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Cost inflation in the construction industry

Forecast cost inflation for construction of 6-8%, is expected to peak in the first half of 2022. This is a temporary spike due to supply chain and logistic challenges across all industries, coupled with a higher inflationary environment.

The COVID-19 outbreak in Shenzhen (one of the biggest ports in the world) saw output drop to 10%. This created a backlog of shipment arrivals, impacting industries across the globe.

Labour costs increased 2.2% Y-o-Y and reinforced concrete costs escalated 4.7% Y-o-Y in 2021. According to Macromonitor research, these components of construction costs are forecast to increase even further in 2022. Largely, this is due to the uncertainty around supply chains and strains on the labour force. Despite this, the spike is expected to only be temporary, with a return to stable price inflation in the second half of 2022.

(Data Macromonitor & ABS– Construction Cost Trends Aug-21)   

This is consistent with what we are seeing in the market for construction projects looking to commence. In places where there is a surge in development activity, like The Gold Coast, build costs have escalated due to labour and material constraints. Top tier builders are competing for resources and labour for these large-scale commercial projects, driving construction costs up. This theme is consistent with two residential towers on the Gold Coast which are sitting in the investment pipeline.

Notwithstanding the increased build costs, Australia’s east coast has experienced a sharp increase in construction since the start of the year. The high demand for property on Australia’s east coast is driving prices up, increasing the value of assets and ultimately offsetting the inflated build costs.

(Data sourced from the ABS)

We are yet to see any meaningful impact on the progression of construction projects in the portfolio from supply chain difficulties, which have slowed construction projects around Australia.

No changes have been made to the Partners Fund or Agriculture Credit Fund portfolios this week.

 

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