|Given the diversity of the Property and Construction sector, the strong forecasts from this PwC Private Business Barometer are not necessarily reflective of the experience of every company in this sector.|
Of the 1,003 private businesses surveyed for the PwC Private Business Barometer, 106 (around per 10.6 per cent) were from the Property and Construction sector.
In our opinion, parts of the industry are certainly doing well, for example companies providing construction services to the resources sector. However, our experience tells us Property and Construction businesses not connected to the resource sector are finding it tough.
Sales results point to sector in strifeSales growth across the sector was just four percent over the past 12 months. South Australia posted the highest sales growth (13 per cent) and Victoria had the lowest at two percent.
Profit growth results varied even more widely between states, with South Australia performing worst with minus 21 per cent, New South Wales relatively strongly with 20 per cent profit growth, and Queensland highest with 31 per cent. In our opinion, infrastructure or engineering consulting companies are doing well off the back of resources; but residential property outside of mining areas in Queensland are finding it very difficult due to oversupply and subsequent price pressures.
Some areas of future growth potentialIn what are undoubtedly tough times for segments within the Property and Construction businesses and a general decline in property prices, there is some growth in property values in mining areas; any optimism we are seeing is from businesses whose model is based around providing construction services and/or property to those areas.
In fact, businesses PwC has spoken to which are providing accommodation in mining areas are seeing yields double or even triple what they can get elsewhere. Key areas are once again Queensland and Perth and to a lesser extent the Hunter region of New South Wales due to the expansion of coal and possible gas mining there.
Another area we’ve seen still doing well in New South Wales is property in the ‘affordable’ range, that is, residential properties in the sub-$600,000 range.
PwC is seeing the fundamentals for growth in the warehousing and industrial property sector due to the growth of online businesses. However, in the short term we are also seeing there is still caution to commit to long term leases on these sites due to macroeconomic factors. The other area with potential strong growth in most states is hotels – in our opinion, the outlook is most bullish in Sydney where there have not been any new hotels built for quite a while.
Organic growth key strategy for propertyMost companies are looking to organic growth to fuel short-term sales and profit growth, including 100 per cent of companies in South Australia and 90 per cent in Western Australia (compared to 58 per cent overall).
Medium-term figures are almost the same, however there is a slight increase in companies looking to expand into new geographic markets within Australia (44 per cent over a three-year period compared to 39 per cent over the next 12 months). One in two business in South Australia are looking to acquisition to fuel short and medium-term growth.
Hiring intentions strong in Western Australia and QueenslandSixty per cent of businesses in the sector are telling us they intend to hire in the next six months – again, this is likely skewed to businesses with exposure to mining and resources, and the figures from South Australia (where 100 per cent intend to hire) and Western Australia (70 per cent) bear this out.
Compared to some other industries surveyed for this Barometer, Property and Construction seems to be having fewer issues with finding qualified workers, with just 39 per cent of respondents indicating this was a constraint to hiring. Some 31 per cent nominated general economic conditions and 29 per cent lack of business demand.
Lack of major investments plannedIn a sector where you would expect plenty of activity, only one in three are planning a major investment in the next six months. Queensland is lowest at 20 per cent, while South Australian companies appear to be the most bullish with 50 per cent of respondents from this state indicating they were planning a major investment.
But the figure of 68 per cent planning no major investments comes as no surprise – financing of property developments needs to meet very strict criteria (loan value ratios, interest cover and pre sales; pre leases) and as a result many existing sites are not being developed.
Further, PwC is seeing banks becoming more cautious around funding apartment purchases where they believe there is an oversupply. In our opinion, banks don’t want to be exposed to a possible reduction in valuations down the track.
In terms of retail property, we believe this segment is perhaps facing the most stress given a combination of structural and cyclical influences affecting retail tenants.
People key issue for Western AustraliaAll respondents from South Australia nominated funding as a key challenge, compared to less than one in four on average across the other states. Nearly half of all respondents in the sector said operations are an issue, and in Western Australia 90 per cent indicated people was the biggest challenge facing their business (compared to 58 per cent overall).