Australia’s tender pricing woes to remain for the year

The construction industry is experiencing unprecedented activity according to experts, but the sector may get no reprieve until late next year.

Commercial property players are ending the year with little relief from rising interest rates and cost pressures.

Deal-making on office towers, shopping centres and even warehouses, which have ridden the tide of e-commerce, has fallen away.

Banks are imposing tighter lending and pension funds have been reluctant to commit, scuttling some deals which had been in train.

Developing and upgrading buildings is also getting tougher as costs keep rising, according to global surveyor Rider Levett Bucknall.

The firm warned that extreme pressure and volatility on contractor tender pricing will continue into the new year, with hurdles like supply chain instability, shipping costs and obtaining skilled labour to remain.

At the same time, builders are experiencing “unprecedented” activity given the rise in work started and not completed and major state and federal government-funded projects in health and education.

The latter areas are drawing big investors with institutions chasing an exposure these non-traditional areas as the main property asset classes are bogged down as investors fear their incomes will drop.

Construction workers on site at Circular Quay, Sydney. Picture: NCA NewsWire / Adam Yip

RLB director Domenic Shiafone said there will be “strong activity” in the building sector next year, but warned that the high levels of work put into question the ability to deliver projects on time and within budget.

“This activity surge is being fuelled by post Covid-19 legacies including government funding of major projects, delayed commencements of projects put on hold during the lockdown periods and a slowdown in actual output of the industry on the east coast due to labour shortages and abnormal weather conditions,” Mr Shiafone said.

There has also been a series of major construction collapses with big players also blaming supply chain issues and rain for the industry’s woes. Subcontractors are feeling the pressure with many at capacity or unable to secure enough skilled labour, causing them to be selective with tenders.

“Significant surges in tender pricing have been experienced in all states, where escalation uplifts for 2022 are well above the levels forecast in the last publication,” Mr Shiafone said. “Suppliers are unable to hold pricing and guarantee availability when tendering. While material price increases have been a risk, contractors and subcontractors historically have navigated and managed.”

Rising costs are hitting the viability of some schemes, with developers dumping some hotel and residential projects in Melbourne, where the build-to-rent market is surging. At same time rising costs have office projects in Brisbane and will make some Sydney schemes less likely to get off the ground.

Incomplete construction in Townsville, Queensland. Picture: Alix Sweeney

Approvals in the first six months of 2022 slowed with a 5 per cent drop on 2021. While residential approvals went down by 9.5 per cent, non-residential approvals increased by 1.1 per cent on the back of government investment.

The RLB tender price index annual change shows Melbourne jumped from 3.5 per cent to 8 per cent and Sydney went up from 4.1 per cent to almost seven per cent. In Brisbane, the annual change jumped up from 9.6 per cent to 10.5 per cent, with Canberra rising from 3.8 per cent to 5 per cent.

RLB warned that activity may slowdown in late 2023. “This easing of demand should allow manufacturing and logistics to get back to “normality” … It should also see a softening of material prices with high levels of demand-led price premiums’ reducing,” Mr Shiafone said.