Opportunity for strong players to increase market share
With rising costs and labour shortages eroding margins and adverse weather conditions delaying project completion, 2022 was a perfect storm for the construction industry. The Ai Group and HIA Australian Performance of Construction Index (PCI) revealed a contraction in activity from May 2022 to November 2022. Sector insolvencies also increased 75% from 2021, the majority of which were recorded in the second half of the year.
In 2023, we expect supply side pressures to ease, with input prices and labour demand both stabilising. While overall activity will be more subdued, pockets of demand will create growth opportunities for participants in a strong position to take advantage:
- Commercial: Office and retail property investment have remained resilient, with commercial assets staying attractive. This trend is expected to continue in 2023, with a one-off boost in demand linked to above-station rail developments.
- Residential: This sector suffered the most from the adverse conditions of 2022 and the challenges are likely to continue, with low demand and a lag of unprofitable projects still to run through. There may be green shoots in apartment developments however, after around $5.9bn of approved apartment buildings were shelved in 2022. The Build-to-Rent trend is also gaining momentum, as demand picks up from returning international students, record high rents and costs stabilising, providing developers and institutional investors with more confidence.
- Infrastructure: While government expenditure and renewable energy investment continues to fuel demand, supply side and productivity pressures are creating challenges, as seen by the high-profile collapses in the sector. Further consolidation is likely, as better performing contractors take market share from failed competitors. These factors, together with discussions on improving risk allocation, will help boost productivity and create a more sustainable industry.
Risk management will continue to be a critical focus for developers, with further insolvencies likely across the sector. Although costs are expected to stabilise, contractors with a large pipeline of low margin or fixed price contracts will continue to face challenges.
This year contractors should pay close attention to counterparty due diligence at the start of projects and throughout. They should also look to tighten working capital management to reduce exposure and build resilience. Critical assessment of growth opportunities from failed contractors will be key. Financial and delivery risks in entering new types of projects, or taking over partially-complete projects, will remain high.