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YOUR MEMBER-ONLY ARCHITECTURE INFORMER - APRIL 2016

WHAT’S INSIDE:

• Overview• The outlook• Opportunities

ARCHITECTURE INFORMER

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The architecture services industry is forecast to grow strongly over the coming five years, as a low-interest rate environment and rising urban density drive greater need for architectural services. Industry revenue is expected to rise by an annualised 2.2% over the coming five years, to reach $7.1 billion in 2019-20 according to IBISWorld. This renewed growth comes after a difficult five year period for the industry, where overall growth was limited by weaker building construction activity. After the global financial crisis, many businesses and commercial clients delayed investment in building and construction, limiting growth in demand for architectural services. However, the industry maintained some growth, with revenue rising by 2 per cent during the current year on the back of stronger residential construction.

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The architecture services industry is forecast to grow strongly over the coming five years, as a low-interest rate environment and rising urban density drive greater need for architectural services. Industry revenue is expected to rise by an annualised 2.2% over the coming five years, to reach $7.1 billion in 2019-20 according to IBISWorld. This renewed growth comes after a difficult five year period for the industry, where overall growth was limited by weaker building construction activity. After the global financial crisis, many businesses and commercial clients delayed investment in building and construction, limiting growth in demand for architectural services. However, the industry maintained some growth, with revenue rising by 2 per cent during the current year on the back of stronger residential construction.

The overview

Figure 2: Percentage of architectural services jobs in each state and territory

Source: ABS cat.8165.0

Architects remain in high demand across all aspects of building design and delivery. Architects provide a wide range of services in the delivery of buildings, including pre-design, schematic design, drafting services, and project management and contract administration. These services become increasingly important as the complexity of projects increase, and as clients seek out customised designs. Aesthetics have become central to project design, especially with major projects or public works. New buildings need to exist in harmony with their surroundings, and the involvement of skilled architects is vital in achieving this harmonisation.

The distribution of architects across Australia falls in line with the general population. As a result, a large portion of architects across Australia are employed in the more-populous eastern-seaboard states. New South Wales is home to the largest share of the nation’s architects, followed by Victoria and Queensland. Victoria holds the largest share of architects relative to its population, supported by the presence of a large number of major architectural firms and head-office locations in Melbourne.

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The architectural services industry has grown modestly over the past five years, despite some challenges. The global financial crisis placed downward pressure on building and construction activity, limiting growth in architectural services to a degree. In the wake of the crisis, many individuals sought to deleverage, paying down debt and increasing savings du e to the uncertainty surrounding the economy. However, while the economy remains somewhat fragile, many areas have resumed solid growth and investment is now flowing back into the markets. As a result, despite the challenges, real industry revenue increased by an annualised 0.5 per cent over the past five years. This growth is gathering pace, with revenue rising by 2 per cent in the current year. Residential developments are responsible for much of this growth, with commercial building growing only modestly.

Current performance

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Industry revenue – Architectural Services

Source: IBISWorld

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DemandOver the past five years, an influx of home renovation and building programs on television has encouraged many individuals into the market for architectural services. Individuals have become more aware of the improvements that skilful design can bring to a building. As a result, the level of residential construction growth has bucked the greater trend over the past five years, outpacing commercial development. Record low interest rates over the past two years have also provided an incentive for increased use of architectural services by individuals, as new construction has become more relateively affordable. The ability to make best use space, while also meeting regulatory requirements and the needs of the occupant is beyond the skills of many individuals and builders, and requires trained, experienced architects. This has been a major factor driving growth over the past five years, causing industry revenue to rise slightly over a period when many industries fell into decline.

Weak commercial and industrial construction over the past five years provided the largest challenge for this industry, preventing stronger growth. However, while overall growth in this area was limited, the industry did receive a boost from Government stimulus spending. The Building the Education Revolution package delivered $16.2 billion of investment in schools buildings across Australia. Packages like this have provided a significant boost for the industry, while also involving architects in the improvement of Australia’s schools. The individual and tailored nature of many of these buildings necessitated the engagement of architects in designing innovative, new educational spaces.

New business modelsWhile growth from architectural service firms has remained relatively modest over the past five years, outcomes for professional architects have been more positive. Large diversified architecture and engineering firms have become more common over the past five years, as major operators sought to improve their revenue base by expanding their services into complementary industries. According to the Australian Bureau of Statistics, the number of architecture businesses has declined slightly over the past five years. This is largely due to the merger of smaller businesses, a rise in the number of larger operators, and this emergence of more vertically integrated architecture and engineering services firms.

The changing business landscape has posed a challenge to some smaller operators, causing some to close or merge in an effort to become more competitive. Larger, diversified companies can often cater for a client’s full suite of construction and design needs, and are often well positioned to win major contracts with large clients. While some of this growth is not counted directly towards the performance of architecture-specific firms, it demonstrates the importance of architecture skills, and highlights the opportunities available for qualified architects.

This trend is expected to ease over the next five years, as the level of construction activity rises and firms focus on winning business rather than restructuring their operations. If smaller architecture firms are to remain viable over the coming years, smaller operators will need to focus on areas of competitive advantage, such as the residential construction, small-scale building improvement and technological integration.

The outlookThe future for architects across Australia looks bright, with conditions in building and construction expected to improve. Record-low interest rates will encourage businesses and individuals to develop property, with much of this development requiring architects.

The complex regulatory environment surrounding building design is also expected to drive the need for more architects, as clients seek to comply with new regulation. Additionally, increasing urban density around major capitals will support the need for more efficient use of space, with skilled architects likely to drive these improvements.

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Interest ratesThe Reserve Bank has lowered interest rates to a record low in an effort to boost spending in the economy. With the official cash rate at 2 per cent, individuals have cheaper access to debt required for building and construction activity. Low interest rates have the potential to encourage new building investment, and also increase the amount of money that existing debt holders have available for building improvements. According to the Australian Bureau of Statistics, the value of building work done is increasing, rising by 7.4 per cent over the past year alone. New residential building is driving much of this growth, rising by a remarkable 13.6 per cent over the same period. In a good sign for architects, this growth is expected to continue over the medium term, as interest rates stay low.

Rising property prices are also providing some support for the industry, as investors rush to take advantage of this growth. Low interest rates mean that the cost of servicing the necessary debt is low – while growth in prices remains high - making investment even more attractive. As long as interest rates remain low, the value of building and construction work done is likely to continue its pattern of growth. This growth will provide valuable support for the architectural services industry, driving revenue and employment upwards over the next five years.

Urban densityUrban density around Australia’s major capitals has risen steadily over the past decade. Populations around major cities have increased, with more people seeking trendy inner-city locations. The challenge presented by this issue is the availability of appropriate housing solutions to cater for this population growth. Land around capitals is becoming increasing scarce, driving the need for more intelligent, efficient use of space. This trend will provide many opportunities for architects to design new private and public spaces that cater for the needs of a rising population, while also maintaining quality of life.

The popularity of inner-city living is also encouraging the development of many new apartment complexes around major population centres, particularly along the eastern seaboard. While much of this growth has already occurred, the enormous popularity of apartment living will encourage more development over the next five years. Architects will be important in facilitating this development, as many local councils have strict approval processes for buildings over two stories. If developers wish to gain approval for large scale apartment complexes, they will need to provide a design that fits in with its surrounds, has street appeal, maximises the use of space and contributes positively to the community. If new buildings are to meet these requirements, architecture services will be required.

Employment Forecast– Architectural Services

Source: IBISWorld

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Free trade agreementsThe Australian Government has confirmed a raft of trade agreements over the past two years. As the effects of these agreements gradually come into force over the next five years, international trade between Australia and other signatories is expected to grow. Free trade agreements have been confirmed with Japan, South Korea, and most significantly China, over the past year, in additional to the wider Trans-Pacific Partnership. The agreements have been met with mixed feelings among local businesses, with many businesses cautious as to whether the agreements will not strike an appropriate balance protecting local industry and allowing greater access to foreign contracts.

The China Free Trade Agreement has the potential to provide the strongest benefits for the local industry, allowing greater access to the Chinese market for local firms. This is likely to include the accessibility of business licenses required in order to win higher-value projects. While the long-term ease of conducting business in China remains to be seen, architecture firms will likely be able to operate without oversight from China’s Local Design Institute, which had previously been a hallmark of doing business in China.

Additionally, while Australian practices will still need to have a business presence in China in order to operate, they will no longer require a permanent presence. The Agreement stipulates that a business presence in China may be only temporary in order to perform a service, subject to some guidelines. While it may take some time Australian architectural involvement in China to be fully realised, the Agreement is a step in the right direction and is likely to encourage business between Australia and China in the years ahead.

While Australian practices are likely to gain an increasing share of their business from China, Chinese firms are not so likely to gain a larger share of the local market. Stringent design standards in Australia, local design trends and the relative abundance of work in China are expected to minimise immigration of Chinese Architects and will also ensure that Australian firms retain their domestic advantage when competing for work.

Opportunities:

• Urban density: more individuals are seeking inner-city living spaces, driving demand for apartments upwards. Property scarcity in inner-city locations will make architects more important in ensuring intelligent and efficient land use;

• Regulation: buildings and renovations need to meet strict regulations, of which architects are knowledgeable and well informed. Environmental regulation in particular will require greater employment architects as new buildings and improvements across most states need to meet very specific energy standards;

• Interest rates: the cost of debt is as low as it has ever been, with record low interest rates of 2 per cent. This will encourage individuals and businesses to borrow and invest in building and construction.

• Vertical integration: while small, specialist architectural firms may face some competition from vertically integrated building and construction businesses, this integration will provide new opportunities for architects. Professional architects will be in high demand as businesses jostle for the best talent.

• Technology: the technology available for integration into homes, offices and industrial spaces is increasing rapidly. Architects are well positioned to take advantage of this trend, informing clients about available technology and how to utilise it to enhance their building.

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Architecture Informer Level 1, 163 Eastern Road SOUTH MELBOURNE VIC 3205 marketing-team@professionalsaustralia.org.au 1300 273 762