Another big developer bites the dust

Via AFR:

Melbourne builder Verve Construction has joined apartment developers Ralan and Steller and and national building supplier SWC as a big property development casualty of 2019.

The Abbotsford-based company, owned by Robert Magdziarz, kept a relatively low profile but was undertaking several big apartment projects across Melbourne this year.

Adam Nikitins and Stewart McCallum of Ernst & Young were appointed joint liquidators at the end of October after Verve ran into financial and legal difficulties.

It will get a lot worse before it gets better. The biggest single downside risk to the Australian economy is the downturn in construction activity.

Gross fixed capital formation (GFCF), basically net investment, was already falling in the year to September 2019, down 3.6% in total driven by a 4.7% decline across the private sector:

The main driver of the fall in private GFCF was dwelling construction, which fell by 10.6% year-over-year in the September quarter:

The outlook for residential construction remains dire in 2020, given both dwelling approvals and commencements have collapsed and completions have only just peaked:

Annual dwelling commencements are running 15% below their 2018 peak, whereas approvals are down 24%.  Both guarantee that dwelling construction will fall heavily into 2021.

Adding to the pain, infrastructure investment is also projected to decline in 2020 as the National Broadband Network (NBN) rolls-off:

Indeed, the latest Performance of Construction Index from the Australian Industry Group was a wipe-out, with all areas in deep contraction (i.e. below 50 points):

Yet to date, the construction bust (residential, in particular) has not translated into job losses. In the year to August 2018, the number of Australians employed directly in construction increased to a near record high 1.2 million, accounting for 9.1% of total Australian jobs:

However, as shown in the next chart from UBS, construction job ads have declined by around 30% – commensurate with the decline in dwelling approvals – resulting in a “material drop in construction employment ahead”:

Australia’s authorities are hoping that the strong bounce in dwelling values will lift dwelling construction in due course. However we are skeptical that it can do so quickly or with any great substance. The reason is the extraordinary “defect crisis” that has swept east coast apartment markets. The use of flammable cladding, the rise of dodgy Chinese builders and “phoenixing” construction firms, and the shear unbridled pace of the last boom, has left a legacy of cracked foundations, towering infernos and shoddy workmanship across the sector.

Estimates of the remediation bill for these defects run as high as $1 trillion.

This will leave a legacy of stalled buyer interest and suppressed lending into the apartment sector, and it was this segment that boomed so powerfully during the last cycle.

David Llewellyn-Smith
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