The high-rise residential sector continues to show more promise than other sectors of the construction industry, according to the latest research by International property and construction consultants Davis Langdon.

Davis Langdon’s Leading Indicator Index for high rise residential shows that over the past four quarters, the high-rise residential tender price levels have continued to decline as competition continued for a relatively small pool of projects.

However, looking ahead, the forecast is for a 2 - 3% increase in tender prices over the next 12 months.

Davis Langdon’s Managing Director Mark Beattie said the latest tender level index showed just how vulnerable the residential sector is to interest rate movements and also the restrictions in place currently regarding access to finance.

“Some cost increases are flowing through to tender prices; however, construction costs remain at competitive levels, reflecting the relatively limited number of projects available and the uncertainty that exists with the wind back of the stimulus initiatives,” he said.

Davis Langdon’s Senior Economist and National Research and Development Manager, Dr Andrew Wilson, said there were still considerable discrepancies in high rise tender pricing between the regions.

“With an existing shortfall in dwellings further exacerbated by above trend migration levels, demand remains strong for residential accommodation,” he said.

“While the number of first home buyers has decreased compared to last year when there were more Government incentives and lower interest rates, investors continue to be attracted by tight rental markets and the prospect for strong capital growth, based on the underlying fundamentals of the sector.

“Until concerns subside about European sovereign debt, diminished returns due to the resources tax and downgrades to international economies, the Reserve Bank is expected to keep interest rates on hold, so this factor is unlikely to put a damper on activity in the sector.

“Despite this promising demand, many developers continue to face the hurdle of securing finance, with banks often requiring high levels of pre-commitment and stringent loan-to-value radios for a project to proceed.”

Davis Langdon’s Tender Price Index is a measure of price movement within the building industry for metropolitan projects, as well as a reasonable comparison between cities. The index is compiled quarterly by pricing the same basket of work items typical for construction projects.

Cities where the tender index forecast is highest include Melbourne, where there is currently a much higher degree of residential activity than most other markets in the country, and Canberra where residential construction continues to thrive.

In Hobart, BER projects have pushed tender pricing up slightly, and in Darwin the high-rise residential sector remains strong, with activity in both the public and private sectors.

Building prices in the Brisbane area are expected to remain competitive in the short to medium term, although conditions are less optimistic in the rest of Queensland.

A revival of interest in private high-rise residential developments in Adelaide and the ongoing stimulus funding for affordable housing provides potential for activity in the local market to grow through 2010, while in Sydney some cost increases are flowing through to tender price, but remain at competitive levels, reflecting the relatively limited number of available projects and uncertainty around the effects of the stimulus wind-back.

Although there is an underlining demand for dwellings, the high-rise residential sector in Perth remains relatively dormant, and the lack of activity continues to suppress prices. Currently costs are stable and Davis Langdon are anticipating only a modest increase in the latter part of the year at the earliest.

For further information, contact Meaghan Jones on +61 3 9933 8800 or email mjones2@davislangdon.com.au