Construction to catch a cold

Some sources and experts are now predicting that Australia’s economy will soon record its first recession since 1991. Transmission of the virus in Australia is now occurring, meaning that disruptions and closures to facilities, such as child-care centres, schools, and aged care communities, will potentially become more widespread. Both the Federal Government and health authorities across the country, supported by the World Health Organisation, anticipated several months of disruption from the outbreak.

Should the Australian economy fall into a recession, it is anticipated that it will be brief and that it will bounce back relatively quickly, as government stimulus and interest rates cuts work to support overall conditions. Housing values as well mining and infrastructure investment have been on the rise recently, and should weather any short term impact. A rebound is also supported by the fact that China is likely to implement policies to stimulate its economy and especially its manufacturing sector, which traditionally benefits Australia.

Many businesses now have significantly improved their digital connection over the last five years, with many also implementing flexible and work-from-home policies. Those businesses and operations with a diversified supply-chain find themselves at an advantage to those reliant on single suppliers in China.

Those businesses that are so enabled will likely not experience the same level of impact from COVID-19.

Supply Chains to feel the pinch

In the more immediate term, we know that several factories in China have closed temporarily in response to the outbreak. These closures have had an immediate impact on several projects across Australia. Looking forward, projects that are looking to secure materials and components from China are likely to experience delays in both manufacture and delivery. Those materials that are likely to be the hardest hit comprise:

• Facades / Glazing
• Structural Steelwork
• Carpet
• Plasterboard
• Elevators
• Joinery
• Mechanical and Electrical Componentry

The best-case scenario is that there will be delays in production and delivery of between 4 and 6 weeks. However, the most likely outcome is that production delays could be as much as 6 months if not longer. This will create a huge amount of pressure on the Australian construction industry and will result in, not only increasing costs and project delays, but also an escalation in claims and disputes.

To offset these potential impacts, clients, consultants and contractors will need to look for alternative supply chain options to meet their needs. This will likely result in a surge in order-books across Australia, with increased orders resulting in a more extensive backlog as local manufacturers become overloaded.

The Sectors that are likely to be most impacted

It is anticipated that there are several sectors that will be more adversely affected than others. These include:

• Tertiary Education | Those Universities that have a significant reliance on overseas students are likely to be the most impacted. We have received anecdotal evidence that suggest that some Universities are already side-lining major capital works projects until the crisis has subsided.
• Residential Apartments | Whilst apartment construction levels have been at its lowest level since the collapse of the sector in 2017 / 18, there have been signs that the values are now returning to previous levels. This was bringing an improved level of confidence to the sector that have seen an increase in approvals and new construction work before the end of the year. However, COVID-19 may delay any such recovery to this sector, particularly where developers are reliant on overseas investors.
• Tourism and Hotels | It has widely been reported that our Tourism Sector will be the hardest hit by COVID-19. Recent data from Tourism Australia suggests that year-on-year bookings are down 100% from China, 71% from Indonesia, more than 50% down from the US, 47% down from the UK and 32% down from India. Government travel bans on people arriving via China, Iran and South Korea have further added to the tourism slump. It is therefore likely that any projects within this sector, that have not yet commenced, will either be delayed for an extended period or until the tourism market begins to show signs of recovery. Some projects may be cancelled altogether.

In addition to the above, almost every business will be impacted in some manner by the outbreak. One of the biggest impacts is to business and consumer confidence which has flow on impacts to the whole economy as key investment decisions are postponed and consumption expenditure becomes more conservative. Many organisations are now implementing strict international travel bans whilst also reviewing domestic travel policies. Therefore, mega projects that may rely on fly-in fly-out expertise may be further impacted by the crisis.

That said, many businesses now have significantly improved their digital connection over the last five years, with many also implementing flexible and work-from-home policies. In addition, those businesses and operations with a more diversified supply-chain find themselves at an advantage to those reliant on single suppliers in China. Those businesses that are so enabled will likely not experience the same level of impact from COVID-19.

The longer COVID-19 continues the larger the impact will be on the property sector and the economy overall, however, in a time of uncertainty, property remains one of more stable and secure investments.