The State of Commercial Construction – Q4 2016

Did you know CoreLogic tracks development of virtually all major construction projects in Australia?

Each quarter, a snapshot of the data gauges development activity. The number and value of projects are observed in four stages:

  • The Pipeline
  • Commencement
  • Deferment
  • Abandonment

All segments of the commercial construction sector are researched in these stages, from commercial high-rise office buildings erected in Sydney, to the construction of industrial poultry farms in regional South Australia. Using CoreLogic’s Cordell records, some insight is provided into the health of the commercial real estate and construction sector.

The Pipeline

Graph 1. Source: CoreLogic

Graph 2. Source: CoreLogic

In Q4 2016, the value of commercial pipeline projects proposed was $31.34 billion. This is a 23% increase from the previous quarter. Graph 1 suggests a rebound in the value of development applications over 2016, though activity in this stage is still generally lower than the previous year.

The pipeline of new proposals and approvals awaiting commencement was dominated by civil engineering, which made up $18.63 billion, or 59% of the value of approvals in 2016.

Despite civil engineering being a continually strong source of pipeline activity, the value of proposals in 2016 in this segment were 30% less than in 2015. Civil engineering experienced the largest reduction in value of all the commercial segments over the year.

The reduction in proposed projects in civil engineering may be partially due to constraints on government and private expenditure amid global economic uncertainty. The value of state owned proposals in Civil Engineering fell approximately 22% in 2016. Other segments that lost value over 2016 were commercial (-4%) and industrial (-21%) pipeline segments, where privately own projects make up a higher portion of development applications.

 Graph 3. Source: CoreLogic

Construction

Following approvals at a slight lag, the value of commercial projects moving into construction saw a 52% increase in between Q3 2016 and Q4 2016. Values declined from a peak in Q4 2015, when the NSW state government began construction on a $5 billion Westconnex M5 Airport link, and several LNG projects also came into construction.

Despite the downward trend from this quarter, the value of projects moving into construction in 2016 was 10% higher than the value of projects moving into construction in 2015.

Comparing Cordell observations with the commodity price index reveals that the increase in new mining proposals in Q4 2016 compared with the Q4 2015 quarter could be a lagged response to the value of commodities rising. Since December 2015, thecommodity price index has risen over 39%. 70% of the gains in the commodity price index were made in the December 2016 quarter, suggesting mining projects may experience further growth in activity over the coming quarters.Graph 4. Source: CoreLogic

The slight recovery in the commodity price index over 2016 may explain why mining dominated the value of mining projects moving into construction.

Despite the narrative of Australia transitioning from a mining economy, the Cordell data suggests that the total value of mining construction in Q4 2016 was around $4.88 billion, or almost half of the total value of commercial construction in the quarter.

As with pipeline activity, civil engineering declined in 2016 relative to 2015, by 3%, while construction on industrial projects fell 8% in value.

Deferred

Graph 5. Source: CoreLogic

The quarterly results in graph 5 suggest that the value of projects being deferred is starting to decline following an increase in Q1 and Q2 2016. In 2015, the total value of deferred projects was $1.64 billion. In 2016, that number fell to $1 billion. Increases in construction display a slight lead lag effect for deferrals, so there is the possibility that a portion of the increase in construction projects will lead to deferrals in the future.

Graph 6. Source: CoreLogic

Civil engineering experienced a 41% decline in the value of deferrals when comparing 2016 to 2015, however there was a rapid increase in civil engineering deferral values in Q4 2016 to $335 million. This was largely due to associated civil works with a residential subdivision being put on hold in WA, as well as a large solar farm in WA.

Abandoned

Graph 7. Source: CoreLogic

Relative to 2015, with total abandoned values of $14 billion, 2016 saw low values of abandoned projects at $7.26 billion. Graph 7 highlights an obvious outlier in the value of abandoned projectsoccurring in Q3 2015, where a $7.5 gold coast resort development was abandoned.

Graph 8. Source: CoreLogic

Interestingly, the composition of the value of abandonments shows that once again, the commercial segment is showing some weakness relative to other commercial segments.

This data could speak to a general trend about the changing nature of work in Australia, where the importance of office space increases as technology increasingly contributes to a flat, mobile workforce.

However, 2016 saw a range of uncertainties, particularly in economic cooperation between countries, which may have contributed to conservative decisions around commercial property investment.

For more information on construction segments including apartments and units and individual projects, see our quarterly Construction Market Movement Report, available for download here.

Data Disclaimer: All development data from CoreLogic is based on raw figures where cost estimates are collected per individual project by researchers, directly from developers and project owners, or estimated by the research team.

 

Eliza Owen
Commercial Research Analyst


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About Commercial Research

CoreLogic RP Data Commercial Cityscope is a web-based service. Access is sold by geographic regions (Cityscope areas). There are 25 geographic regions across Australia (three in New Zealand), clustered around the cities of Sydney, Melbourne, Brisbane, Adelaide, Perth, Canberra and Newcastle. Darwin and Hobart CBD centres aren’t covered. Cityscope Areas in NSW and QLD also include lease expiry data for the most complete commercial coverage available. For more information call 1300 734 318.

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