Construction is a significant contributor to the Australian economy, accounting for 8.1% of GDP.
It is the largest non-service related industry employing more than 1.1 million people.
2019 was a difficult year for the industry with lower building activity and decreasing value added (down 5.7%). Residential construction output continued to decline due to more restrictive lending practices and falling property prices. Growth in the non-residential subsector could not outweigh this decline. Fierce competition has lowered profit margins of residential construction businesses.
The residential construction slump is expected to bottom out in early 2020. In the course of the year performance is expected to rebound, together with renovation activities, due to interest rate cuts, population growth, a rising national dwelling stock deficiency and housing stimulus.
At the same time, commercial construction is forecast to remain robust in the medium-term, while in the public construction segment high levels of infrastructure activity underpinned by public investment are expected to continue. Demand for construction materials remains high, and value added in this segment is expected to increase almost 2% in 2020.
Payments in the construction sector take 30-60 days on average. The portfolio payment expercience has been bad over the past two years, and the number of non-payment notifications and value of credit insurance claims was high in 2019. This is expected to continue in 2020.
Construction business failures account for about 20%-25% of total Australian business insolvencies. Underperforming projects and rising costs led to more high profile business failures in 2019. Despite signs of a performance rebound on the horizon, we expect further insolvency increases in 2020.
Due to ongoing high levels of payment delays and increasing insolvencies our underwriting approach remains cautious, especially for small businesses active in the residential segment. Construction sector performance needs to be closely monitored given its volatility.