Brickworks warns of construction fallout as inflation hits home building

Brickworks warns surging construction prices mean the cost of building a house could soon be out of reach for many.

Brickworks managing director Lindsay Partridge. Picture: Hollie Adams / The Australian

Brickworks managing director Lindsay Partridge expects to see a “fallout” in the building industry as surging prices of raw materials obliterate profits, and has issued a stark warning that the cost of building a house may soon be out of reach for many if inflationary pressures don’t subside.

Speaking to The Australian after handing down Brickworks’ first-half result, which showed a staggering 720 per cent lift in net profit, Mr Partridge said the building materials maker had so far been able to pass on rising costs to customers in the local market.

But supply chain constraints and the recent east coast floods are slowing down construction in the housing market, resulting in building timelines stretching out as prices continue to march upward, he warned.

“There’s a lot of work in the pipeline at the moment because builders can’t get the builds done for a variety of reasons.

“We’ve got to overcome those bottlenecks, which are made worse by not only the construction delays but also insurance companies outbidding everybody to get their customers back in their houses. So the tradies go and work for insurance companies first and then work for other builders second.”

Some builders were already constructing houses at a loss, due to the combination of delays and rising costs, he added.

“I think we might see a bit of a fallout in the industry going forward. Many of the homes that builders would be working on, they’ll be building at a loss. So we’ll just have to watch that space.

“Some of them, if not on fixed price contracts, have been able to get higher prices. But eventually you’d have to be concerned that, particularly if interest rates are rising, you’re going to see housing will become unaffordable.”

The biggest price rises had been in roof tiles, with the installed price now 20 per cent higher than last year, Mr Partridge said. The price of terracotta tiles, which Brickworks imports from Spain, surged 60 per cent in the past six months.

Longer term, Mr Partridge cautioned on the need to boost Australia’s migration levels.

“It’s been two years of no immigration, so that’s 500,000 or 600,000 people less than what we would have otherwise had. And that’s part of the reason why there is a labour shortage and why there’s pressure on wages in some areas, including truck drivers and transport. And that’s gonna bite harder.”

Brickworks half-year result showed it is on track to record over $1bn in annual group revenue for the first time, as revenue for the half topped $500m. The building materials maker also saw its profit surge 729 per cent, to $581m.

The record profit number for the six months through January was boosted by the deemed disposal of Washington H Soul Pattinson shares following its merger with Milton.

Stripping this and other one-off items out, Brickworks’ underlying profit still jumped 269 per cent per cent to $330m, as its property division assets enjoyed a boost in valuation.

Underlying group earnings before interest, tax and depreciation from continuing operations rose 200 per cent to $488m, while revenue was 24 per cent higher at $535m.

The expectation of a similar revenue number in the second half to top $1bn for the year comes even as managing director Lindsay Partridge cautioned on the impact from the recent east coast floods and the uncertain global near-term outlook.

“Within Building Products Australia, the start of the second half has been impacted by severe wet weather and flooding along the east coast. This has resulted in reduced construction activity in key markets such as Sydney and Brisbane,” Mr Partridge said. “However, underlying demand remains strong, and we are hopeful that all states will experience an elevated period of activity for the remainder of the second half.”

The outbreak of war in Ukraine had also increased uncertainty “that has the potential to significantly impact all of our businesses in a variety of ways”, he added.

“These impacts may include the price and availability of energy, upward pressure on inflation and interest rates and a decline in consumer confidence,” Mr Partridge said.

“Further strain on international supply chains is already evident, with shipping rates increasing back to levels not seen since the worst of the pandemic.”

The company was not yet affected by surging gas prices because of contracted gas through to 2024, Mr Partridge said.

Over the first half, Brickworks’ property trust assets were revalued, resulting in a profit of $228m, due to a “significant increase” in the market value of the portfolio, the company said. Development profit of $115m was also recorded.

“We have seen strong demand and sustained growth in the value of our property trust over a number of years,” Mr Partridge said. “The pandemic has only fuelled this growth, by accelerating industry trends towards online shopping and increasing the importance of well-located distribution hubs and sophisticated supply chain solutions.

“These trends are reflected in our independent revaluation process that has resulted in average capitalisation rate compression of 50 basis points to 3.6 per cent across the leased assets within the property trust.”

For the Australian building products division, pre-tax earnings jumped 66 per cent to $27m over the six months, while its North American division saw a 70 per cent plunge in pre-tax earnings as a jump in sales revenue, driven by the acquisition of Illinois Brick Co, was more than offset by rising labour costs and supply chain challenges. “Despite the challenges faced in the first half, the business has made strong progress,” Mr Partridge said.

The company increased its interim dividend to 22c per cent share, up from last year’s 21c.

Brickworks shares jumped 5 per cent to $22.87.