Land prices still the elephant in the room for construction

The Government’s Construction Sector Accord is a welcome initiative for the troubled sector.

Recent data from NZIER shows that the industry is in for a long cold winter; profitability expectations for the next quarter have dropped from -22% in Q4 2018 to -37% percent in Q1 2019.

The research also revealed that the building sector was one of the most pessimistic, especially in the face of weakening domestic demand. Business confidence in construction is sitting at -25%.

“When Ebert and Mainzeal went into liquidation, an unpleasant side-effect has been the requirement for some sub-contractors to provide a bond and bank guarantee before they are given work.

“This is unusual and it’s causing a lot of unease in the industry, but it shows how dire things are becoming.

“The Government’s Construction Sector Accord is a fantastic, much-needed initiative for all industry stakeholders, especially in terms of the commitment to improve things like pipeline management, procurement practices, risk management and collaboration,” says David Ruscoe, Partner, Financial Advisory Services at Grant Thornton New Zealand.

“All of these strands will come together to boost the chronically low industry productivity, and ultimately improve the build quality and rate.

“However, the elephant in the room is still the high cost of land; if land prices continue to rise, the overall cost of development will also rise, and it’s something the Accord cannot address.

“The measures that can be taken to improve the situation - such as reducing the appeal of land banking, making more land available for development, and reducing regulatory costs and processes - remains to be seen.

“Positive outcomes will depend on who is willing to give a little to achieve a lot more”, says Ruscoe.

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