Property and Construction Cost Consultancy Advisory Services. Presented by Jeffrey Gall Senior Associate Sydney ACIF Briefing 26 September 2011

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1 Property and Construction Cost Consultancy Advisory Services Presented by Jeffrey Gall Senior Associate Sydney ACIF Briefing 26 September 2011

2 Construction Analysis Where are we Now and where are we Going?

3 Introduction Global Markets Europe US China Australian Construction Market Residential Non-Residential Public vs Private activity State Construction Markets Adelaide Brisbane Canberra Melbourne Perth Sydney

2005 2006 2007 2008 2009 2010 Global Markets Europe Liquidity Crisis European banks overexposed to sovereign debt problems Vicious cycle for EU Banks Market nervousness; share price falls; restricted

5 Global Markets Europe Liquidity Crisis European banks overexposed to sovereign debt problems Vicious cycle for EU Banks Market nervousness; share price falls; restricted supply of short-term funding from US money markets. European Construction looked to have stabilised 1st Half 2011 However further softening likely: Basel III tighter lending regulations; lack of access to global money markets; general market volatility. P.I.G.S. (Portugal, Ireland, Greece, Spain) European Construction GDP (Mn EUR) 720, , , , , , ,000 Construction Sector Barometer - EMEA 100% 90% 80% 70% 60% 50% 40% 30% 20% Source: ABS Who will be next? Blue = BAD 10% 0% Houses Apartments Offices Industrial Retail Hotel Civil Trough Zone Mid Zone Peak Zone Source: RLB

2005 2006 2007 2008 2009 2010 Global Markets US Recent downgrade of US credit rating Political stalemate over debt ceiling brinkmanship Markets question strength and duration of US recovery

6 Global Markets US Recent downgrade of US credit rating Political stalemate over debt ceiling brinkmanship Markets question strength and duration of US recovery Unemployment remains historically high over 9% Residential demand has failed to recover from subprime collapse and GFC Demand for new homes still extremely weak Foreclosure pipeline still high US Construction GDP (Mn USD) 700, , , , , , % Construction Sector Barometer - Americas 90% Source: ABS 80% Unemployment, foreclosures, falling sales delaying any rebound Depriving economy of strength and the catalyst (construction) for early growth seen in past recoveries 70% 60% 50% 40% 30% 20% 10% 0% Houses Apartments Offices Industrial Retail Hotel Civil Trough Zone Mid Zone Peak Zone Source: RLB

7 Global Markets China Shining light amidst global economic turmoil GDP set to grow 8.8% for 2011; 7.8% for 2012 Slower but persistently strong growth Inflation remains key concern Up to 6.5% in July but back to 6.2% in August Economic adjustment since the GFC 2007, Net Exports represented 18% of its 14% GDP growth 1H 2011, Net Exports represented -0.7% of its 9.6% GDP growth Illustrates the economy is shifting from export-based to being driven by domestic consumption and Fixed Asset Investment (FAI) This strong 23-25% FAI growth is bullish for commodities demand Increased construction and industry activity gobble resources Strong catalyst for Australian economic prospects Chinese Construction GDP (10 Mn CNY) 200, , ,000 50,000 0 Source: ABS Construction Sector Barometer - Asia 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Houses Apartments Offices Industrial Retail Hotel Civil Trough Zone Mid Zone Peak Zone Source: RLB

8 Australian Construction Overview Construction Work Done in 2010 bn Residential $48.3 Non-Residential $37.7 Engineering $79.5 TOTAL $165.5bn Source: RLB, ABS

Australian Construction Residential ($48.3bn work done in 2010) Housing Volume of work done fell 3.1% FY2008-09 sparked by GFC turmoil Gov.

9 Australian Construction Residential ($48.3bn work done in 2010) Housing Volume of work done fell 3.1% FY sparked by GFC turmoil Gov. stimulus (1 st Home Owners Grants) boosted levels in FY but fell 4.1% in FY % lower than pre-gfc levels Apartments/other Residential Work Done Continued growth of 6.7% in volume of work done for FY followed by a slight pull back in FY Significant jump of 16.2% in FY Work Commenced A more volatile and market reactive indicator that strongly correlates with market sentiments FY saw a huge fall of 24.4% in volume of commencements Equally strong rebound of 27.3% in FY on back of growing positive market sentiment 30% 20% 10% 0% -10% -20% -30% Other new residential buildings (Apartments) -2.6% 16.4% Sep 07 - June 08 (FY ) Pre GFC 6.7% -24.4% Sep 08 - June 09 (FY ) GFC -0.4% 27.3% Sep 09 - June 10 (FY ) 16.2% Work done YoY % change Work commenced YoY % change Sep 10 - June 11 (FY ) Source: RLB, ABS

Australian Construction Non-Residential ($37.

Done declined 47% over 2009 after peaking in late 2008 before

completely eroded over 1 st half 2011 Industrial Also trading

2010 Recovery took place in 2010 before falling over 1 st half

3% below 2008 highs Despite weakness within privately dominated

10 Australian Construction Non-Residential ($37.7bn work done in 2010) Commercial Construction Value of Work Done declined 47% over 2009 after peaking in late 2008 before GFC 2010 saw a 30% recovery which has again been almost completely eroded over 1 st half 2011 Industrial Also trading at historically high levels at GFC and declined 49% to early 2010 Recovery took place in 2010 before falling over 1 st half 2011 to 46.3% below 2008 highs Despite weakness within privately dominated sectors, Non-residential construction in sectors targeted by Federal Gov. stimulus have performed markedly different. (particularly education and Health)

11 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Mar- 08 Jun- 08 Sep- 08 Dec- 08 Mar- 09 Jun- 09 Sep- 09 Dec- 09 Mar- 10 Jun- 10 Sep- 10 Dec- 10 Mar- 11 Australian Construction Private vs Public Activity Post GFC ($Mn) Work done (current value) by sector Non-residential Work Done by sector indicates the significant contribution public-funded construction has had post-gfc BER package in Education sector Activity winding down 10,000 8,000 6,000 4,000 2,000 0 Industrial Retail Offices Education Health Stark difference in Public/Private market contributions to volumes of Work Done pre-gfc and post-gfc Overall volumes falling with Private sector yet to pick up slack as public spending winds down ($Mn) 12,000 10,000 8,000 6,000 4,000 2,000 0 GFC Source: RLB, ABS Volume of work done (Non-residential buildings) Public Private GFC Source: RLB, ABS

12 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 NSW Construction Market Sentiment The Sydney construction market, in the last quarter, mirrors the general reporting of financial issues at the present time. All sectors of the Sydney construction industry report: Inconsistent trading conditions Economic uncertainty due to global volatility Awaiting NSW Government Budget deliberations and; Outcomes of proposed taxation reforms by the Federal Government. Confidence of improving conditions during Q has disappeared. Reduced work opportunities Reluctance of clients to commit to new projects Extremely competitive marketplace ($Mn) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Source: RLB, ABS NSW Total Building Work Done

13 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 NSW Construction Non-Residential Construction Earlier forecasts in 2011, of reduced opportunities in the non-residential sector, are becoming reality In the past quarter, opportunities for major projects in the non-residential sector of circa $50m have been very limited. The NSW Government Budget tabled in Parliament in early September provided guidance on future construction work in the State Government Sector. Significant spending initiatives for new Public Transport, Roads, Health, Justice and Education projects. Spending in the short term will be in the order of $3.0Billion Announcement will assist in the replacement of work completed in the 2009 Federal Stimulus Package measures. ($Mn) 4,000 3,000 2,000 1,000 0 Source: RLB, ABS NSW Non-residential Work Done

14 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 NSW Construction Non-Residential Construction (Cont d) The Commercial Office sector continues to experience limited opportunities in the Sydney CBD. Refurbishment type projects continue to offer more opportunities than new projects. However, due to anticipated lease completions in the next 3 to 4 years, developers are starting to investigate project feasibilities. The Barangaroo Development has completed review of planning, the project is now expected to commence by the end of the year. ($ '000) 500, , , , ,000 0 Source: RLB, ABS

15 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 NSW Construction Residential Construction A sustained increase in activity in the residential sector is still to become apparent. Within the residential sector there are a number of projects about to or will commence construction shortly. However, these projects are limited to a small number of developers and a select group of contractors who specialise in the residential sector ($Mn) 5,000 4,000 3,000 2,000 1,000 0 NSW Residential Work Done

16 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 NSW Construction Market Competition With reduced workload a reality, the level of discounting has increased as sub-contractors and contractors seek competitive advantages. The higher level of discounting is offsetting material price rises, observed to have risen between 5% and 15% for a wide range of materials. These price rises are not being reflected on tenders received, and it appears that price rises have not been passed on. Imported products and the rise of the $A vs $US has impacted on price reduction for a wide range of components in engineering services adding to the competitive marketplace. (Dec 2005 = 100) Sydney Tender Price Movements * Growth well below CPI despite materials & labour cost increases

17 NSW Construction Carbon Pricing Published indications on material price rises are limited, e.g. cement and steel to be compensated, imported materials shouldn t be affected, etc. Market supply and demand factors will determine whether any underlying cost increase is passed on immediately after 1 July RLB s Research & Development team in Melbourne are working up some models but will hold off until more details are available on companies affected and levels of compensation, etc. RLB suggest that a 1.5% - 2% increase range is the likely outcome, with so many unknowns

18 NSW Construction Summary Australian economic fortunes remain subject to the ability of major global economies to resolve current market turmoils. A return of market confidence would see an increase in private sector funded projects to replace public funded work Sydney Construction Market sentiment reflects the global economic situation with confidence yet to return Non-residential Construction remains weak with some optimism surrounding the NSW Government s planned infrastructure spending initiatives Highly competitive market which is absorbing materials and labour cost increases

19 Thank you Presented by Jeffrey Gall Senior Associate Rider Levett Bucknall Level 5, 41 McLaren Street North Sydney NSW 2060 p e jeffrey.gall@au.rlb.com w app rlb.com/app WebApp

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