Market Monitor - Construction Australia

Debt levels have increased and margins have decreased, especially for smaller businesses.

Construction performance in Australia remains subued, mainly due the massive decrease in mining-related heavy industrial, rail and port infrastructure construction activities after the end of the commodity boom.
Business construction has contracted in 2015, but an upturn is expected in the medium-term, driven by higher investment and increased economic growth. Residential building spending is expected to increase further in 2016, fuelled by low interest rates, pent-up domestic demand and foreign investment.
Payments in the construction sector take between 90-120 days on average. Notifications of non-payments have increased and the current level is high.
Construction insolvencies are expected to level off in 2016, but the overall level remains high. Debt levels have increased and margins have decreased, especially for smaller businesses with little ability to differentiate themselves, and which therefore rely on price competition in order to acquire orders.
Our underwriting approach remains cautious, especially for small businesses and the mining-related segment.
Besides focusing on the type of construction subsector it is also important to take into account regional differences, e.g. while engineering construction in Queensland and Western Australia remains subdued, it is expected that in New South Wales it will benefit from infrastructure investments (roads, telecommuncations).

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