Diesel-powered cranes may be one factor to contribute to a blowout in costs for new developments.
A toxic mix of rising fuel prices and high interest rates threatens to slow the property sector, potentially hitting large home builders and residential developers as they face a squeeze from higher costs.
Uncertainty generated by the conflict in the Middle East and turmoil in international share and bond markets has put a damper on the outlook for new projects.
In a shift akin to the shock from the last jump in interest rates and pandemic-related shortages, cost price inflation has taken off and new housing schemes are under threat.
Rider Levett Bucknall Oceania director of research and development, Oliver Nichols, said the immediate impact of the Middle East conflict on construction was higher transport and logistics costs.
“Rising oil prices are already flowing through fuel, freight, shipping and insurance, with suppliers and carriers implementing fuel surcharges,” he said.
Energy costs are feeding into material pricing, particularly oil linked products such as plastics, steel, cabling and bitumen, which was compounded by supply chain disruption and longer lead times.
“Uncertainty is also slowing contract negotiations, as builders and developers reassess cost risk and pricing assumptions,” Mr Nichols said.
The firm said crane operations were particularly exposed to higher fuel prices as most are diesel powered.
“While it’s too early to say whether this will lead to widespread project delays, it does increase the risk of deferrals or re-sequencing, particularly for marginal projects,” Mr Nichols said.
Construction crane numbers remain strong and Mr Nichols noted that construction overall remained buoyant, with the national crane count dipping slightly from 845 to 838.
Crane numbers are now 5 per cent below the 2023 peak.
Sydney had 346 cranes in operation, dipping from 370 in the third quarter. Work in Melbourne shifted from residential to civil and data centre construction.
The tougher finance environment is also biting.
Chifley Securities managing director Caterina Martinis said the funding landscape was more complex. “Developers are facing rising construction costs, tighter credit conditions, especially after the latest rise in interest rates, and increasingly compressed project margins,” she said.
Ms Martinis said higher interest rates were placing greater pressure on developers and construction companies’ serviceability. “Traditional banks are becoming more conservative during the current rising rate cycle, and as a result, private lenders are playing an increasingly important role in commercial property finance alongside the big four,” she said.
Morgan Stanley analysts Simon Chan and Lauren A Berry also called out the potential impact on listed residential developers.
They said home builders were starting to see price rises for building materials and services, and warned that if the financials of such operators were affected, it could have second-order effects on the likes of Stockland and Mirvac.
“It is possible that heightened fuel prices in Australia could eventually work their way to dampening sales/earnings for residential developers,” they said.
They said there were some material price increases, including a 30 per cent jump in PVC and a rise in concrete prices.
Freight operators were pushing for a 15 per cent fuel levy for moving materials and this could work its way to wage pressure.
“If the situation persists, home builders could see margins squeezed, as they face immediate higher costs but have limited ability to pass these through to customers, due to fixed-price homebuild contracts,” the Morgan Stanley analysts said.
