ICC 2020: The Case to Keep Building

The continuing development of COVID-19 has resulted in uncertain times and despite mounting evidence that this might be the ‘new normal’ for the foreseeable future, we are all holding onto hoping that it is only a temporary blip. That the beaches, pubs and clubs will be open in a few weeks’ time and that investor-driven industries like construction will be able to ‘see through’ the short-term turbulence to bounce-back later in the year.

Like many of you, I have read about the various models that could be employed in response to the virus – all with the aim of ‘flattening the curve’.  Some seem to be far more draconian, but no less necessary, than others.  Some set out in stark detail the necessity for measures like school closures and self-quarantine, together with the very positive impact they are expected to have – reducing deathrates and pressure on intensive-care units.

The other key insight that is becoming increasingly clear, is that the virus won’t go away quickly. Infection rates have fallen in China because of extreme suppression measures which have included the isolation of whole city populations. When business as usual returns, it is possible that COVID-19 will return as well.  When the fight against the virus is described as a war, it’s likely to be an accurate description. A war is long haul, punctuated by a series of battles. Wars take years. One of the scenarios that has modelled is a one-to-two-year period of disruption, characterised by on-off periods of lock-down and business as usual, as the impact of COVID-19 waxes and wanes. 

But how do you manage a business or an economy when market conditions are so volatile and uncertain?

The first priority, as it should be, is that we keep our people healthy and safe. This feels like a short-term response but may well become business as usual if the experts are right. It has been very encouraging to see construction firms and their trade bodies responding quickly with a proactive line on necessary steps to keep sites open.  Lessons taken from what has happened in Italy and globally has informed thinking on health protection for workers.  Measures that enable people in all occupations to continue to work – for example, adapting site practice to minimise contact risks – will be essential if we are to continue to build.

The second priority – business continuity – is equally urgent.  Cash could stop circulating through the sector within weeks.  It is important to recall that, in the immediate aftermath of the 2008 financial crisis, nearly 70% of construction business failures in the UK occurred as a result of either reduced cashflow, a reduction in workload, or as a consequence of a slowdown in the wider economy.  Through a lethal cocktail of work stopping on sites and the holding of money within the supply chain, untold damage was done to industry capacity – damage that still affects the sector.  

Whilst the impact of the 2008 financial crisis was not quite as stark here, COVID-19 could well put the Australian construction industry on a similar path - particularly if cash flow begins to slow or stop altogether.  Therefore, the UK industry post-2008 makes sobering reading.

How the industry allocates the risk and pain of COVID-19 disruption is beyond the scope of this piece, but equally must be addressed quickly so that businesses can concentrate on fighting the virus rather than each other.

Planning for long-term recovery

The area that I am interested in is the planning for long-term recovery.  This may feel perverse given that the crisis has barely started.  However, lessons learned in 2010 remind us that good thinking gets overtaken by events and that a defining and bluntly applied policy like austerity or bail-out will have many unintended consequences.  

Those with long memories will recall that public investment increased in the immediate aftermath of the 2008 financial crisis supported by falling interest rates.  The economic stimulus package, which focused on social infrastructure and housing, had the desired effect and kept Australia out of recession.  However, the policy was short term, with public construction work returning to longer term trend levels with a few years.  Housing levels also dipped but rebounded quickly on the back of low interest rates.  It was private business investment, particularly in the mining sector driven by demand from China, that ultimately supported the local economy during this period.

Currently, we don’t have the luxury of relying on the mining sector and instead are looking to government expenditure to support the recovery effort and to keep the construction sector (along with the broader economy) ticking along.

Challenges and Opportunities

This time the opportunities and challenges are very different.  Borrowing is cheap and politically popular.  Construction is seen as part of the solution to levelling-up.  The housing market, which was slowly starting to show signs of recovery, is now facing the prospect of another dip with impacts to both pricing and approvals.  The question remans of how much will the record low interest rates support this sector in the near term? 

The sustained and repeated and negative impacts of COVID-19 shutdown is very likely to effect the confidence of the construction industry and its investors, particularly in the short term. Shares in the Australian REIT (Real Estate Investment Trusts) have fallen by around 69% in the past month and show no sign of finding a floor as the ASX continues well into negative territory. Some of those blue chip ASX listed property development firms have seen their share price fall by as much as 190% at the time of writing.

If Australia’s home buyers are starting to put their plans on hold, and builders and construction companies cannot find investment support, then who can break the logjam?  Perhaps it is time for government to become the buyer and owner of last resort?

Should the Government in any part of Australia decide to pursue an ownership model, it would hark back to times in the post war period through to the early 1970’s. A lot has been learnt since then, and the outcomes would be both palatable to the broader community as well as most, if not all, industry bodies.   

Now is the time to remember the lessons learnt from 2008. Just in the way that the public purse is already supporting our stricken consumer-facing industries, soon it will be necessary to stand behind Australia’s investment industries. The difference is that underwriting construction will deliver valuable assets as well as sustaining important businesses and scarce skills.

No government wants to buy and build houses. Neither does it want to bail out banks or airlines. It certainly doesn’t want to manufacture ventilators. These are all examples of imperfect decisions driven by events that eventually deliver long-term benefits. By making the case to keep building early, clearly and loudly, even in the midst of a crisis, I’d like to think that as an industry we can help Australia to keep investing in our future, even as it seems so uncertain.

This article is part of Arcadis’ International Construction Costs report for 2020.  This annual study looks at the construction industry around the globe and gives insights into how cities are tackling the challenges facing the sector. This year’s report focuses on resiliency, as well as the impacts of COVID-19.

Click here to download the ICC2020 report.

This article is based on a similar viewpoint that was originally prepared by Simon Rawlinson in the UK.  It has been updated and repurposed for the Australian market.  Matthew Gross, of the National Property Research Company, and Lee Cikuts, of Ethos Urban, have also contributed to this article.