CAUTION is a must for those involved in the boom that is set to creep into the engineering and non-residential construction sector by late 2003, according to economic forecasting company BIS Shrapnel .
With investors starting to pull out of the softening residential market, non-residential construction is poised to take over the lead over the next five years. Australia is on the verge of a major investment-led growth phase driven largely by private sector building activity, according to BIS Shrapnel. Money has poured out of the share market and into investment funds, a lot of these being property investment funds.
This shift in the flow of funds means that businesses will essentially take over from consumers. Total non-dwelling building commencements are set to rise by 6 per cent in 2003 and continue into 2004/2005. Rising demand and limited capacity across key product and non-residential property markets will drive a major upswing in capacity-building investment, as will a strong economy with solid employment growth and delayed new construction.
However the fear is that companies will jump in too deep and find themselves in trouble when the boom turns to bust as early as 2006/2007.
“The danger is that people will go over the top but the boom won’t be long lasting,” director of building and construction for BIS Shrapnel, Robert Mellor said.
“Companies need to watch very closely what’s happening in 2004/2005. If activity begins early in the cycle then the boom may not last long. An oversupply will lead to lower rental growth values which will discourage investors, “ he said.
In addition, BIS Shrapnel expects the current low interest rates to continue for at least the next 18 months, bolstering growth levels over the short term until key investment drivers start to kick in.
Investment spending that has been delayed over the last 2-3 years is being set in motion again. Major infrastructure projects such as the $1.25 billion Western Sydney Orbital and the $815 million Lane Cove tunnel, both scheduled to begin in 2003 will be one of the biggest drivers of the boom. Other major projects recently commenced include the $1.3 billion Alice to Darwin railway and the $1.6 billion Parramatta to Chatswood rail link.
Entertainment and recreation facilities are forecast to increase by 49 per cent in 2002/03 spurred on by projects like the $280 million MCG redevelopment, Queensland’s $180 million Lang Park redevelopment and the $150 million redevelopment of the Perth Convention Centre. Similarly, hotels and factories will be among the key drivers of the boom while major retail and office projects like Queensland’s $110 million Helensvale Westfield, the $162 million NAB Head Office development in Melbourne’s Docklands and the $400 million World Square office will also influence the boom.
A lack of sites in CBD areas will lead to high demand that will need to be satisfied by demolishing existing buildings and consolidating sites. Now is the time to buy a site and develop, according to BIS Shrapnel. There are lots of old buildings that need to be gutted, rebuilt, leased up and sold before the downturn kicks in around 2006/2007.