Tag Archives | construction

Home construction remains strong, non-residential slips

Warning: The item below contains a lot of dollar figures & percentages on work completed in the construction sector, hopefully put in perspective.

First, the positive figures for the 12 months through to the June quarter: all work put in place was up $2.6 billion on the previous 12 months to $20.6 billion. Work on new homes was up $1.7 billion to $11 billion, and all residential work was up $1.9 billion to $13.28 billion. Non-residential work rose by $700 million to $7.3 billion.

Work put in place during the latest quarter totalled $5.16 billion – $2.79 billion for new homes, $567 million for other residential work, $1.8 for non-residential.

Now, the percentage shifts.

After strong completion rates right through 2016, building work put in place nationally slumped (comparatively) in the March quarter of this year and growth was low in the June quarter.

Non-residential building work completed in the March quarter was up 5.1% on that quarter in 2016, but fell to 0.2% growth in the June quarter.

Work on new homes rose by 18.9% in the March quarter last year, and then by 26.4%, 27.6% & 24.1% in the next 3 quarters. This year, the growth rate wasn’t sustained but was still positive, falling to 14.8% in the first quarter and to 8.9% in the second.

Those shrinkages took total growth in the first quarter down to 10.9%, and to 4.9% in the second quarter.

On an annual basis, the fall is less visible because the rates of construction are still being held up by the 2016 growth. In the residential sector, after strong growth in 2014 (33.5% in the June 2014 quarter), growth tumbled in mid-2015 to a 9.3% increase in the second quarter and 6.6% in the third. The annual growth rate slipped to 15.9% in the June 2016 year, but rose to 18.4% in the latest 12-month period.

Now, in dollars.

In dollar terms, total work put in place has risen to a new level over the last 4 quarters, from a range down at $3.7 billion in the June 2014 quarter, climbing to $4.9 billion in the June 2016 quarter. Over the last 4 quarters, total work put in place fell just short of $5 billion ($4.935 billion) in the March quarter but was otherwise over $4 billion, reaching $5.157 billion in the latest quarter.

Non-residential work, down at $1.4 billion in early 2015, climbed above $1.6 billion/quarter in 2016, reaching $1.94 billion in the final quarter of the year. This year, non-residential work slipped to $1.68 billion in the first quarter but rose to $1.8 billion in the second.

Work on new homes has been above $2.7 billion/quarter for all the last 4 quarters – $2.8 billion in the December quarter & $2.79 billion in the June 2017 quarter. Annually, that has seen work on new homes rise by $1.7 billion in the last 12 months to $11 billion, and all residential work (including additions & alterations) rise by $1.9 billion to $13.28 billion.

Canterbury winds down, Auckland ramps up

Canterbury’s post-earthquake residential rebuild kept total construction there above $1 billion for every quarter since June 2014, but the total fell to $998 million in the latest quarter.

In Auckland, total work put in place went over the $1 billion mark in the September 2013 quarter, went over $1.5 billion in March 2016 and fell just short of $2 billion ($1.985 billion) in December. This year, it was down to $1.76 billion in the first quarter and back up to $1.95 billion in the second quarter.

Attribution: Statistics NZ tables.

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Construction pipeline report continues to show high optimism bias

The annual national construction pipeline report acknowledges an optimism bias in forecasting, then doesn’t seem to take it into account.

In an election year, in particular, optimism about funding is a critical factor for all construction, but the Reserve Bank has had some success in dampening housing expectations and Australia’s Big 4 banks have been clawing money back to meet regulatory expectations of bank funding strength.

International expectations are anybody’s guess, depending largely on the reactions & impulses of one man, US President Donald Trump.

And a highly important factor in New Zealand construction – the level of immigration – depends on who wins the election. A government led by Labour is likely to see cuts, and a lift in Australia’s mining sector will result in a migration swing back to that country.

Those economic factors don’t filter through to the pipeline report, resulting in an even greater optimism bias this year than in the 4 previous reports.

The report, commissioned by the Ministry of Business, Innovation & Employment, is based on building & construction forecasting by BRANZ, and Pacifecon NZ Ltd data on known non-residential building & infrastructure intentions. It has a 6-year horizon.

Despite the absence of critical factors, the report does contain findings. These are its main 6:

  1. The national forecast shows a higher peak with a longer duration than previously forecast
  2. Dwelling unit consents are forecast to reach a new peak for the next 5 years (34,500)
  3. Growth in non-residential buildings is forecast to continue for longer and to a higher level than previously forecast
  4. Growth in building & construction in Auckland is expected to be sustained for a longer time than in other regions
  5. Dwelling consents in the rest of New Zealand grew 27% in 2016, and
  6. House sizes have plateaued & decreased in some regions in the last decade.

Earlier story:
27 July 2016: $200 billion construction pipeline forecast for next 6 years

Attribution: Pipeline report & release.

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Fletcher Building cuts earnings guidance by $110 million

Fletcher Building Ltd has dropped its range earnings guidance for the year to June by $110 million (before interest, tax & significant items).

The range when chief executive Mark Adamson (above) delivered the half-year results on 22 February was $720-760 million. The range now is $610-650 million.

Mr Adamson said today: “The revised guidance is due to the identification of additional estimated losses & downside risk in the buildings & interiors business unit of the construction division.

“A thorough review of the buildings & interiors business & projects began in late calendar year 2016 and led to new management & governance processes. A significant loss was recorded for buildings & interiors in the half-year results based on the best estimate available at the time. However, management has now identified an increase in the estimated loss on the major construction project which was referenced at the time of the announcement of the first-half results, and the identification of downside risk on other buildings & interiors projects, with the majority being a provision for expected losses on one other major project….

“For reasons of client confidentiality, we will not name the projects. We expect one of the projects to complete within the next few months, and the other is targeting completion in the 2019 financial year.”

The second project had been expected to make a $10 million ebit contribution to 2018 earnings.

Mr Adamson said all other business units within the construction division had continued their strong trading performance. “However, taking into account the new estimates of profitability for the commercial construction projects, it is now expected that the construction division as a whole will report a loss at the ebit level for the 2017 financial year.

“Trading for Fletcher Building’s other divisions remains in line with expectations previously discussed in the first-half earnings commentary.”

Specific questions

In a Q&A section of his release, Mr Adamson said: “The major projects involved are large & highly complex. Project reports & reviews received since the half-year results announcement have indicated significantly higher costs to complete the projects, and have also enabled improved quantification of remaining risks. In addition, the detailed review by new management has led to downward revisions in expected profits on a number of smaller projects.

“The most significant issues relate to complexity in design, subcontractor management and building programme delivery on key projects. This has led to an extension of project timelines and increase in project resource requirements & costs, relative to original budgets. The extent of this has become more apparent since the half-year announcement as new management & processes have bedded in.”

As a result of this debacle, Mr Adamson said Fletcher Building had appointed a chief operating officer for the construction division, a new head of risk & governance in the construction division, and a new general manager of the buildings & interiors business unit would start shortly. We have new finance leadership & processes along with the recent implementation of a new financial management reporting system. The criteria for bidding major construction projects have been made more stringent, and internal review processes for proposed & existing projects have been strengthened. We believe these changes will drive improvement in future periods.”

Would the update also impact the outlook for financial year 2018? Mr Adamson said: “Fletcher Building does not provide guidance beyond the current financial year, however we have tried to be conservative in estimating the losses in the current construction book, and trading in our other divisions remains in line with our expectations.”

Mr Adamson said he wouldn’t discuss potential claims: “We do not discuss matters related to claims publicly. Whenever we have issues on a construction project, we endeavour to work constructively with our clients & other relevant parties to resolve them. Where we have a robust basis for a claim we will consider our position carefully.

Do these issues point to a systemic issue in your construction book? “We don’t think these issues are systemic because they are primarily related to programme & design challenges on a small number of major projects. We are very cognisant of pressure on labour & sub-contractor resource in the New Zealand construction industry at present, and need to ensure we manage this effectively in current projects & future bids. We believe that the changes we are making to strengthen our governance, management processes & bidding criteria and review & approval processes will enable improved performance in the future.

What proportion of the contracts in the construction book are fixed price? “Our current construction backlog is about $2.7 billion. Of this, about $1.5 billion is in the buildings & interiors business. All but one of our major projects underway in buildings & interiors is either a ‘fixed price lump sum’ or ‘guaranteed maximum price’ contract. This is standard in the commercial construction industry. We do not believe the issues we have uncovered relate to contract type, but rather challenges related to programme & design complexity in key projects.”

Has the growth in the buildings & interiors business been driven by a deliberate strategy to boost volume growth for the building products division? “Building products operates as an independent division to construction and supplies product to the construction division’s projects on arm’s length terms. We estimate that sales from building products businesses to buildings & interiors make up less than 5% of total building products revenue.”

Despite the reduction in forecast cashflows from the construction division in financial year 2017, Mr Adamson said the company remained comfortably within its banking covenants & target debt metrics and expected to continue to do so: “Based on the updated guidance range, we expect the ratio of net debt:net debt + equity to be around 34% at the end of financial year 2017, and the ratio of net debt:ebitda to be about 2.4 times.”

Earlier story:
19 March 2017: Fletcher Building to explain construction loss Monday morning

Attribution: Company release.

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Intensification forecast to take bigger housing share despite greenfield expansion

Forecasting in the third National construction pipeline report is for a steady growth of multi-unit housing’s share of the residential market in Auckland over the next 5 years, even though developers have won approval for a high proportion of new housing to be in greenfield special housing areas.

The statistics are hard to work with – Statistics NZ has started producing monthly building consent figures in 3 more intensive categories (apartments, retirement village units and suburban townhouses or flats) nationally. Though a high proportion of them are in Auckland, and Auckland’s share of the more intensive categories is likely to remain high, the pipeline report focused on a forecast for standalone housing in the region.

2 factors will determine whether intensive housing continues to grow its share of the market – migration and the unitary plan for the region.

Less restrictive rules on intensive housing are a likely outcome of mediation under the guidance of the unitary plan hearing panel, but the migration picture is complex. High numbers of Chinese & Indians have been migrating to New Zealand, while NZ citizen departures have slowed and the number of citizens returning from Australia has jumped. Changes in economic conditions in Australia & China could bring sharp reversals in migrant numbers and in the money dedicated to housing.

Statistics NZ’s monthly report on building consents showed 8300 housing consents (of all types) in the Auckland region in the June year, and 7200 consents nationally (but probably mostly in Auckland) for more intensive housing.

The pipeline report is jointly prepared by Pacifecon & BRANZ for the Ministry of Business, Innovation & Employment to give the building & construction industry a forward view and assist planning, project co-ordination & resourcing.

It covers residential & non-residential projects planned by the Government, local government & the private sector for the 6 years ending December 2020.

Ministry building systems control manager Chris Kane said: “This third report validates our previous ones. Actual data from 2014 shows our forecasts are reasonably accurate. That’s important because the national construction pipeline gives the building & construction sector reliable information to base decisions on, with confidence.”

Auckland was the fastest growing region by population from 2006-13, increasing 8.5% to 1.4 million in the 2013 census. The report’s authors said: “Residential building demand in Auckland has played a significant role in reversing the national slowdown in residential construction that occurred after the global financial crisis in 2007-08. The value of residential construction in Auckland is predicted to grow by 126% from 2013 ($4.2 billion) to a peak in 2018 ($9.6b billion).”

The forecast shows 94,400 new dwelling consents in Auckland between January 2013-December 2020, up from the 2014 forecast of 70,800 from 2012-19.

Over 53,500 detached homes are forecast to be consented in Auckland from 2013-20, peaking at over 8200 in 2017. The number of multi-unit dwellings consented each year is forecast to grow rapidly between 2013-18 before the rate of growth slows. The number of detached & multi-unit dwellings is forecast to be almost the same by 2020, although it is likely there will still be more houses (6800) than multi-unit dwellings consented (6200).

Among the forecasts:

  • The annual value of all building & construction nationally is projected to increase by 19% from 2013-20 (residential building by 22% and non-residential building by 17%)
  • The forecast spend on all construction for the 3 years to the end of 2017 is $106 billion
  • The value of all building & construction is forecast to grow to over $36 billion by 2016, $7.5 billion higher than the last peak in 2007. The value of all building & construction has grown between 9-12% over each of the last 3 years.

The revised forecast for all building & construction activity from 2015-20 has a smoother, longer peak.

Local government is initiating nearly 40% (22% by value) of other construction projects (horizontal construction, including infrastructure & roading).

I’ve added a link to my 2008 story about the use I made of housing statistics to give an idea – wrongly, Statistics NZ told me – of costs/m². It’s a warning – a technical note added to the monthly tables as a result of my 2008 discussion – which I suspect Statistics NZ itself now, and possibly the authors of this pipeline report may also have ignored: “For staged consents, values are recorded at each stage but floor areas & unit counts are normally recorded at the first large stage.”

Link: 2015 pipeline report

Earlier stories:
11 December 2013: Caveats ignored as construction forecast report raises boomtime speculation
1 February 2008: Statistics, lies & don’t knows

Attribution: Pipeline report.

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Guide to construction tolerances released

The Ministry of Business, Innovation & Employment has released the Guide to tolerances, materials & workmanship in new residential construction 2015, which supports the new consumer protection measures in part 4A of the Building Act that came into law on 1 January.

The guide sets standards of work expected for key aspects of new home construction. It covers roof & wall cladding, windows & doors, flooring, wall & ceiling linings, cabinets & benchtops, plumbing, drainage & electrical fittings. It’s been written with advice from the construction industry and represents currently accepted standards.

Building & Housing Minister Nick Smith unveiled the technical guidance at the Certified Builders’ Association conference in Christchurch on Friday: “These quality measures are needed alongside our other initiatives to increase housing supply & affordability. There is a risk with the build rate up from 14,000 to 25,000 homes/year that standards will slip. We are investing in record numbers of new building tradespeople and tightening up on standards to ensure we get both the quality & quantity of new homes that New Zealand needs.

“This new resource provides clarity for builders & homeowners on the standards of work expected. It complements the new consumer protection requirements that the Government introduced on 1 January. These regulations provide for a defect period of 12 months with an obligation to remedy. This guidance gives better information on what constitutes an acceptable level of workmanship.

“The guidance covers common areas of dispute, like what degree of slope on a floor is reasonable or when a crack in a driveway is unacceptable. It will help resolve problems more quickly by giving clarity about what tolerances are acceptable.”

Link: Guide to tolerances

Attribution: Guide, ministerial release.

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Caveats ignored as construction forecast report raises boomtime speculation

A construction forecast released yesterday opened up talk of a boom around the nation, but especially in Auckland housebuilding.

There are 2 things wrong with the boom assumption. One is the frequent caveats in the report, particularly that private sector developers don’t reveal their intentions unless they have to, don’t reveal them far in advance and can change their minds at the drop of a hat.

The other is the assumption that all projections will occur. The report doesn’t get into the detail of financing or tenancy, though it does mention them. Without finance, tenants or buyers, projections can fall flat.

The forecast increase in overall construction compared to the previous peak in 2007.

The forecast increase in overall construction compared to the previous peak in 2007.

The report concedes an important point about the forecast for Auckland housing growth but omits to mention one that is probably more important: It says the 2013 census figures show Auckland had the fastest-rising population from 2006-13 at 8.5% to 1.4 million and says there was a significant slowdown in residential construction after the global financial crisis began. Therefore, it’s been widely assumed, there was a growing shortfall of homes.

What the report omits is that Auckland population growth declined to 15,800/year during that 7-year census period from 29,000/year over the previous 5 years. The shortfall assumption has to change, but does not appear to have been taken into account.

The Building & Construction Productivity Partnership, a joint industry & Government body established in 2010 to address barriers to productivity in the construction sector, commissioned the National Construction Pipeline Report from Pacifecon (NZ) Ltd, in conjunction with BRANZ. It brings together economic forecasts and data from the public & private sectors on their forward construction workload.

One example the report gives of why its boom forecast might be wrong, or mistimed: A $100 million-plus project first detected in 2009 has now had its start date deferred from the December 2013 quarter until 2017.

Pacvifecon has noted: “Private sector projects are also the most uncertain as they tend to have shorter planning horizons, and start dates may be deferred due to factors such as securing tenancy agreements &/or accessing finance.

The residential growth picture for Auckland is even stronger than that for overall growth compared to other regions.

The residential growth picture for Auckland is even stronger than that for overall growth compared to other regions.

“Much of the immediate peak in known non-residential construction will be private sector projects. These have less certainty that they will proceed as planned.”

The forecasts for Auckland residential work are spectacular – from a low point of $2.9 billion in the March 2012 year to $7 billion in 2016, $7.2 billion in 2018 – a 145% rise over 6 years. The non-residential forecast, however, is far from spectacular – from a base of $4.1 billion in 2012 to $4.2 billion in 2016, $4.6 billion in 2018 – a 13% rise.

The report forecasts the nature & timing of construction work by type & region over the 6 years to March 2019 and highlights 5 findings:

  • An unprecedented level of construction activity is forecast to peak in 2016 at $32 billion, up 23% from the 2007 peak of $26 billion
  • The forecast shows high rates of growth over a longer period than at any time in the last 40 years, , comparable to the mid-1990s boom: “The challenge for the sector will be how to sustain 4 or more years of 10%+ growth.”
  • Auckland construction is expected to grow by 68% over the forecast period, dominating national demand, even taking into account the Canterbury rebuild
  • Auckland’s residential building is forecast to grow by 150% between now & 2017, from $2.9 billion to $7.3 billion
  • The non-residential construction forecasts are supported by known construction intentions. (As mentioned above, private sector and particularly residential construction intentions are harder to pin down).

The report’s national construction pipeline fact sheet (a term which can easily be disputed as it’s about forecasts & projections):

  • predicts unprecedented growth in construction to the beginning of 2019
  • forecasts at least a 10% increase in construction activity every year for the next 4 years
  • says growth is expected to peak in 2016
  • says the estimated total value of construction activity is expected to be nearly $32 billion in 2016

The report says the primary drivers are an increase in housebuilding in Auckland the Canterbury rebuild, plus more demand in the Waikato, Bay of Plenty & Wellington:

  • Highest demand by value is in the Auckland region, driven by housing needs more than doubling, and the Government’s intention to accelerate residential building there. Residential building in Auckland is forecast to increase by 145% between 2012-16
  • There is a noticeable increase in construction of higher density housing, especially in Auckland
  • The Canterbury rebuild is another key driver of demand – between 2012-16 the value of non-residential work is forecast to more than double in Canterbury.

Council says it’s gearing up to meet higher demand

Auckland Council’s new chief operating officer, Dean Kimpton, who has just moved from the building sector consultancy Aecom (NZ) Ltd, said yesterday the significance of the report’s findings for Auckland were clear: “The report identifies Auckland as one of New Zealand’s ‘construction hot spots’, with around a third of building work predicted to take place here. Much of this is driven by the forecast that Auckland’s residential housing demand will more than double. This is consistent with the projected population growth of Auckland over the next 30 years.

“We are already building capacity in our building & resource consent units and working more efficiently, such as by introducing fast-track processing so straightforward consents are dealt with in 10 days. We will use the findings to ensure our regulatory teams are structured to meet demand and that we are investing in graduate employment schemes & cadetships to continue to deliver a timely regulatory application process.”

He said the newly established Housing Project Office was one example of Auckland Council’s co-ordinated response to meet demand for regulatory building approvals. It brings together representatives from the council’s building & resource consent, planning, stormwater, libraries & parks units, Auckland Transport & Watercare, along with the Ministry of Business, Innovation & Employment, to provide a co-ordinated response to deliver high quality housing & neighbourhoods.

Mr Kimpton said the council was also contributing to the research needed to understand market demand and was working closely with MBIE & the Productivity Partnership to streamline procurement processes.

He chairs the Auckland Procurement Forum, a group working across both public & private sectors to better understand the forward pipeline of infrastructure work and how procurement processes can be improved.

Links: National construction pipeline report pdf
Pacifecon, construction pipeline report
Productivity Partnership

Attribution: Report, council release.

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Building completions recover from 2011 dip

New home construction last year recovered what it lost in 2011 but the overall resurgence in construction activity didn’t quite match the 2011 decline.

Statistics NZ figures out on Wednesday show a 15.3% rise in new home completions in 2012 for a total $4.7 billion, up $630 million from 2011. Totals in the previous 2 years were $4.8 million in 2010 and $4.6 million in 2009, down from $5.95 million in 2008, first full year of the global financial crisis.

The $978 million of completions in the March 2012 quarter was the lowest unadjusted quarterly figure of the last 3 years, but the December quarter was the strongest, with $1.312 billion of completions.

Total residential construction picked up to 2010 levels in the last 2 quarters, to $1.6 billion/quarter, taking the annual increase to 11.8% after a 13.8% decline in 2011. From a high point of $7.3 billion of residential completions in 2008, completions got down to $5.4 billion in 2011 then rose to $6 billion.

The non-residential sectors have been steadier after falling from $5.2 billion of completions in 2008 to a range of $4.5-4.9 billion in the next 4 years. The latest result was $4.7 billion, up 4.2% from 2011.

This took total completions over $10 billion again after dipping to $9.9 billion in 2011. Total completions reached $12.5 billion in 2008, dropped to $10.77 billion in 2010 and were back at $10.76 billion last year.

The general rise in construction activity was supported by the steady decline in residential mortgage yield, which the Reserve Bank put at 5.7% in the December 2012 quarter. The yield dropped below 8% in the June 2009 quarter and has had only one small upward blip in the 14 subsequent quarters.

Attribution: Statistics NZ tables.

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