Building sector cements its base

For property investors, developers, superannuation and other fund managers, the dramatic change in the construction sector over the past two years holds huge implications for return on investment and managing risk.

There's a new environment in construction in which some companies are thriving and others struggling.  Choosing which company to build your next shop, skyscraper, factory, apartment block or even mining development is critical to investment success.  Not so long ago it was necessary to choose a builder who had "positive" relationships with unions.  Now this approach is risky.

Take one example.  Two years ago a smallish retailer in Melbourne took the plunge, and bought a retail site instead of renting.  The site needed renovating, budgeted to cost about $1.8 million.  The owners had built the retail business over 25 years and the building was the retirement investment.

The builder insisted that renovations had to be done using the construction union, the CFMEU, instead of subcontractors.  Work ran nine months over schedule and $800,000 over budget.

Next door, a smaller but similar renovation was recently completed at much lower cost and finished early.  They chose a builder who used subcontractors without the union.

The difference has a simple explanation.  The first retailer started construction before the workplace reforms in the construction sector, and used a builder who had commercial relationships with the union.  The second was renovated after the reforms to the construction sector were well in place.

The stories give a micro example of what's happened on a grand scale throughout Australia's construction sector.  The changes have affected the entire Australian economy and critically affected each individual investment decision.

In summary, the federal workplace reforms to the construction sector were designed to, and have broken the back of the mafia-like thuggery that dominated commercial construction.

The reforms established an industry policeman, the Australian Building and Construction Commission, which has been vastly more successful than anyone in the sector could have contemplated.  It is heavily staffed with former police, who ensure a strong presence on construction sites to counter union and other thuggery.

But mafia-like behaviour was never one-sided.  Some companies based their business model on the fact that if they worked with unions, unions would make commercial life intolerable for their competitors.  These companies developed a management process reliant on union relationships.

The construction reforms have turned this business model into a commercial liability.  There are companies now having difficulty because their management culture can't compete in a proper open market.

The forecaster Econtech recently reported a 9.4 per cent jump in sector productivity since the reforms.  Some speculate that longer-term productivity improvements could reach 30-40 per cent.

The key for investors and developers is to understand the changed sector and pick the right construction companies.

There's new success to be had.  This applies whether a development is a $1 million retail renovation or a $12 billion mine.

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