NEW ZEALAND TRENDS IN PROPERTY AND CONSTRUCTION MARCH 2010

NEW ZEALAND TRENDS IN PROPERTY AND CONSTRUCTION MARCH 2010

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INDEPENDENT CONSULTANTS LOCAL KNOWLEDGE AND EXPERTISE GLOBAL NETWORK Rider levett bucknall Rider Levett Bucknall are independent property market and construction cost consultants with offices located globally. forecast 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 intelligence Forecast is supplemented by Rider Levett Bucknall's bi-annual construction market intelligence publications: the Oceania Report, International Report and Gulf Report. key points in this issue Building activity The downturn in work in the non-residential building sector shows very clearly in the latest data, with a 5.2% decrease in building work put in place over 2009. Building consents The 3.9% decline in non-residential building consents also signals less work ahead, for the next six to nine months at least. Building investment Looking further out, non-residential building investment is forecast to drop 17% over the next 12 months, before solid growth over the following two years. Building confidence Nevertheless, the building sector as a whole is feeling more positive about the immediate future, with signs that the worst is over for residential building at least. Building costs Non-residential building costs are still falling, by 3.8% over 2009, in the face of weak demand, excess capacity and competitive pricing. Cost escalation should remain low for the next two years, before accelerating over 2012 and 2013 as the demand for non-residential building returns to previous levels. 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 use only and is based on rates as March 2010.

Figure 1 Annual non-residential building work put in place $ BILLION 6 5 4 3 2 1 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Statistics New Zealand YEAR Figure 2 Annual non-residential building work put in place by sector COMMERCIAL MISCELLANEOUS EDUCATION FACTORIES AND INDUSTRIAL HOTELS AND BOARDING HOUSES HOSPITALS AND NURSING HOMES $ BILLION 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Statistics New Zealand YEAR 2

building activity trends The downturn in work in the nonresidential building sector shows very clearly in the latest data, as shown in Figure 1. The value of non-residential building work put in place fell 9.0% in the last quarter of 2009. This contributed to a 5.2% reduction over the 2009 calendar year, to an annual total of $4.948 billion, after peaking in mid 2009. In comparison, work on residential buildings fell 3.9% in the last quarter of 2009 and 19.8% over the 2009 calendar year. Work on hospitals and nursing homes recorded the sharpest drop, down 39% this year. Work on commercial buildings declined 9%, hotels and boarding houses 7%, factories and industrial buildings 5% and miscellaneous buildings 1 1.6%. The only sector to record an increase in work this year was education buildings, the third largest sector reported, growing 21% due in part to government spending. 3 1 A category encompassing social, cultural, religious, recreational and farm buildings.

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building activity outlook economic growth and building investment The New Zealand economy stabilised with low but positive growth of 0.2% in each of the June 2009 and September 2009 quarters. This marked the end of the recession, but the recovery is still weak and likely to waver some as it gradually gains strength. The outlook is for economic growth of 2.4% over the next 12 months, slowing to 1.8% over the year to March 2011, before accelerating again to 4.0% over the year to March 2012. Demand for new commercial buildings tends to lag economic growth. The non-residential building sector was therefore later to enter a downturn than the residential building sector and will also be later to see an upturn. The recession squeezed firms profits and has left them with low reserves for investing in new buildings. There is also plenty of vacant office and retail space available before needing to build more. In the short run, the sector faces regulatory uncertainty over the government s tax reforms. The outlook is for the total value of nonresidential building investment to fall a further 17% over the next 12 months, before solid growth of 16% and 12% over the following two years. The outlook for residential building investment is a shallow recovery over the next 12 months, held back by rising mortgage rates and slowing net migration, before gaining speed over the following two years, driven by population growth and replacement of old housing stock. Interest rates and exchange rates With economic activity starting to pick up, annual consumer price inflation rose slightly to 2.0% at the end of 2009. Firms still have significant excess capacity and are competing strongly for customers, which kept producer prices down. Producer input prices fell 3.3% and output prices fell 3.8% over the 2009 calendar year. The Official Cash Rate (OCR) remained unchanged at 2.5% at the Reserve Bank s latest review on 11 March 2010. Households and businesses are more positive about the future, but still cautious in increasing their spending. The Reserve Bank expects to start raising the OCR again around mid year. The New Zealand dollar has shown some weakness recently, due to waning risk appetites, after strengthening over the course of 2009. It looks fairly valued, based on relative economic performance and, despite ongoing volatility, is expected to remain around the current rate for the remainder of 2010. 5

Figure 3 Annual non-residential building consents $ BILLION 5 4 3 2 1 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Statistics New Zealand YEAR Figure 4 Annual total floor area and average value of consents 4.0 3.5 SQUARE METRES (MILLION) $ PER SQUARE METRE 2,000 1,800 1,600 3.0 1,400 2.5 1,200 2.0 1,000 TOTAL FLOOR AREA (LEFT AXIS) 1.5 800 AVERAGE VALUE (RIGHT AXIS) 1.0 600 400 0.5 200 0.0 0.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Statistics New Zealand YEAR 6

building activity outlook building consents Declining volumes of non-residential building consents over 2009 have at last translated into a drop in the total value of consents issued, as shown in Figure 3. Although the start of the year is usually quiet, the month of January 2010 was 39% lower than January 2009 and the lowest month since April 2006. Consents data are, however, very volatile month to month. In annual terms, $4.387 billion of non-residential building consents were issued over the year to January 2010, 3.9% less than in the year to January 2009. Over the same year, the total value of consents issued for residential buildings dropped 14.2%, although the month of January 2010 was 15.3% higher than the lowest point of January 2009. The total floor area of non-residential building consents issued fell 31% over the year to January 2010, as shown in Figure 4. The 38% increase in average value per square meter is at least some consolation for firms able to secure the lower volumes of work signalled. 7

TABLE 1 Value of consents by sector in the year to January 2010 Sector Offices and administration buildings Social, cultural and religious buildings Annual value ($ million) Share of total (%) Annual growth (%) 1,044 23.8-0.9 665 15.2 73.3 Education buildings 614 14.0 2.4 Shops, restaurants and taverns Factories and industrial buildings 449 10.2-16.4 393 9.0-32.7 Hospitals and nursing homes 357 8.1 36.7 Storage buildings 261 6.0-36.6 Hostels and boarding houses 252 5.7 247.0 Farm buildings 190 4.3-48.4 Hotels and motels 124 2.8-39.1 Miscellaneous buildings 38 0.9-57.2 Total 4,387 100-3.9 Source: Statistics New Zealand Figure 5 Annual growth in value of consents by region in the year to January 2010 GISBORNE BAY OF PLENTY CANTERBURY TASMAN -90% -60% -30% 0% 30% 60% 90% 120% Average annual percentage change OTAGO MARLBOROUGH MANAWATU-WANGANUI AUCKLAND WELLINGTON WAIKATO SOUTHLAND NELSON HAWKE'S BAY TARANAKI NORTHLAND WEST COAST 8 Source: Statistics New Zealand -90% -60% -30% 0% 30% 60% 90% 120%

building activity outlook consents by sector Despite the drop in consents overall, three sectors grew strongly. Consents for hostels and boarding houses and social, cultural and religious buildings were boosted by upcoming work for the 2011 Rugby World Cup. Consents for hospitals and nursing homes saw a significant upturn, closing 2009 with this sector s highest quarter ever, concentrated in the Bay of Plenty, Wellington and Auckland regions. Consents for miscellaneous buildings 2 and farm buildings halved from the highs of early 2009 and late 2008, respectively. Downward trends continued for shops, restaurants and taverns, factories and industrial buildings, storage buildings and hotels and motels. consents by region Gisborne seems to have come through the economic recession relatively unscathed and its demand for commercial building has held up. Over the year to January 2010, the Gisborne region recorded an 88% increase in the total annual value of consents issued, although this is the fourth smallest of the regions reported. The number of consents issued fell 12%, but their total floor area rose 30%, indicating larger building projects of higher average value. Over $18 million worth of consents were issued for new factories and industrial buildings in this region in the month of November 2009. The following month, over $6 million of consents were issued for office building alterations. In the first month of 2010, over $7 million of consents were issued for new shops, restaurants and taverns. As shown in Figure 5, the Bay of Plenty, Canterbury, Tasman, Otago and Marlborough regions saw annual growth rates in double figures. Downward trends continued in the West Coast, Northland, Taranaki, Hawke s Bay and Nelson regions. Southland and Wellington entered downturns after robust growth over most of 2009. All three main centres recorded lower consent volumes over the year to January 2010 than the previous year, but Canterbury fared best with an increase in the total value of consents issued. Over the year to December 2009, the total value of consents issued in Canterbury grew 26%, whilst their total floor area fell 32%. After rebounding strongly for much of 2009, Wellington recorded a 10% drop in consent values over the January 2010 year, the same as over the January 2009 year, and their total floor area fell 14%. The total value of consents issued in Auckland dropped 5%, compared with a 13% increase over the previous year, and their total floor area fell 30%. This did at least represent a 37% increase in average value per square metre. The outlook for Auckland in particular remains negative as vacancy rates for existing office and retail space in the central business district continue to rise. 9 2 This is smallest of the sectors reported and a residual category for buildings not covered by other sectors (e.g. public toilets and car parks). Unfortunately, this category is not comparable to the miscellaneous buildings category of building work put in place

building activity outlook building industry confidence In NZIER s January 2010 Quarterly Survey of Business Opinion, the building sector residential and non-residential building combined showed signs of stabilising. The general business confidence of the building sector strengthened further, as firms saw their own output and new orders hold steady in the last quarter of 2009 after two years of contraction. This survey is, however, dominated by the larger residential building sector, which saw a downturn, and is showing signs of a subsequent upturn, ahead of the non-residential building sector. A net 3 balance of 0% of firms in the building sector reported a fall in their own output in the last three months of 2009, after a net 30% reported reduced output in the previous survey. Similarly, a net 0% reported a decline in new orders, compared with a net 37% in the September 2009 quarter. Firms were cautiously optimistic about the immediate future. A net 1% expected lower output in the first quarter of 2010, but a net 8% expected new orders to increase. Consistent with this picture of building activity stabilising and possibly about to pick up, job losses in the sector have slowed. A net 11% of firms reduced staff numbers in the last three months of 2009, compared with 31% to 43% of firms in the previous three quarters. Only a net 3% expected to make further job cuts in the first quarter of 2010. Firms also reported cost pressures to be mounting once again. Fewer firms cut their selling prices in late 2009 and a net balance of 7% expected to raise their selling prices in early 2010, the first time this indicator has been positive for over a year. Of particular relevance to the nonresidential building sector are other firms building investment intentions. These improved somewhat over the second half of 2009, but remained negative. At the end of 2009, a net 15% of firms economywide expected to reduce their investment in buildings over the following 12 months. This showed little movement from the October 2009 survey s 16%, but a marked improvement from the 46% and 29% of the first two quarters of 2009. 10 3 The percentage of firms reporting their output to have fallen minus the percentage reporting their output to have risen, after accounting for firms that did not provide a response.

building costs The Capital Goods Price Index for Non-Residential Buildings (CGPI- NRB) provides an official measure of cost movements in the sector. The rate of increase in the CGPI-NRB can be used as an indicator of cost escalation. Note that this 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 March 2010 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. According to the CGPI-NRB, average building costs in the nonresidential building sector continued to fall in late 2009, although not quite as sharply as earlier in the year. The CGPI-NRB fell 1.0% in the last quarter of 2009 after falling 1.4% in the third quarter and 1.1% in the second quarter. Statistics New Zealand attributed the latest quarter s decrease to lower labour costs, materials prices and contractor margins. Meanwhile, average building costs for residential building and other construction both rose in the last quarter of 2009. The relatively large quarterly falls caused the CGPI- NRB to drop 3.8% over the year to December 2009. This reflects, to some extent, excess capacity and competitive pricing in the face of weak demand for non-residential building, but also Statistics New Zealand s switch to a new calculation methodology over these three quarters. NZIER s latest forecast of the annual percentage change in the CGPI- NRB is shown in Figure 6 and Table 2. NZIER expects building costs to have fallen further in the first quarter of 2010. Annual cost escalation should remain low for the next two years before accelerating over 2012 and 2013 as the demand for non-residential building returns to previous levels. 11

Figure 6 Non-residential building cost escalation 12 10 8 FORECAST Annual percentage change in the CGPI-NRB 6 4 2 MARCH 2010 FORECAST DECEMBER 2009 FORECAST 0-2 -4 1999 2001 2003 2005 2007 2009 2011 2013 2015 YEAR Source: Statistics New Zealand, NZIER forecast TABLE 2 Non-residential building cost index 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. 12 Forecast Year Quarter Index Quarterly change (%) Annual change (%) March 1363 1.0 2.3 2008 June 1371 0.6 2.8 Sept 1393 1.6 4.0 Dec 1390-0.2 3.0 March 1384-0.4 1.5 2009 June 1369-1.1-0.1 Sept 1350-1.4-3.1 Dec 1337-1.0-3.8 March 1328-0.7-4.1 2010 June 1333 0.4-2.6 Sept 1341 0.6-0.7 Dec 1345 0.3 0.6 March 1348 0.2 1.5 2011 June 1352 0.3 1.4 Sept 13 0.3 1.1 Dec 1362 0.4 1.2 March 1369 0.5 1.5 2012 June 1376 0.6 1.8 Sept 1385 0.7 2.2 Dec 1395 0.7 2.5 March 1407 0.8 2.8 2013 June 1420 0.9 3.2 Sept 1433 0.9 3.4 Dec 1446 0.9 3.6 March 1457 0.8 3.6 2014 June 1467 0.7 3.3 Sept 1475 0.5 2.9 Dec 1481 0.4 2.4 2015 March 1484 0.3 1.9 Source: Statistics New Zealand, NZIER forecast

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