16
FOURTH QUARTER 2016 NEW ZEALAND TRENDS IN PROPERTY AND CONSTRUCTION FORECAST REPORT 81
Fourth Quarter 2016
NEW ZEALAND TRENDS IN PROPERTY AND CONSTRUCTION
FORECAST REPORT 81
Disclaimer: While the information in this publication is believed to be correct at the time of publishing, no responsibility is accepted for its accuracy. Persons desiring to utilise any information appearing in the publication should verify its applicability to their specific circumstances. Cost information in this publication is indicative and for general guidance only and is based on rates as September 2016. National statistics are derived from the Australian Bureau of Statistics (ABS) and Statistics New Zealand.
OFFICES AROUND THE WORLD
Cover: Northwest Shopping Centre, Auckland
aFricaBOTSwAnAGaborone
MAuRiTiuSSaint Pierre
MOzAMBiquEMaputo
SOuTh AFRiCACape TownJohannesburgPretoria
asianORTh ASiABeijingChengduChongqingDalianGuangzhouGuiyangHaikouHangzhouHong KongJejuMacauNanjingNanningQingdaoSeoulShanghaiShenyangShenzhenTianjinWuhanWuxiXiamenXianZhuhai
SOuTh ASiABacolodBoholCagayan de OroCebuDavaoHo Chi Minh CityIloiloJakartaKuala LumpurLagunaMetro ManilaSingaporeYangon
americasCARiBBEAnBarbadosCayman IslandsSt. Lucia
nORTh AMERiCAAustinBostonCalgaryChicagoDenverGuamHiloHonoluluLas VegasLos AngelesMauiNew YorkOrlandoPhoenixPortlandSan FranciscoSeattleTorontoTucsonWaikoloaWashington DC
euroPeuniTED KingDOMBirminghamBristolCumbriaLeedsLondonManchesterSheffieldThames ValleyWarrington/BirchwoodWelwyn Garden City
RLB | EuRO ALLiAnCEAustriaBelgiumCzech RepublicFinlandGermanyHungaryIrelandItalyLuxemburgNetherlandsNorwayPolandPortugalRussiaSpainSwedenTurkey
miDDLe eastOMAnMuscat
qATARDoha
SAuDi ARABiARiyadh
uniTED ARAB EMiRATESAbu DhabiDubai
oceaniaAuSTRALiAAdelaideBrisbaneCairnsCanberraCoffs HarbourDarwinGold CoastMelbourneNewcastlePerthSunshine CoastSydneyTownsville
nEw zEALAnDAucklandChristchurchHamiltonPalmerston NorthQueenstownTaurangaWellington
Rider Levett Bucknall | Forecast Report 81 – Fourth Quarter 2016
3
kEY POINTS IN THIS ISSUEAuCKLAnD AgAin LEADS ThE wAy in COnSTRuCTiOn gROwTh Strong migration-led population growth in Auckland is boosting construction demand, particularly for residential construction.
LiFT in COnSTRuCTiOn in “hALO” REgiOnS AS hOuSE PRiCE gROwTh BROADEnSHouse prices are accelerating in the “halo” regions of Waikato and the Bay of Plenty, and this is encouraging residential construction.
nOn-RESiDEnTiAL COnSTRuCTiOn DEMAnD REFLECTS POPuLATiOn gROwTh Robust demand for new education buildings and health facilities from increased population.
FuRThER CuT in inTEREST RATES LiKELyDespite solid momentum in the New Zealand economy and house price strength inflation remains weak. With the Reserve Bank’s primary focus on lifting inflation back to its 2% mid-point inflation target further easing is likely. We expect the Official Cash Rate to reach 1.5% by the middle of 2017.
CONFIDENCE TODAY INSPIRES TOMORROWRiDER LEvETT BuCKnALLWith a network that covers the globe and a heritage spanning over two centuries, Rider Levett Bucknall is a leading independent organisation in cost management and quantity surveying and advisory services.
Our achievements are renowned: from the early days of pioneering quantity surveying, to landmark projects such as the Sydney Opera House, HSBC Headquarters Building in Hong Kong, the 2012 London Olympic Games and CityCenter in Las Vegas.
We continue this successful legacy with our dedication to the value, quality and sustainability of the built environment. Our innovative thinking, global reach, and flawless execution push the boundaries. Taking ambitious projects from an idea to reality.
FORECAST 81 Prepared by the New Zealand Institute of Economic Research (Inc.) exclusively for Rider Levett Bucknall, Forecast is produced quarterly and provides detailed local construction market intelligence and knowledge.
COnSTRuCTiOn MARKET inTELLigEnCEForecast is supplemented by Rider Levett Bucknall's construction market intelligence publications: the International Report, regional (including the Oceania Report) and country specific reports.
Rider Levett Bucknall’s Smartphone app. Download direct from your app store. Available on iPhone, Android, Windows Phone7 and Blackberry Operating Systems.
Rider Levett Bucknall | Forecast Report 81 – Fourth Quarter 2016
4
Both residential and non-residential construction grew strongly over the first half of 2016, as the surge in population in recent years boosted demand for new dwellings as well as education and health facilities. We continue to expect construction to be a key driver of economic growth in the New Zealand economy over the coming years.
Along with lower interest rates, the migration-led surge in population in recent years will be a key support. There are signs net migration is moderating in recent months on the back of a slowing in new permanent arrivals into the country. However, the effects of the surge in population in recent years will continue to flow through to many areas of construction demand.
Construction demand is particularly strong in Auckland, reflecting the concentration of net migration inflows into the region. Net migration into Auckland totalled around 32,000 over the past year.
Net migration into Wellington, Canterbury and the Bay of Plenty
were also relatively strong over the past year. This was in contrast to the net migration outflows from the West Coast and Marlborough.
These net migration flows provide some indication of housing market pressures across the regions.
With strong population growth boosting housing demand, residential construction is ramping up, particularly in Auckland. However, the supply of new houses has not been enough to keep up with increased demand even from net migration alone. For example, the circa-32,000 net migration inflow into Auckland would suggest at least 10,000 new dwellings are required, yet dwelling consent issuance in the region totalled only around 9,500 over the past year.
The Auckland Unitary Plan has loosened planning restrictions to allow for the construction of up to 422,000 dwellings by 2040 to accommodate population growth with a mix of infill/intensification and greenfields developments on the city fringe. This should also
increase demand for commercial property given the increased needs for services that a concentration of residents would bring. However, the Productivity Commission has also recently highlighted impediments to residential construction that remain within the Resource Management Act.
Strong population growth has also spilled over into the “halo” regions of Waikato and the Bay of Plenty, as reflected in the acceleration in house prices in these regions. This in turn has encouraged house-building demand in these regions.
Non-residential construction continues to strengthen, with the surge in population boosting demand for education and health facilities. Robust household spending and growth in international visitor numbers have also underpinned demand for new retail outlets. Lower fuel prices have increased the number of flights coming into New Zealand, with the increase in long-haul travellers particularly encouraging as they tend to stay in the country longer and spend more.
BUILDINg ACTIvITY TRENDS
FiguRE 1 TENTATIvE SIgNS OF A MODERATION IN NET MIgRATION PERMAnEnT ARRivALS inTO nz, MOnThLy 000S
Source: Statistics NZ, NZIER
1990 1997 1999 2001 2003 2005 2007 20090
9
4
5
2
3
1
8
6
7
20152011 2013
NON-NZ CITIZENSNZ CITIZENS
PERMANENT ARRIVALS
PER
SO
NS
PE
R M
ON
TH
(00
0 S
)
Rider Levett Bucknall | Forecast Report 81 – Fourth Quarter 2016
5
FiguRE 2 NET MIgRATION BY REgION
Source: Statistics NZ, NZIER
NET MIGRATION
DECREASE0 - 250249 - 500499 - 1000999 - 2000MORE THAN 2000
ANNUAL CHANGE IN NET MIGRATION BY REGION
Rider Levett Bucknall | Forecast Report 81 – Fourth Quarter 2016
6
ECONOMIC BACkDROP There is solid momentum in the New Zealand economy on the back of strong domestic demand, with annual growth of almost 3% on average over the past year. A substantial lift in construction activity and household spending led the way, and we continue to expect they will be key drivers of economic growth over the coming years.
We expect this solid momentum will buffer the New Zealand economy from the downside risks stemming from a more fragile global growth outlook. Uncertainty over the effects of the decision by Britain to leave the European Union, the upcoming presidential election in the United States, and how successfully the Chinese economy can rebalance its economic growth is casting a shadow over the global growth outlook.
Meanwhile, the risks around the dairy sector have receded with the pick-up in global dairy prices in recent auctions. The lift in the price of whole milk powder is particularly encouraging given it is New Zealand’s key dairy export. As profitability improves in the dairy sector on-farm investment should recover.
We also expect further robust growth in tourism income given the increase in flight capacity bringing more tourists into the country. This should be a key support for regional economic development over the next few years
INTEREST AND ExCHANgE RATES Inflation remains weak despite robust economic activity, with annual CPI of 0.4% for the year to June still well below the Reserve Bank’s 1 to 3 percent target band. The Reserve Bank is focused on bringing inflation back up to its 2 percent mid-point target, and is concerned that inflation expectations will remain persistently low. These factors saw the central bank cut the Official Cash Rate (OCR) to 2% at its August meeting and indicate further easing was likely. We expect the OCR to reach 1.5% by the middle of next year. While this will cause further imbalances in the housing market, the Reserve Bank is choosing to mitigate the risks to financial stability through the introduction of further macro-prudential tools requiring all property investors taking out new mortgages to have a 40% deposit.
The New Zealand dollar has continued to appreciate despite the monetary policy easing from the Reserve Bank. The more favourable New Zealand economic outlook relative to the other major economies is underpinning strong demand for the New Zealand dollar.
BUILDINg INvESTMENT There has been further strengthening in non-residential construction, with consent issuance and the architects’ measure of own activity in the NZIER Quarterly Survey of Business Opinion both indicating a solid pipeline of work. Population growth is underpinning strong demand for education buildings and hospitals. Looking ahead, we expect demand for commercial buildings including offices and hotels will lift over the coming years on improved optimism amongst businesses towards investment in new buildings.
Building consents
Non-residential building consent issuance has rebounded in recent months, following some softness earlier this year. We expect population growth and low interest rates will continue to support further pick-up in non-residential construction demand.
The average value per square metre consented spiked in recent months. While this measure is very volatile, it does suggest a lift in construction cost inflation.
BUILDINg ACTIvITY OUTLOOk
Rider Levett Bucknall | Forecast Report 81 – Fourth Quarter 2016
7
FiguRE 3 RESIDENTIAL CONSTRUCTION RAMPINg UP, BUT NOT BY ENOUgH AnnuAL COnSEnTS, nuMBER 000S
Source: Statistics NZ, NZIER
BuiLDing COnSEnTS By SECTOR Education buildings, healthcare facilities and retail outlets were the top three drivers of growth in non-residential consent issuance over the past year, reflecting the effects of strong population growth. The surge in construction of education buildings largely reflects new construction, although alterations also contribute to the growth.
Meanwhile, the increase in healthcare facilities consists entirely of growth in new construction.
Construction demand for hotels and office buildings have been flat to easing slightly over the past year, despite growth in professional services and tourism activity. However, the easing in office construction reflects a decline in alterations, which offset growth in new office building construction. We expect lower interest rates and lift in office rents will encourage stronger demand for new developments including office and retail space.
There was a decline in farm and industrial buildings over the past year as the rural sector pared back on investment in light of
reduced incomes. However, the recent improvement in profitability, particularly amongst dairy farmers, should see demand for these types of buildings recover from 2018.
Strong population growth underpin many of the longer-term trends:
• Officegrowthtoaccommodatethehigher number of workers.
• Publicsectorspendingoneducation buildings, along with rebuilding activity.
• Capacityconstraintsinthetourismsector will drive demand for new accommodation buildings.
1991 1996 2001 20060
14
8
2
4
6
12
10
20162011
WAIKATO WELLINGTON CANTERBURYAUCKLAND
AN
NU
AL
NU
MB
ER
(00
0S)
RESIDENTIAL CONSENTS BY REGION
Te Whare Whakapapa - New Zealand Blood Service - South Island Blood Centre, Christchurch
Rider Levett Bucknall | Forecast Report 81 – Fourth Quarter 2016
9
Despite the easing in recent months, concrete usage in Canterbury remains at historically high levels. This reflects the fact that there is still a substantial amount of earthquake rebuilding activity taking place, although the residential part of it is wrapping up. Consent issuance for education buildings has lifted particularly strongly over the past year.
Non-residential construction demand is also picking up in Wellington and the Bay of Plenty. In Wellington, this reflects increased demand for the construction of offices and education buildings. Demand for storage buildings and retail outlets have increased over the past year.
In contrast, non-residential construction demand contracted in Marlborough and the West Coast over the past year, with net migration outflows likely weighing on demand.
FiguRE 4 STRONg POPULATION gROWTH DRIvES NON-RESIDENTIAL CONSTRUCTION DEMANDAnnuAL ChAngE in COnSEnTS, $M, yEAR EnDED JuLy 2016
Source: Statistics NZ, NZIER
BuiLDing COnSEnTS By REgiOn The different rates of population growth across the regions provide an indication of the relative strength of construction demand. The surge in construction activity in Auckland is reflected in the lift in concrete sales in the region, and it has now overtaken Canterbury in terms of concrete usage over the past year. The growth reflects increased demand for offices and education buildings in the region.
HOSTELS INDUSTRIALOFFICEHOTELSHEALTH FARMSOCIALSTORAGEEDUCATION RETAIL
0
400
500
300
200
-200
100
-100
600
TOTALNEW ALTERED
CH
AN
GE
OV
ER
YE
AR
TO
JU
LY 2
016
($ M
ILLI
ON
)
NON-RESIDENTIAL CONSENTS BY BUILDING TYPE
Rider Levett Bucknall | Forecast Report 81 – Fourth Quarter 2016
10
FiguRE 5 STRONg PIPELINE OF CONSTRUCTION WORk ACROSS THE SECTORSnET % OF ARChiTECTS
FiguRE 6 AUCkLAND OvERTAkES CANTERBURY FOR CONCRETE USAgEAnnuAL CuBiC METERS, 000S
Source: NZIER
Source: Statistics NZ
1996 20001998 2002 2004 2006 2008 20122010 2014 2016
80
20
40
60
-20
0
-60
-40
-80
NE
T %
OF
FIR
MS
ARCHITECTS: WORK IN OWN OFFICE NEXT 12 MONTHS
COMMERCIAL GOVERNMENTHOUSING
1995 2000 2005 20100
1,200
600
200
400
1,000
800
2015
WAIKATO & BAY OF PLENTY WELLINGTON CANTERBURYAUCKLAND
AN
NU
AL
CU
BIC
ME
TR
ES
, 000
S
CONCRETE SALES BY REGION
Rider Levett Bucknall | Forecast Report 81 – Fourth Quarter 2016
11
TABLE 1 NON-RESIDENTIAL BUILDINg CONSENTS BY REgION AND SECTOR$M OF COnSEnTS FOR ThE yEAR EnDing JuLy 2016; RED COLOuR ShADing FOR DECLinE in COnSEnTS FROM PREviOuS yEAR
SECTOR
REgiOnhOSTELS, PRiSOnS
ETCACCOMODATiOn hEALTh EDuCATiOn
SOCiAL, CuLTuRAL, RELigiOuS
RETAiL OFFiCE STORAgE inDuSTRiAL FARM
nORThLAnD 7.7 1.6 1.5 11.8 6.7 5.1 8.5 5.4 3.8 7.6
AuCKLAnD 204.6 36.5 165.8 427.1 76.1 342.1 450.8 281.7 115.8 26.9
wAiKATO 1.8 11.5 33.1 47.2 48.0 77.2 35.2 32.1 48.9 61.1
BAy OF PLEnTy 1.5 0.5 27.8 42.6 25.8 61.7 45.1 76.7 17.6 11.6
giSBORnE 0.0 0.1 0.1 5.7 2.2 2.3 2.3 0.5 11.8 2.0
hAwKE'S BAy 0.6 1.3 1.0 23.5 18.0 14.9 15.1 23.4 12.8 8.5
TARAnAKi 0.7 3.6 6.4 15.1 9.8 8.0 16.4 6.7 13.6 29.8
MAnAwATu-wAngAnui 0.1 3.1 19.1 20.9 15.4 13.9 29.8 14.4 14.5 13.6
wELLingTOn 1.6 5.0 26.9 139.9 33.6 51.0 227.6 18.3 34.2 4.4
nELSOn 0.0 0.4 0.3 6.9 12.5 5.6 2.3 2.0 9.5 0.1
TASMAn 0.0 0.9 0.1 3.5 3.5 8.0 4.0 3.2 1.2 4.2
MARLBOROugh 0.0 6.4 4.2 4.8 2.5 4.2 4.0 6.3 9.8 2.3
wEST COAST 0.0 2.2 4.3 2.4 2.3 0.8 1.9 2.2 4.7 3.1
CAnTERBuRy 16.8 42.8 361.2 469.2 121.2 200.1 302.5 218.9 113.9 55.3
OTAgO 5.5 45.5 23.7 134.4 8.5 62.4 31.0 15.0 18.9 11.7
SOuThLAnD 2.0 0.5 5.3 4.3 2.6 18.5 6.8 9.3 6.7 11.2
Source: Statistics NZ, NZIER
New Mental Health Inpatient building (Ngā Rau Rākau), Hastings
Rider Levett Bucknall | Forecast Report 81 – Fourth Quarter 2016
13
The Capital Goods Price Index for Non-Residential Buildings (CGPI-NRB) provides an official measure of cost movements in the sector. The CGPI-NRB excludes GST. The rate of increase in the CGPI-NRB can be used as an indicator of cost escalation.
The CGPI-NRB is a national average across all regions and building types. We therefore advise caution in applying the increase in the CGPI-NRB as an indicator of cost escalation for specific building projects.
The Rider Levett Bucknall Third Quarter 2016 Oceania Report provides local regional comment and tender price relativity between the main New Zealand and Australian centres. This publication is available at www.rlb.com or on request from any Rider Levett Bucknall office.
Construction costs increases have moderated more recently following solid growth over 2014, but there are differences across the regions. While resource and capacity constraints have eased in Canterbury, they are more acute in Auckland.
NZIER forecasts construction cost inflation to edge up to 4% in 2020. This represents the highest sustained inflation in the sector since the construction boom of the mid-2000s. However, NZIER does not expect the inflation to be as high as the mid-2000s given 1) the low inflation environment limits the extent to which rising costs can be passed on, and 2) strong net migration is helping to mitigate skills shortages in the building sector.
BUILDINg COSTS
FiguRE 7 NON-RESIDENTIAL BUILDINg COST ESCALATIONCgPi-nRB inDEx, AnnuAL % ChAngE
Source: Statistics NZ, NZIER forecasts
FORECAST
1991 1997 20001994 2003 2006 2009 2012 2015 2018
10
12
8
6
2
4
-2
0
-4
-6
Rider Levett Bucknall | Forecast Report 81 – Fourth Quarter 2016
14
yEAR quARTER inDEx quARTERLy % ChAngE
AnnuAL % ChAngE
2011
MARCh 1334 0.1 -0.1
JunE 1342 0.6 0.4
SEPT 1347 0.4 0.8
DEC 1349 0.1 1.2
2012
MARCh 1351 0.1 1.3
JunE 1352 0.1 0.7
SEPT 1354 0.1 0.5
DEC 1358 0.3 0.7
2013
MARCh 1365 0.5 1.0
JunE 1372 0.5 1.5
SEPT 1383 0.8 2.1
DEC 1402 1.4 3.2
2014
MARCh 1413 0.8 3.5
JunE 1429 1.1 4.2
SEPT 1440 0.8 4.1
DEC 1456 1.1 3.9
2015
MARCh 1471 1.0 4.1
JunE 1480 0.6 3.6
SEPT 1494 0.9 3.8
DEC 1502 0.5 3.2
MARCh 1514 0.8 2.9
JunE 1529 1.0 3.3
2016 SEPT 1541 0.8 3.2
DEC 1556 0.9 3.6
2017
MARCh 1570 0.9 3.7
JunE 1585 0.9 3.7
SEPT 1599 0.9 3.7
DEC 1613 0.9 3.7
2018
MARCh 1626 0.8 3.6
JunE 1640 0.8 3.5
SEPT 1655 0.9 3.5
DEC 1670 0.9 3.5
2019
MARCh 1685 0.9 3.6
JunE 1701 1.0 3.8
SEPT 1718 1.0 3.8
DEC 1735 1.0 3.9
2020
MARCh 1752 1.0 4.0
JunE 1769 1.0 4.0
SEPT 1786 1.0 4.0
DEC 1800 0.8 3.7
Notes: The current and forecast CGPI-NRB is a national average, which does not differentiate between regions or building types. We therefore advise caution in applying the increase in the CGPI-NRB as a measure of cost escalation for specific building projects.
Source: Statistics NZ, NZIER forecasts
TABLE 2 NON-RESIDENTIAL BUILDINg COST INDEx
Rider Levett Bucknall | Forecast Report 81 – Fourth Quarter 2016
15
New ZealandAuckland +64 9 309 1074
Christchurch +64 3 354 6873
Hamilton +64 7 839 1306
Palmerston North +64 6 357 0326
Queenstown +64 3 409 0325
Tauranga +64 7 579 5873
Wellington +64 4 384 9198
For further information please contact grant Watkins +64 4 384 9198 or your nearest Rider Levett Bucknall office.
RIDER LEvETT BUCkNALL OFFICES
rlb.com
