By David Hargreaves
Construction giant Fletcher Building is forecasting a dip in residential building activity in New Zealand over 2019 following a strong year of activity.
Fletcher said in the year to June 30, 2018 it sold 714 dwellings in NZ, up from just 499 the previous year. Operating earnings for the residential group within Fletcher were up 12% at $85 million.
However, at a time when the Government’s looking to get its KIwiBuild initiative up and cranking, Fletcher’s forecasting a drop in home building activity over the next 12 months.
“In New Zealand activity in the residential sector is expected to decline slightly in FY19, mainly reflecting a forecast modest decline in the number of new residential dwelling consents being issued from 32,860 in full year 2018,” the company said.
“Activity levels in the non-residential, commercial and infrastructure sectors are expected to increase modestly as large roading contracts are completed and the backlog of significant commercial projects unwinds.”
And the company is quite downbeat about prospects across the Tasman.
“Australian residential activity is forecast to decline as a result of a sharp slowdown in multi-unit dwellings, tightening of bank lending and restrictions on foreign ownership. Infrastructure on the Eastern Seaboard looks set to benefit from large state and federal funded infrastructure projects.”
The whole Fletcher Building company reported a loss of $190 million for the 12 months ended 30 June 2018, which was in line with forecasts made by the company when announcing write-downs in February. This compares with a profit of $94 million in FY17.
Fletcher said that losses in its Building and Interiors division (which includes projects such as the SkyCity Convention Centre) have been maintained at the $660 million announced to the market in February 2018.
The Residential and Development division had performed strongly, with the Residential business benefiting from the number of units available to sell as subdivisions came to market as well as robust selling prices in Auckland, and the Land Development business recognising the sale of the first site at Wiri North, the company said.
The rise in Residential earnings reflected an increase in the number of units available to sell “as the established subdivisions of Swanson, Whenuapai and Red Beach are now operating at a sustainable level and new subdivisions of Waiata Shores, Kowhai Ridge, Totara Heights, and Atlas Quarter commenced sales”.
The company said, however, that during the year a $12 million provision was recognised for a forecast loss on the Atlas Quarter Apartment project in Christchurch.
“This reflects a combination of lower than expected selling prices and cost escalations on the project, mainly due to seismic requirements and higher than forecast construction market rates. At year end $10 million of this provision remained unutilised following initial sales. Excluding the impact of this provision, Residential earnings were up $21 million, or 28%, on the prior year.”
The Residential business continued to see strong demand for homes in Auckland priced between $600,000 and $900,000, where the depth of market demand is greatest, but softer demand for large standalone homes priced in excess of $1,000,000.
“This supports a strategy of focusing on delivering smaller and innovative home typologies to target a lower price point.”
The Christchurch market remained subdued with no growth in prices over the period. Work commenced on the East Frame project, with an initial 112 units underway. The next anticipated stage will include a further 59 terrace homes, and the decision on further stages of this development will depend on discussions with Government on typologies and market conditions.
The company noted that In the second half of the financial year, the Residential division “continued to see an elevated number of transactions requiring the sale of the customer’s current home due to bridging finance restrictions”. The average settlement period lengthened to 43 days from 32 days in FY17.
At 30 June 2018, the Residential business held a total of 3,707 lots on balance sheet. In addition, the business holds a further 1,272 units under unconditional agreements, to be delivered over the next five years.
Land Development operating earnings in the period were $51 million. This business develops and sells mainly commercial sites within the Group’s property portfolio which are surplus to operating requirements. The most significant contribution to this year was the sale of a 10 hectare site in June 2018 at the Wiri North development, in addition to three development locations in Australia.
Whilst Land Development earnings will be irregular in nature, it is anticipated that the business will earn at least $25 million per annum over the next five years.