‘Survive 2025’: Property sector expects more lows before bounce back

Monday, 30 December 2024

Seascape was meant to be finished by now with its penthouses occupied by wealthy owners. But instead construction has stopped and the matter's before the courts.

High inflation, interest rates and construction costs have dampened construction industry confidence, as businesses brace to “survive 2025”.

According to BCI Central’s 2024 Construction Outlook Report, persistently high building costs, ongoing construction insolvencies and labour market shortages could keep the industry from bouncing before 2026.

The third quarter saw a steady rise in development projects. That lift is expected to peak at the end of the fourth quarter but will be followed by “a sharp decline before a gradual recovery that will extend through to quarter three 2025”, the report said.

'There’s a cautious optimism for next year. Easing inflation and stabilising interest rates provide a foundation for hope, while the pipeline of planned projects signals potential growth. That said, the road ahead is not without its challenges,” Asia-Pacific President Ashleigh Porter told The Post.

“Economic uncertainties, driven by global conditions and local cost pressures, will continue to play a role. The balance of these factors will determine whether 2025 is a year of recovery or cautious advancement,” Porter said.

The third quarter saw over 1800 projects in development around the motu with total build spending at $6.5 billion. That was up from the same period last year when there were a total of 1100 construction projects at a total value of $12.5b, as more businesses work to cut building costs.

Developments are forecasted to max out at 2000 projects across the country and across all sectors at the end of this year, then fall 55% to 900 projects in the first quarter of next year followed by a slow, steady increase until 2026.

BCI Central Asia-Pacific President Ashleigh Porter.

2024 roadblocks

Development demand slowed this year in line with steep financing costs. That led to an uptick in abandoned and deferred projects.

Abandoned projects were down in the last year with 1.5% of projects abandoned in the third quarter , down from 5.6% of projects in the third quarter a year earlier. But Porter said a simultaneous uptick in deferred projects reflects a “cautious market”.

“Builders and developers are hitting the pause button as they contend with financing challenges and economic uncertainties. This deferral trend signals an industry waiting for clearer signals before committing to breaking ground,” Porter said.

BCI Central found a decline in abandoned builds as more companies are deferring projects, largely in residential developments.

About 3.8% of all projects around the country were deferred by the end of the third quarter, up from about 2.2% in the same period last year and was driven largely by residential projects. The third quarter of this year saw 7.5% of residential builds deferred and about 2.6% abandoned, with deferrals up from 2.8% last year and abandoned builds down from 6.9% in the same period a year earlier.

The central and lower-North Island regions experienced a notable surge in the third quarter largely due to deferred residential projects while the upper North Island saw higher levels of abandoned projects than other parts of the country mainly for community and public buildings.

That saw developers and builders planning projects further in advance with 40% of developers planning builds at least two years early and 50% of builders planning builds 12 to 24 months early this year.

Outlook ‘not enough to feel optimistic’ for developers

Business restructures, staff cuts and stalled projects made unsold properties and reduced activity more common this year which developers believe will carry on through 2025.

“Many believe that if they can survive until 2025, everything will be fine, but I’m not so sure,” Ockham Residental chief executive officer William Deihl said. “The key is to keep our lean team employed and ready to rebuild.”

“Sales are tough, and while there’s a slight upside, it’s not enough to feel optimistic. If you’re not preparing for tough times in the next nine to 12 months, you might get into trouble,” Deihl said.

Large-scale energy and resources projects are expected to drive spending on developments in the next year, making up about $19b (46%) of the total $42b spent on planned projects between quarter four 2024 and quarter three 2025.

The industrial, infrastructure and transport sector secured the second position, accounting for just over 20% of the total development value, with projects totalling almost $9b.

While developments are expected to decline steadily after that, “the residential sector stands out as an exception,” the report finds with residential project values expected to exceed $2.5b in the third quarter of next year while all other sectors slow.

Post-pandemic complications

Maddren Homes managing director Keegan Anderson says the company is dealing with fluctuating development opportunities in the post-pandemic economy.

Maddren Homes managing director Keegan Anderson said the company is dealing with fluctuating development opportunities in the post-pandemic economy.

“We only have six builds right now, and while the margins are great compared to the last few years, it’s a strange time,” Anderson said.

“When we had more jobs, margins were tight due to price hikes. Through the tough times of Covid, we had to try and pass on nearly $1.5m in cost fluctuations to clients… Now, with cheaper labour, we’re trying as fast as possible to reduce prices while others leave for overseas due to high housing costs.”

“We’re probably back to pre-Covid pricing. Labour costs have dropped since there’s less work, and people are eager for jobs,” Anderson said.

Ongoing effects from the pandemic, particularly project backlogs, are still complicating the prospect of a 2026 recovery.

Icon Group NZ director Dan Bosher is anticipating “a double bounce at the bottom of the market”.

“Optimism is challenging right now, and I don’t expect much change by 2025,” Bosher said, as the slowdown in the public sector has hit builders hard.

CMP Construction NZ commercial manager Andrew Moore says strategic pricing and getting materials early can help mitigate price fluctuations.

He said builders are opting for a few large-scale projects to protect against market fluctuations, with Icon dipping into aviation, data centres and healthcare developments on top of ongoing accommodation projects.

“We focus on a few large-scale projects, typically four or five at a time, and early contractor involvement has been vital to our resilience this year in New Zealand,” Bosher said.

Managing risks and challenges

Costs are adding up for construction firms, particularly due to lengthy consent processes, the report said. Compounded with sales volatility, construction firms are opting to partner with fund management businesses to deal with ongoing cashflow problems.

CMP Construction NZ commercial manager Andrew Moore said strategic pricing and getting materials early can help mitigate price fluctuations. “Price uncertainty is our biggest risk. Most of the projects we undertake are two-plus years long and we offer a lump sum fixed price,” Moore said.

A hold on a raft of Government builds, including schools and hospitals, has slashed project opportunities for companies like Naylor Love.

Project delays are now hitting 40% of builders, down from 60% in 2023 while compliance concerns were cited by 63% of developers and 50% of builders as a major concern.

But Moore said when current projects are completed, in about two years, “the market will be hotter and prices will have increased”.

“We do not know exactly what the increases will be and to what level however, we need to price our projects now to cover that risk,” Moore said. “One way of mitigating risks is the early procurement of materials and booking in manufacturing timeslots early.”

A lack of Government spending has also presented risks for construction. The New Zealand Government’s decision to halt substantial projects including schools and hospitals has led to delays in the consenting and design processes.

“The biggest risk is the lack of Government spending after the new Government halted projects like schools and hospitals,” Naylor Love business development director Scott Watson said.

“Even if funding resumes by Christmas, a 12-month lag will increase pressures on the industry and the likelihood of supplier and subcontractor failures,” Watson said.

Barnes Beagley Doherr director David Doherr says lending rates are expected to stay high meaning investors and developers will struggle to find feasible development opportunities.

More insolvencies expected

Most developers (56%) said contractor insolvency was a major risk and created uncertainty about their projects, in the private and public sector.

“It’s tough to predict whether there will be enough work or an oversupply in the next 12 to 24 months,” Bosher said.

Developer fears about securing funding jumped from 18% last year to 34% in 2024, largely driven by tightening credit requirements from banks.

Market competition is significant threat for builders, with 63% citing it as the biggest challenge for 2025.

“The lack of work is causing many builders and project managers to lose their jobs. I’m seeing at least 50 new building companies in Auckland started by those laid off,” Anderson said. “This is increasing competition in an already tight market.”

Construction solutions firm Barnes Beagley Doherr director David Doherr said lending rates are expected to stay high despite recent official cash rate cuts, meaning investors and developers will struggle to find feasible development opportunities.

“The low level of activity now means that there is a possible elevated risk of supplier and subcontractor company failure. The level of insolvencies within the New Zealand market has risen of late and there is a real danger that this will increase into 2025,” Doherr said.

Construction firms said quality assurance and comprehensive risk assessment programs are critical.

“There is a real sentiment that the more collaborative and efficient a project can become, the better the return for all involved,” Doherr said.