CONSTRUCTIONSENTIMENT MONITOR

Findings Report TwelveSeptember 2010

Executive SummaryIn this Findings Report, we explore the results of our twelfth Davis Langdon Sentiment Survey.During the past six months, Davis Langdon’s Construction Sentiment Index inched up by 2 points to reach 63. The industry continues to face a reoccurring set of obstacles and a mixed outlook in terms of workload. However, labour force capacity constraints are not as prevalent and an encouraging proportion of industry participants reported increased levels of new business from the private sector.We hope you find this survey insightful and we look forward to keeping you up to date in future editions of the Construction Sentiment Monitor.Key Findings• Skills Shortages – easing• Workload Expectations – varied by state• Civil & Resource and Health sectors – most likely for growth • Access to Finance – remains greatest obstacle • Industrial Relations – concerns are rising

Problems in the Industry77% of participants now feel that there are problems in the industry – dropping from 85% in our March survey.

Funding obstacles faced by developers, the diminishing workload and market confidence were cited as the standout issues by respondents.

Skills shortages remained a concern but only 10% of respondents listed this as a problem, compared to 17% in March. The nature of the responses in this area also shifted from simply talking about a lack of workers to commenting on the lack of quality and sufficiently experienced workers across the industry.

The level of concern about industrial relations issues remained steady, while it appears that the pressure placed on the market by Government stimulus works as mentioned in previous surveys has somewhat lifted.

Comments in relation to Government red tape continued, planning delays re-emerged and several industry participants mentioned the burden of onerous contracts and increased risks for professionals.

Industrial Relations - 8%

Costs - 8%

Government Red Tape - 6%

Diminishing Workload & Market Confidence - 24%

Access to Finance - 34%

Onerous Contracts and Project Disputes - 6%

Skills Shortage - 10%

Planning Delays & Decision Making Process - 4%

Sentiment Findings Report Twelve

Industry Workload Expectations – Mixed Views Which statements best describes your sentiment about industry workload in the upcoming 12 months? The general outlook for workload levels lost some of its shine this time around, with a considerable proportion expecting workload levels to remain steady (47%, up from 40% in March). Those predicting an increase dropped from 35% to 25%.

The situation varied considerably across the states; 71% of WA respondents anticipated a rise in workload, while in Queensland conditions were largely reversed with only 10% expecting a lift in activity over the coming year.

Optimistic respondents mentioned several large infrastructure and residential projects coming through. One architect reported: “There appears to be an upsurge of projects in design [stage]” – an early indicator of future activity.

However, the most common talking points were whether the private sector looked likely to take up the slack left by the completion of stimulus works and that the “banks were still reluctant to lend”. A respondent anticipating a reduction in work also pointed to the delayed effects of abandoned projects from the past year and the shortfall this was now causing in the construction pipeline.

When looking at Net Workload Expectations (those expecting an increase minus those expecting a decrease) across our previous surveys of the industry, it is clear that sentiment although still positive, remains cautious.

36N

ov 0

6

May

07

Nov

07

May

08

Nov

08

Mar

09

Jun

09

Sep

09

Dec

09

Mar

10

Sep

10

58 59

21

-6

-62

-28

6 7

15

3

%National Net Workload Expectations (Historical)

%

Workload Expectations by State

-40

-20

0

20

40

60

80

100

ReduceStableIncrease

NSW

VIC

QLD

WA

New Business – Level of Inquiries Improve Has the level of new business in your company changed in the last six months? In an encouraging sign for the industry, more respondents are experiencing a rise in new business levels. Participants reporting that their level of new business had increased in some way rose from 43% in March to 49%.

Those with diminishing levels of new business increased slightly, accounting for 27% of responses, while respondents reporting steady levels of new business dropped from 33% to 24%. It is promising to note that 46% also experienced an increase in new private sector business inquiries.

35

30

25

20

15

10

5

0Diminished >10% Remained the same Increased >10%

%

New Business LevelsMarch 2010 September 2010

Diminished - 22%

Remained the same - 32%

Increased - 46%

Private Sector Business

*

* Only states or territories with sufficient number of respondents and minimal statistical error shown.

Sentiment Findings Report Twelve

Skills Shortages – Concerns Easing Do you feel the industry is experiencing a skills shortage at the moment? 54% of respondents now feel that the industry is experiencing a skills shortage – a 9% drop on our survey in March. This would suggest that as stimulus works recede in certain parts of the country, the pressure on the industry’s workforce is also being lifted. However, some respondents who continued to experience skilled worker shortages pointed out that mining work in WA was an ongoing draw card, luring skilled workers away from the building trades.

In the last six months participants saw skills shortages reduce for most trades. The only one to worsen was Form Workers, which rose from 4% in March to 8% this survey. Electricians remained in demand with 10% of respondents reporting shortages (down from 12% in March), as did Construction, Project Management and Professional Design Services.

In addition to demand from the mining sector and stimulus projects, respondents also pointed to the need for a better long term approach to remedy poor retention and improve apprentice numbers. Participants were also concerned that shortages may reduce the affordability of quality work to the detriment of construction standards.

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September 2010

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Staffing Expectations – Flat Thinking about your staffing levels, how have these changed? Staffing expectations have stabilised among industry participants. Fewer respondents expect permanent or contract staffing levels to increase over the next six months, with a greater proportion reporting that increases had occurred over the previous six months (49% for permanent staff and 26% for contract).

In the coming six months, 51% of respondents anticipate that permanent staff levels will remain the same, while 67% expect contract staff levels to hold steady.

49

36

51

55

67

3

8

11 11

36

26

18

Increased up to 20% Remained the same Decreased up to 20%

Last 6 months Permanent Staff Next 6 months Permanent StaffLast 6 months Contract Staff Next 6 months Contract Staff

Principal Contractors

%

Sentiment Findings Report Twelve

The State of Industrial Relations – Sliding Sentiment toward industrial relations has deteriorated somewhat since our last survey in March. While 82% of respondents agree that industrial relations are Good to Very Good at the moment, when asked about the upcoming 12 months, this figure drops to 70%.

Respondents are anticipating a poor industrial relations climate ahead, with 30% expecting Bad or Very Bad conditions in the next 12 months, up from 15% six months ago.

2 4 2

13 14

75

64

7 7 6

28

78

Very Bad Bad Good Very Good

6 months ago Currently During the upcoming 12 months

Industrial Relations

%

Greatest Obstacles in Building Development What are the greatest obstacles in the building development process?One of the most telling questions we ask survey participants is about the obstacles they are experiencing in the development process – both now and in the upcoming twelve months.

Overall sentiment toward obstacles in the building development process was slightly worse than our last survey in March.

Obtaining Finance continued to be the number one obstacle in the building development process. Compared to our last survey in March, industry participants were less optimistic about the situation improving and expect access to finance to remain an obstacle over the coming 12 months.

Obtaining End-user Pre-commitments became more of a challenge to the development process, perhaps due to the stringent requirements which are still in place in order to secure project finance. Respondents believe this will become less of an obstacle over the next year, but will remain a challenging area for those looking to get a development under way.

Development Risks and Town Planning Approvals were also identified by participants as impeding the building process. However, most expected improvements in these areas over the next year.

Interest Rate Volatility is currently a minor concern, although sentiment about this issue has deteriorated since our last survey in March. This is unsurprising given the series of cash rate adjustments by the Reserve Bank during this period, back to a more ‘normal’ setting of 4.5% at its meeting in May. There remains an expectation among participants that interest rates will become a greater obstacle for the building development process during the upcoming 12 months.

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At the moment

1 - Obtaining Finance (1)2 - Obtaining End-user Pre-commitment (3)3 - Risks of Development (4)4 - Obtaining Pre-sales (5)5 - Town Planning Approval (2)6 - Low Sale or Yield Expectations (6)7 - Availability of Appropriate Sites (8)8 - Costs of Construction (7)9 - Interest Rate Volatility (10)10 - Time to Construct (9)

During the next 12 months(n) Place in Sentiment Report 11

Sentiment Findings Report Twelve

Procurement Preferences – Holding Steady What is your preferred method of procurement? Conventional Lump Sum contracts remain the preferred method of procurement for industry participants. Negotiated contracts and Design & Construct (D&C) via a novated design retained prominence, once again ranking second and third in respondents’ procurement preferences.

Preference towards Partnerships/Alliance Contracts has increased since the last survey – with 9% of responses, compared to 6% in March.

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Planning – Ongoing Delays Is the timeframe for obtaining town planning approvals excessive or reasonable? The time taken to obtain planning approvals remains an issue for most survey participants, with 74% continuing to experience excessive or protracted timeframes. The situation has slightly worsened since our last report in March, when 70% claimed they were experiencing delays.

For those that are affected by this problem, 74% feel that timeframes were protracted by at least 30%.

Conditions have deteriorated in most states – particularly in Victoria where 90% of participants felt that planning timeframes were excessive or protracted (up from 67% in March). This problem continues to hamper development in WA where 86% of respondents cited lengthy timeframes, whereas in Queensland only half of those surveyed identified this issue.

70 74

12

7

19 18

Protracted or Excessive

Reasonable Unsure

March 2010 September 2010

Timeframe for obtaining approvals

Protracted by how much?

%

<30%0

10

20

30

40

%

30-50% >50%

March 2010 September 201050

Competition How do you rate the level of competitiveness at the moment? Levels of competition among contractors appear to be returning to equilibrium as the stimulus work recedes, although competition is still strong as some contractors remain nervous about future workloads.

Principal Contractors moved closer to the centre with a drop in those perceived to be Extremely Competitive (35% now, down from 44% in March) and a rise in the Fairly Competitive category (up from 47% to 57% this survey). There was a similar shift to the middle of the road for Sub Contractors as 70% of respondents viewed pricing as Fairly Competitive, compared to only 51% in March.

The Next 12 Months – Growth Sectors The top three sectors nominated for growth this survey – Civil and Resource (72%), Health (72%) and Aged Care (66%) – have maintained top position since early 2008, when the Office sector fell from first place. However, in our latest survey, the proportion of respondents backing them eased somewhat, levelling out the playing field in terms of growth predictions.

There is now some evidence to suggest that sentiment is turning a corner for the Retail, Office and Refurbishment sectors. The proportion of respondents identifying Retail as a possible growth sector has risen from a low of 18% in March 2009 to 45% in the current survey.

Tourism and Manufacturing both dropped further down the ladder in terms of opportunities for the year ahead, with 76% and 66% of participants (respectively) agreeing that these are the sectors least likely to contribute to growth over the coming year.

Civil and Resource

Health

Retirement & Aged Care

Multi Unit Residential

Office

Retail

Manufacturing

Tourism

%20 40 60 80 1000

Most Position at March 2010 Least

Restoration and Refurbishment

If you would like to discuss the details of this report further, please contact Michael Skelton, ANZ Research and Knowledge Manager, by email: mskelton@davislangdon.com.au or by phone: 03 9933 8800

Which segments do you think will most contribute to growth during the upcoming 12 months?

44

35

47

4 0

4

57

9

Extremely Competitive

Fairly Competitive

Fairly Uncompetitive

Not Competitive

March 2010 September 2010

Principal Contractors

%

25

21

51

5 5 4

70

18

Extremely Competitive

Fairly Competitive

Fairly Uncompetitive

Not Competitive

Sub Contractors

%March 2010 September 2010

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