Non-residential construction set to advance in 2018: Westpac's Andrew Hanlan

Non-residential construction set to advance in 2018: Westpac's Andrew Hanlan
Non-residential construction set to advance in 2018: Westpac's Andrew Hanlan

GUEST OBSERVER

The non-residential construction sector enjoyed better times in 2017, with more projects proceeding, a point that we have highlighted previously.

This lays the foundation for building work in the sector to advance solidly in 2018. The long duration of some projects can see work spread out over two to three years.

Approvals for non-residential building projects increased by 22% in 2017, to $46.8bn, a rise of $8.3bn on the previous year. That built upon an 11% increase in 2016, up by almost $4.0bn.

The lift in approvals in 2017 is the largest annual increase since 2007, post the GFC. While, the 35% lift for the two years from 2015 to 2017 is the strongest two year showing since the 2006 to 2008 period, but that is still well short of the 50% jump from 2004 to 2006.

The positive developments in the sector are underpinned by robust population growth and a lift in public investment. In short, the capital stock is expanding to meet the needs of a growing population, as well as to service rapid growth in both international tourism and foreign student numbers.

The non-residential building sector is diverse, spanning offices and retail in the commercial segment; factories and warehouses in industrial; and social buildings, including, health, education, accommodation (hotels, aged care, student apartments), and entertainment.

Building approvals in 2017 advanced across each of the broad segments, with public projects and offices punching well above their weight.

The $8.3bn increase in total building approvals in 2017 is comprised of: public works, +$2.3bn; offices, +$2.7bn; social buildings, $1.4b; industrial, $1.0bn and commercial ex offices, +$0.9bn. Together, public and office projects accounted for 60% of the increase in approvals in 2017.

Office approvals have rebounded from the lows of 2015 to be in line with the highs of 2013. This profile, against the current economic backdrop, points to the likelihood that office approvals will retrace somewhat over 2018 and 2019.

The major non-mining states on the east coast, Victoria and NSW are enjoying sustained strong population growth, with the global cities of Melbourne and Sydney key growth engines. No surprise then that the rise in building approvals is centred in these two states.

Victoria and NSW together account for 86% of the increase in building approvals in 2017 and 80% of the increase over the past two years.

In the mining states, private building approvals moved higher in 2017, Qld +5% and WA +21%, although in WA a decline in public works is a headwind. 

Private non-residential building activity is forecast to expand by 7% in 2017, a turnaround from a 9% fall in 2016, followed by an 8% lift in 2018 and moderate gains in 2019 and 2020.

Andrew Hanlan is a research analyst at Westpac.

Andrew Hanlan

Andrew Hanlan

Andrew has been with Westpac since 2002. After starting his career in the public sector, Andrew worked at the Commonwealth Treasury in Canberra, before enjoying a stint at Parliament House, where he worked as an adviser to the Finance Minister. His main focus is analysing the Australian macro economy.

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Construction Activity Construction Market

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