traditional markets in non-residential building, retail, commercial and industrial, are fairly flat.
“Housing has been probably the worst performing sector in Australia in recent years. We haven’t built enough housing to keep up with population growth, but a lot of policy initiatives have taken place in recent years to try and stimulate housing activity and get it moving again. We are starting to see that come through in the approvals numbers, and it’s this strong growth in housing a bit similar to what we saw in the in the mid- 2000s and 2010s.
“Some states are ahead of others because they are at different points in the housing cycle. WA and Queensland are probably a bit more advanced on this, but New South Wales and Victoria and other states are also picking up, and there will be a fairly uniformly strong performance in housing activity in coming years.”
Challenges
Along with ongoing labour shortages, the amount of infrastructure required to be built in the coming decade will create strong wage pressures as skilled workers are in demand.
“We expect wages to continue to grow in the construction industry faster than inflation,” Hart says.
“It’s those real increases in wages that, over time, have shown that construction costs tend to rise over time, and could be a big driver of costs in [construction material] businesses.”
The solution to that is productivity he says and investing in new technology and equipment.
“Giving people the ability to do more with their time is how we’re going to get through a lot of the market capacity challenges we will see over the next five years,” Hart says.
“Technology is a ticket towards productivity. Keep an eye out for the federal budget this year to see what incentives they have. I think the government will want to incentivise the private sector to invest more, and particularly in productivity enhancing investment.”
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