Building costs hurting NZ's construction chances, says property fund

Saturday, 6 March 2021

A $100m upgrade of Wellington’s Wakefield Hospital in Newtown is costing the owner, Vital Healthcare, much more than expected.

Construction costs in have gotten so high that one company is considering contracting services out to Australia.

Aaron Hockly, chief executive of NZX-listed Vital Healthcare, oversees 42 healthcare investment properties in Australia and New Zealand, including Wakefield Hospital in Wellington.

The hospital is going through a $98 million upgrade, but cost blowouts have pushed the budget out to $114m.

It would have cost $130m if the plans had not been trimmed, ''which is pretty extraordinary,'' Hockly says.

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''The costs are going up much faster than in Australia. That's been the case for a couple of years now, to the point where people are getting so frustrated that they're thinking of bringing Australians across.''

In Australia, Vital has $300m worth of projects underway, ''every one of them on budget and on time''.

Hockly believes timing and a lack of competition among construction and consulting firms in New Zealand are the key issues.

Soaring freight costs and shipping issues are thought to be pushing up building costs.

''Everyone's needing the same workers at the same time, so the Government pushing through with its infrastructure pipeline is fantastic, but it just means everybody's suddenly going onto those jobs, and we're competing for those same types of workers.

''It's not the chippie or the sparky, it's more the firm as a whole or ancillary services.''

Hockly's cost issues began before Covid, but there are also reports of the pandemic affecting the price and availability of building supplies in the Auckland’s residential market.

A Statistics New Zealand survey on the impact of Covid-19 on Auckland's residential building projects found six out of 10 respondents had had difficulty sourcing materials or equipment.

Supply issues and price increases were the most mentioned complaints, most likely due to disrupted supply chains and soaring sea and air freight charges.

Another pressure was the red-hot building sector. Auckland issued 16,656 consents for new homes last year, a near 10 per cent increase.

Leys says fewer bespoke houses, more land and bigger projects would ‘’solve our housing crisis’’.

“The record levels of new homes consented in Auckland in 2020 means that demand for materials and freight will be up,” Stats NZ's construction statistics manager Michael Heslop said.

But building industry representatives believe the reasons behind the high cost of building in New Zealand are more fundamental.

A study commissioned by Fletcher Building showed the price of land was the single largest cost in building a house, up nearly 50 per cent between December 2009 and June 2018.

Scale not competition in the industry was New Zealand’s problem, Julien Leys, chief executive of the Building Industry Federation, said.

New Zealand was inherently a more competitive market than Australia for most things, including building materials and the merchants who supplied them, as well as architects, engineers and designers.

Residential construction is steaming ahead but commercial work is slowing down.

''We know that across the board salaries, including in the building and construction industry, are less in New Zealand than Australia.''

Moreover, New Zealand had six national building and construction merchant chains (Mitre 10, Placemakers, ITM, Carter’s, Bunnings, and BuildLink), ''whereas Australia, with a market of 25 million, only had two’’ (Bunnings and Mitre 10).

''The issue is not the lack of competition but the lack of building houses at scale combined with the massive increase in the cost of land over the last 10 years.

''If we built more standardised houses (not bespoke designs), encouraged larger companies to build by awarding sizeable projects … and made more land available, we would solve our housing crisis.

''It is not rocket science but no one has joined the dots to achieve all of these things.'

A Commerce Commission market study into building supplies has been flagged for later this year.

Meanwhile, Statistics NZ has also released the latest figures for building work that is underway or ''put in place''.

Construction activity fell by 0.7 per cent in the December quarter compared to September, which was below market forecasts, but Westpac said it believed the construction sector will continue to steam ahead for the rest of the year.

Residential activity was worth $1.9 billion in Auckland alone, up from $1b five years ago.

The fall was due to a decline in ''lumpy'' non-residential work, which fell sharply in volume in June last after the Covid-19 lockdown, bounced back in September and then fell by 4.9 per cent in December.

Heslop said the volume of commercial building work had been running at elevated levels for about three years, but had fallen from a high point in late 2019.

“This reflects both a recent slowdown in some commercial work in Auckland, and a longer-term decline in Canterbury after the high levels seen during the post-2011 quake rebuild,'' he said.

He cautioned the figures often reflected a lagged effect between building consents being issued and construction ending.

“Recently consented new homes and non-residential buildings will be reflected in future quarters.”