Australia : Building Industry gradually crumbling

Australia : Building Industry gradually crumbling

Date July 23, 2012

Adele Ferguson

Business columnist


Rising costs are beating up the industry, particularly in labour.‘Rising costs are beating up the industry, particularly in labour.’

AUSTRALIA’S building industry is in survival mode, with official statistics revealing that at least two companies a day are going to the wall as labour costs continue to rise, profit margins flatline and banks play hardball on funding.

The latest statistics on liquidations and voluntary administrations show that since January 1 more than 363 companies in the building industry, excluding mining, have collapsed, more than 200 of them from New South Wales and 95 from Victoria.

What is even more alarming is the trend seems to be getting worse, with 30 building companies failing in March, 33 in April, 51 in May, 63 in June and a whopping 40 collapsing in the first 10 days of July.

Profit margins have shrunk to between zero and 2 per cent.

It isn’t a pretty picture and supports the general economic statistics, which show that as a proportion of nominal gross domestic product (GDP) building activity in Australia is close to a 35-year low. Outside mining, Australia is in the midst of a downturn in residential, commercial and public sector infrastructure activity.

A survey by Evans & Partners in May and June of private companies, consultants, service providers and customers in the construction sector to identify emerging issues, revealed a bleak outlook for the sector, ex-mining.

”If exposure to the resources sector is limited or non-existent, the industry is observing the passing of a high-rise residential peak in Melbourne, commercial office ‘back fill’ and/or shuffling the deck chairs taking precedence over new office build, all levels of government minimising (or zero-ing) their infrastructure spending … Even for those who can secure work, the margins have become wafer thin and [they] often bet on improved buying terms to make a profit. The forward pipeline is thin and the outlook bleak,” the survey report notes.

The outlook for Victoria is poor. The report cited an example of one project attracting 27 builders in the tender process versus three to four previously, which is hurting profit margins. It said unsolicited emails from suppliers, subcontractors and individuals looking for work had increased enormously. ”A reasonable amount of work is available for tender, but is being purely price driven – pre-existing relationships account for nothing now.”

The outlook for Queensland is slightly better than for NSW, but there are no signs of improvement in either state as yet.

The overwhelming theme of the survey is that the country’s building sector ex-mining is being hit so hard from so many different angles that if it wasn’t for the mining boom the severity of the downturn in the sector would have had a big impact on the broader economy.

The lack of activity is not being helped by state and federal governments, whose infrastructure spending has all but dried up and the pipeline for new projects is woeful.

And when it comes to funding, bank appetite for development project finance remains constrained. To put it into perspective, the loan-to-valuation ratios for commercial projects are at about 50 per cent and for residential at 50-60 per cent.

Rising costs are also belting up the industry, particularly in labour, which is threatening the viability of many projects. The survey says unions have admitted privately that they overshot the mark in terms of wage increases and that it is having an impact. The survey says productivity gains will be about prefabrication and importation to compensate for lack of labour cost efficiency, but they see very few Australian companies participating in this innovative trend, given it is all about ”down costs” and ”sticking to your knitting”.

Another big part of the problem is the delay of payments to these businesses, which puts their cash flows under pressure. According to the country’s biggest receivables management and credit report company, Dun & Bradstreet, the trade payment terms for the construction sector are 52.8 days, which is almost double the conventional 30 days. This has a domino effect on the rest of the industry, including architects, subcontractors and engineers.

It is chilling to remember that the boom is reaching a peak, as can be seen from the fall in iron ore prices in recent months. ”The combination of escalating costs and the poor global macro outlook will inevitably see slippage in the ramp-up of current and future projects. As we approach the summit of the boom, policymakers (including the construction unions) will be increasingly keen to see a recovery in mainstream building activity,” the survey warns.

As I have noted in previous posts….what has happened is a Global Financial Scam that is slowly but surely working its way to BC………. as opposed to a slower but steadier pace that historically  accomodated growth.
One analogy may be to consider building a HUGE auto factory, ……..say 20 X’s what is required for historical  annual output, ……and then building a 20 year supply of cars in 12 months. 
Of course, the “real” market cannot absorb this without some VERY creative financing, but the end result is still predictable. The bubble bursts.  Those that rely on such a business model / Industry will be find themselves rather redundant, and perhaps for a very long time.
While our motto is “Beautiful BC”, there are far more attractive places on earth with better weather etc that are “going under” as we speak, and “Down Under” cited above is a perfect example.
As the article above notes, credit and cash flow are the life blood of business….and this dynamic must be maintained. Once it stagnates, the business that may have taken a lifetime, or generations,……to build can be gone in a few months. Then it becomes the “Law of the Jungle” to survive.
What the future holds is uncertain, but to not predict the same Economic Tsunami occurring here in BC  is sheer folly.
At least “Forewarned” is Forearmed.
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