Construction costs easing but developer margins still stretched
In his first column for API Magazine, development expert Greg Devine says developers' margins are tight but 2024 represents an opportunity for progress as building cost pressures begin to ease.
Over the past 12 months development groups have faced three persistent challenges: interest rates, inflation, and supply/build costs.
Finally, we are observing each of these issues beginning to stabilise.
While inflation is gradually finding stability, there remains the possibility of another interest rate hike affecting mortgage payers. On a positive note, construction prices are now stabilising and, in some cases, even experiencing a decline for the first time since 2020.
Altus Group recently revealed a trend of suppliers offering discounts on preliminary construction materials to stay competitive.
Their research emphasised that, on the international front, multiple factors are influencing the construction industry. While global geopolitical unrest persists, notably in the Middle East, the more significant impact on Australia's construction sector is attributed to China’s economic downturn.
In November, the Reserve Bank of Australia (RBA) issued a warning regarding the possibility of a significant decline in China’s property sector, which accounts for roughly 30 per cent of that nation’s economic growth.
This decline has the potential to result in a worldwide economic slowdown, diminished commodity prices, and a decrease in demand for Australian goods and services.
Construction costs stabilising
Despite a gradual easing of material prices, margins are still under pressure, contributing to the ongoing challenges faced by construction companies. Builders and subcontractors continue to steer clear of residential apartment projects after weighing up the risk versus reward equation.
The Altus research provided further insight into the outlook for construction material prices in Australia, emphasising various price movements.
Notably, steel prices, which surged during the pandemic, are slowly stabilising. Structural timber, previously at elevated levels, is improving as demand aligns with available supply. While plasterboard prices remained constant, bricks experienced a significant price increase due to spikes in energy prices.
Concrete prices saw a marginal rise in Q2 of 2023, attributed to increased electricity costs.
Despite a slight uptick in average diesel prices to $2.06 per litre in June 2023, the construction industry experienced a modest reprieve during the quarter.
Construction costs are showing signs of stabilisation and a potential decrease in 2024. Despite significant price hikes in materials due to energy cost increases, there is apparent ongoing relief as the costs of structural timber and steel have eased.
Griffin Group has already experienced this with several ongoing projects, and we anticipate this as being a valuable opportunity in 2024 for developers, builders, and buyers to make substantial progress.