CEO OF AUSTRALIA'S LARGEST COMMERCIAL BUILDER ON CHALLENGES

UNCLAS SECTION 01 OF 02 MELBOURNE 000026 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EIND ECON ETRD AS SUBJECT: CEO OF AUSTRALIA'S LARGEST COMMERCIAL BUILDER ON CHALLENGES AHEAD REF: A) Canberra 95, B) 08 Melbourne 136 MELBOURNE 00000026 001.2 OF 002 Summary -------------- ¶1. (SBU) The CEO of Australia's largest commercial builder said that the GOA's controversial January 27 commercial property assistance plan will help give a much needed confidence boost to the sector. Money is still tight for commercial developers and many are looking gloomily ahead to 2011-2012 when existing projects in the pipeline will begin to wrap up. Grocon and others are looking to take advantage of Australia's investment in infrastructure as a way to cushion the slowdown. It is still too early to determine whether the assistance program will have the desired effect, but developers are receiving it well. End Summary. Response to GOA Assistance -------------- ¶2. (SBU) During a February 3 meeting, Grocon (Australia's largest commercial builder) CEO Daniel Grollo told Consul General that the GOA's commercial real estate assistance package has been "critically important." The A$4 billion (US$2.7 billion) assistance package, which provides backstop funding for commercial developers (Ref. A), would help to restore a "degree of confidence" in the building sector. According to John Van Camp, Grocon's Labor Relations boss, each Australian construction position fuels four downstream jobs, so reenergizing the commercial property sector could have an exponential impact on the Australian economy. ¶3. (SBU) During a separate meeting in late January, a Master Builders Association of Victoria (MBAV) official told post that the government's assistance program has been welcomed by the building industry, but appears to be a "stop-gap" measure because it is limited to projects that already had funding approved which had subsequently fallen through. MBAV is also concerned that the program does not address an expected slow-down in commercial building. Grocon and the MBAV are both waiting for specific details on exactly how the GOA's commercial property vehicle will function. Money Still Tight -------------- ¶4. (SBU) According to Grocon, money is still "very tight" for developers. Van Kamp described a Brisbane client who is still searching for financing. Other projects have been forcibly downsized due to money woes. Grocon executives noted that a tightening money supply has most dramatically impacted smaller developers (market capitalizations under US$17 million). Post has heard from several sources that banks have become very selective about funding new projects despite the reduction in Australia's official money rate to 3.25 percent. Grocon has been impacted by tighter money as well, but claims that it is "scraping along." Outlook -------------- ¶5. (SBU) Looking ahead, Daniel Grollo sees a potentially very dry business pipeline. Commercial development projects entail a long lead time and Grollo believes that this may insulate Grocon and the commercial real estate sector for the short term. Grocon is already expecting, however, a soft 2011-2012. The company will attempt to respond by going after A$5 billion (US$ 3.35 billion) of "safe" government and defense building projects. Opportunities may arise in green buildings and Grocon is looking to lock in "anchor tenants" into several of the buildings which they own and operate. The company would also like to expand operations in China and Dubai, but the executives noted that business has slowed in both places. Labor Relations -------------- ¶6. (SBU) Responding to the Labor Government's new Fair Work Australia legislation currently before the Senate, John Van Kamp noted that Grocon was "comfortable" with the laws. He said that Grocon is in a "wait and see" mode with respect to the proposed legislation and is giving the government the benefit of the doubt. Van Kamp believes that Grocon's generous benefit and salary packages along with a "sterling" safety record will insulate the company from the new, more worker-friendly IR legislation. Comment -------------- ¶7. (SBU) Concerns over exposure to foreign banks which may not renew short term financing played a large role in propelling the GOA's commercial building assistance package. While the CEO of the MELBOURNE 00000026 002.2 OF 002 country's biggest builder did not appear to be losing sleep over a dearth of financing, he did seem deeply concerned about a crisis of confidence and long term demand. Previous Australian slowdowns have led to significant falls in commercial property values and occupancy rates. Many contacts are bracing for the worst. It is still too early to tell whether the GOA's assistance package is having the desired effect of freeing up money in the commercial property sector, but it has been well received by at least Grocon and the Master Builder Association of Victoria as providing a short term stimulatory shot of confidence. THURSTON