Residential new builds
Consents for residential new builds have continued to increase in the last 3 months with 8,316 consents issued, up from 8,158 in the previous 3 months. This is about 28% above the 5-year quarterly average of c.6,500.
However, this growth is not evenly distributed geographically. Tauranga, Wellington and Dunedin are all below the 5-year average currently, while some parts of Auckland, Southland and Central Canterbury are as much as 40 – 60% above the 5-year average. So, the area you operate in really matters.
Overall, however, the building sector is clearly in something of a boom phase, and booms in the construction sector don’t last.
To manage through this phase of the business cycle, it would be prudent to: (i) keep an eye on how your key clients are performing and behaving; and (ii) continue to develop new client relationships. If you get concerned about a client, find out more about how they are doing so you are not caught by surprise if work from them drops off. If a client starts being late with payments, be pro-active in talking to them. Also, be wary of agreeing to over-generous payment terms – if you are being squeezed, that is a warning sign that the client is concerned about cash flow.
One area where you should be able to develop new client relationships is in the residential renovation market. As mentioned in the August 2021 Industry Trends blog, it is important you don’t ignore this market segment, for no other reason that its large size.
Assuming each private dwelling in New Zealand requires scaffolding or edge protection once every 25 to 50 years, this market represents between 37,000 to 74,000 jobs a year for scaffolding and edge protection companies. Furthermore, when new build work drops off, renovation work can help fill the gap.
Commercial edge protection
Commercial edge protection is another market that can be worth considering, depending on your size and skill set of your workforce. This market continues to hold steady with around 1,300 new non-residential building consents per quarter.
With ongoing good demand for new storage and distribution buildings, this work can be expected to continue.
Inflation, interest rates, wages, and pricing
As you will have seen in the media, the cost of living in New Zealand increased by 4.9% in the past year. This high level of inflation is more than double the average of 2% since 1992. Higher inflation means a number of things.
First, interest rates will rise. In fact, they already have. Six months ago, one year mortgage rates were at 2.3%, now they are at 3.2%. Further increases are likely. In addition, bank lending criteria have tightened considerably in recent months – it is now not so easy as it has been to obtain bank finance.
Second, staff are likely to expect an increase in their wages to offset the increase in their cost of living. This is especially the case when the unemployment rate is so low (3.4%), because many workers will think (probably correctly) that they can easily find another job at their desired wage rate.
Third, many businesses will look to raise their prices to recover some of the increase in their wage and operating expenses, as well as higher prices for capital items.
The key takeaways from this for scaffolding business owners seem to be the following:
· Ensure your key staff are content in their jobs. This means they’re happy with their wages, but also with the working environment and business culture. You may need to increase their wages, but that is better than having to replace them. Without key staff, operating becomes much harder.
· Look at how your other costs have increased over the past year, and how much you expect them to increase in the year ahead. You need to ensure that your business is profitable and sustainable throughout the business cycle.
· Consider whether you can increase your prices while remaining competitive. Some clients will be more price sensitive than others. But all your clients know that costs have increased over the past year, so they won’t be surprised if you bring up the topic for discussion with them.
· Continue focusing on delivering great service to your clients. And look for opportunities to offer even better service. The better the service you provide, the easier it will be to have a conversation about pricing with a client.
Reach out for support
If you would like to discuss any of the above with one of the team at INTAKS, please get in touch. None of the above is particularly easy to put into action but doing nothing may not a good option either.
We regularly have conversations with our customers about these and similar challenges and of how to best address them. Each situation is different, but you can be assured that we will provide the best support we can.