2009 construction forecast: can it weather the economic downturn?

It’s all over the news that business and consumer confidence is low and that Australia and other Western economies are heading for tough times. Money is tight, many business sales are falling and company directors are wondering whether their business will survive the downturn.

The spectre of job losses is looming across the general economy as the financial jitters spread out across numerous industries including the Quantity Surveying and Construction sectors.

Construction has been following a steady path during the past decade with continual single digit growth in output. The rises have not been as spectacular as other sectors, but the flipside is that it is predicted that the fallout from the current economic troubles will be nowhere near as severe. However, it is clear that this sector like many others is not immune from the crunch.

The private building sectors have been the hardest hit with many banks developing cold feet and becoming more cautious in funding new projects. Private infrastructure spending is still rising, but apart from that, things are gloomy, which shows how important public spending is.

Alastair McMichael, a Director of Rider Levett Bucknall agrees that the private infrastructure sector has been impacted significantly with “numerous projects put on hold or cancelled due to the shockwaves that are travelling through the Quantity Surveying and Commercial Construction sectors.”

McMichael’s predicts that their workload in the New Year could potentially be “substantially reduced and we will be looking into new opportunities as internal resources become more available.”

Rachel Callaway, National Research Manager of Davis Langdon explains despite the doom and gloom, on a “global level we have seen a lot of former expats returning to Australia as they are no longer required in international jobs. Therefore we are seeing a higher calibre of candidates in our industry.”

“This time last year everyone was screaming skills shortage, now the tables have turned dramatically. Economically, it will take awhile for the situation to turn however the government’s quick act to inject money into the infrastructure sector will help.”

It is evident that the outlook for the construction industry is somewhat cloudy with revenue expected to increase by only 4% in 2009-10 and just 2% in 2010-11. Although, despite this somewhat disappointing prediction, there is still hope with it forecasted that there will be nearly 90,000 construction workers needed every year between now and 2012.

A Director of a National Infrastructure Organisation says “despite the obvious slow down, we won’t be changing our area of focus too much during 2009. If we were purely a building company we would notice a more substantial slow down but because we are well diversified we will have enough to keep us going.”

“The current economic climate will see project funding becoming much harder to secure and will probably never revert to that of the past few years. You will need to have a fundamentally secured project to receive funding, including excellent fundamentals, and larger equity invested with less debt. 2009 will start off very flat and probably wont get up and running until the first half of 2010 where more stimuli will come back into the economy.”

A Project Manager of a National Construction Company agrees that “You currently have to look at projects in cycles as a job we start now won't be finished for nearly two years and the economic climate might be different by then. Everyone knows there is a shortage of housing as the demand is there, the problem is affordability and finance.”

“We are still expanding as a company because the work is still coming through. If residential wobbles a bit then we are looking at other areas such as hotel construction, which is booming. All our skills are transferable between the two, so you just have to adapt when things get a little tighter.”

Director of Conduit Recruitment Adam Walker says that recruitment in the construction sector has also been hit by the downturn. “We have found that most of our clients are either laying people off or have established a recruitment freeze.”

“As far as recruitment in construction is concerned, what we are finding is that there are a lack of vacant positions but also a lack of candidates as the quality candidates have not been let go. Smart companies are using this time to attract candidates who may not have been available in busier times.”

Conduit Recruitment Construction Consultant Greg Ford agrees that “there is an enormous amount of uncertainty in the sector. We are finding that many of our clients have had projects cease or be put on hold, but for some construction companies it is a question of adapting and moving into other areas where work is still ongoing.”

“The beginning of 2009 has seen many of our clients madly tendering with predictions that it will be quiet for most of 2009. We have found that many of our clients have switched their focus from placing permanent roles to contract.”

As for the overall prediction of what 2009 will bring, the building sector will suffer as long as private development has all but stopped. Building will most probably stagnate, infrastructure remuneration might continue to move upwards but it won’t increase at the rate it has in the past.

Alastair McMichael says that during 2009 they will be “sitting tight and keeping our existing team together.”

Adam Walker agrees that there is a lot of “wait and see for clients in the construction and infrastructure sector, although the search for hard to find specialist skilled workers such as client estimators has not ceased.”

“In terms of the skills shortage, there will always be a skills shortage in the construction and quantity surveying space. Although there are presently fewer jobs available because of the climate, when things start to pick up the shortage will not have disappeared.”

The economic downturn has caused a construction slump as these leading construction professionals have revealed, and although there is a vast array of prediction and opinion, the general consensus seems to be that we will have ‘to wait and see’.

Is it all Doom and Gloom? - An Interview with an Executive Chairman

It’s all over the news that business and consumer confidence is low and that Australia and other Western economies are heading for tough times. Money is tight, many business sales are falling and company directors are wondering what the outlook looks like for 2009.

We interviewed an Executive Chairman from a National Infrastructure Organisation to grasp an idea of how the current economic climate has affected the construction sector and what they foresee for 2009.

How has the current economic climate affected your Industry in Australia, and workload in general?
Yes we have been affected, private building is very weak but government building projects remain strong. In mining, top tier miners are still spending (albeit reduced) but second tier miners have stopped expansion. There is still a lot of money being spent in rail; the government sector in particular is very strong. Gas is also a strong industry with there being a number of schemes for liquefied natural gas in Western Australia, Queensland and Darwin. Other areas are going strong such as water treatment plants, recycling and the pipelines.

In regards to the areas of construction that you specialises in which areas have you found to be hit the hardest, and why?
The private building sector has been the hardest hit, which is made up of residential and commercial projects. The reason is finance related with banks changing both their cost of funds and their lending criteria to developers.

Where will you now be shifting your focus or what do you foresee as becoming your main area of interest?
We won’t change our focus too much; if we were purely a builder we would slow down, but because we are well diversified we will have enough to keep us going.

Do you think that the current economic climate will have a lasting effect on the construction industry and what do you foresee as being some of the long term ramifications for the industry as a whole, if any?
Project funding will become much harder to secure and will probably never revert to that of the past few years. You will need to have an fundamentally secured project to receive funding, meaning excellent fundamentals, high degree of pre sales and larger equity invested with less debt.. 2009 will start off very flat and probably wont get up and running until the first half of 2010 where more stimuli will come back into the economy.

In the Construction and Property sectors, salaries are considered considerably good, do you see them changing, staying the same or increasing? Why is this?
Building will most probably stagnate, infrastructure remuneration might continue to move upwards but it won’t increase at the rate it has in the past.

With the current state of the market, have you found that Gen Y employees are concerned or worried about their jobs?
This generation has never experienced a recession before. Many employers have been biding their time through the boom times and will now look to show the Gen Y’s that the boot is on the other foot. We are not like that. We love the vibrancy and diversity of the contribution from Gen Y’ers.

Do you still envisage a skill shortage in Australia, calling for offshore candidates or will you now focus more/only on local talent?
Research shows that by 2018 there will be more people leaving construction than entering into it. We must continue training and bringing on graduates – this is a critical part of our business model. We also appreciate the importance of continuing hiring graduates cadets and apprentices.

What are your predictions of your immediate workload moving into 2009?
We expect to remain slow to steady in 2009 – certainly slower than 2008.. In general, the building sector will suffer as private development has all but stopped. State and Federal governments are being responsible by investing heavily into infrastructure – the trick will be just how quickly they are able to get these projects off the ground.

Could Dubai's Economic Boom Stall?

A hot topic at the moment is the current economic climate in Dubai. I came across an interesting article that questions whether Dubai's economic boom could stall despite their confidence. Have a read of the article below.

Dubai’s social and economic transformation could stall if runaway inflation is not reined in, says the editor of a new economic report released on Monday.
Thirteen per cent growth over seven years may also be eroded if inflation is not kept at bay, Oliver Cornock, Regional Editor of Oxford Business Group’s first The Report 2007, told reporters.

Inflation hit 9.3 per cent last year and is rising.
“Inflation needs to be kept in check,” Cornock said.
The UAE’s ties to the free-falling US dollar and lower American interest rates combined with an exploding rental housing market here are creating major inflation pressures in Dubai, the new study reported.

The report was released jointly with Dubai Chamber of Commerce and Industry Director General Hamad Buamim in the Penthouse floor of the city’s most iconic structure, the Burj Al Arab.
The recommendation to rein in inflation is one of a series of findings in the 200-page report compiled by a six-member research team based upon 250 face-to-face interviews across the UAE this year.

In a broad sweeping document now available to the public, Cornock told XPRESS that the future lies in the hands of government legislators and businessmen and will depend on the priority placed on everything from foreign investment to transparency.
Dubai is no longer a gold-rush city, he said, rather it has morphed into an increasingly stable long-term market that is outshining its neighbours in almost every sector.
“What we’re seeing is the maturity and establishment of the economy here rather than just a huge speculative market boom that’s been going on,” said Cornock.

For example, Dubai has surpassed Saudi Arabia in terms of banking assets reported by the 41 domestic and international banks registered in the UAE, he said, to amass more than Dh250 billion in the emirates as last reported by mid-2007.
The establishment of sophisticated economic vehicles such as the Dubai Financial Market, the Dubai International Financial Exchange as well as the new gold and commodities exchange probably signifies a permanent stable change in markets in Dubai.

Last year, Dubai’s economy grew by a record 20 per cent and a reported GDP of 49.96 billion, numbers that made the emirate “probably the envy of every non-oil” neighbour. Growth shows no sign of waning, said Cornock, with plenty of examples of prosperity and more to come.
In 2008, a further 2.8 million square metres of new office space is expected to come online in Dubai, he said, to handle the surge of companies and workers still pouring into the emirate to make money, he said.

http://www.iht.com/articles/ap/2008/10/08/business/ML-Dubai-Property.php

Dubai Cityscape Conference - A Vision of Tomorrow

A couple of consultants at Conduit along with myself recently attended the Dubai Cityscape Conference. Cityscape Dubai 2008, in its 7th year, is the largest business-to-business real estate investment and development event in the world.

Cityscape Dubai attracts regional and international investors, property developers, governmental and development authorities, leading architects, designers, consultants and all senior professionals involved in the property industry. It provides an annual forum that celebrates the very best in real estate, architecture, urban planning and design from around the world.

About 60,000 participants from over 150 countries had gathered in Dubai, to be a part of the world's largest development exhibition and its associated conferences, which is expected to break all previous records. About 40,000 visitors flocked the Cityscape Dubai during the first two days of the show, which exceeds a total of three days of crowd gathering during last year's event.

With the world facing market uncertainty, we enter a new era in which the Middle East developers are expected to maintain or even increase their presence across the world. The intensity and scale of the iconic projects, is one of the most impressive property booms in modern history that has kept the UAE and Dubai in particular, on focus worldwide for most of the decade.

However, a report by the property consultants Colliers International stated that Dubai prices would drop by 16 percent during second quarter of 2008, and will remain flat until 2010, which came as bad news just prior to opening of the seventh Cityscape Dubai.

On the whole, about $100bn worth of new projects were launched on the first day of Cityscape. However, this news failed to ignite investor confidence, as there were growing fears about the global credit crunch and the possible overheating of the local property market. Starting from Dh.350bn beachfront project to a kilometer-high tower, the developers at the annual Cityscape exhibition in Dubai launched the usual series of mega-developments, which has been responsible for boosting the Gulf Arab Commercial hub to international fame.

While the Dubai mortgage lender Tamweel, announced plans to launch about Dh.2bn worth of Islamic bonds in 2009, the Sorouh Real Estate of Abu Dhabi announced that all its projects have been proceeding on track.

It is evident after attending Cityscape that we began to think about whether the large scale projects exhibited at the conference will actually be built. Although the shopping malls and apartment complexes look great now, when they are completed in 10 years time they will look dated. There was alot of talk surrounding Dubai and whether places such as Abu Dhabi will in fact produce bigger and better developments in the years to come.

It will be interesting to see as to whether other countries in the Middle East overtake Dubai with the grandeur and large scale of their developments. One thing is for sure that the Dubai Cityscape Conference will continue to be the largest property exhibition in the world attracting tens of thousands from all over the globe.

Urban Environment: Challenges to Sustainability

From small towns to megacities of more than 10 million people, the developing world is irreversibly urbanising. As rural migration into cities continues to rise, municipal infrastructures are struggling to find efficient, less polluting ways to meet the water, sanitation, transportation and power demands of its residents.

It is important to consider the kinds of cities in which we want to live, and the critical issues that affect them; from air pollution and lack of clean water, to adequate financing and effective civic engagement, urban sustainability presents a host of challenges and opportunities.Two major international events underscore how closely interrelated urban development is with the environment. World Environment Day brings to the forefront urban challenges with air pollution, lack of clean water, and energy shortages. The World Urban Forum3, an international meeting held biannually by UN Habitat, brings together urban experts in Vancouver, British Columbia and Canada to discuss critical issues for urban sustainability, such as municipal financing and effective civic engagement.

It is predicted that by 2030, 60 percent of the world’s population will live in settlements larger than 2,500 people emphasising that sustainable urban development is going to continue to call for urgency.