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Gap narrows between global construction costs finds EC Harris

6 Aug 12 Construction costs in the Asia-Pacific region, North America and parts of the Middle East are on the rise and closing in on prices in western and northern Europe, according to a new study from EC Harris.

The 2012 International construction costs report, which benchmarks building costs in 53 countries, found that construction costs were acting as a reliable bellwether for global economic trends. Europe was responsible for just five of the top 10 most expensive markets in this year’s report, compared with eight entrants in 2011.

Markets such as Canada that are focusing on infrastructure-based development are seeing higher construction costs. Costs are also rising in countries that are recovering from natural disasters. But economic turbulence within the Eurozone is resulting in lower construction costs across region.

Switzerland remains the most expensive country, but Australia, Hong Kong, Singapore and Canada have all moved further up the list of the 10 countries with highest costs (see table below story).

Construction costs in the UK have decreased over the past 12 months, with the UK now a cheaper place to build than countries such as Qatar and New Zealand. In Europe, the UK has moved from having Europe’s ninth to eighth highest construction costs.

As countries such as Greece and Portugal labour under stringent fiscal austerity programmes, the threat of default has had an impact on the price of construction across the entire region. More stable markets including Germany and Sweden are also posting lower costs than last year. Switzerland continues to top the list, though even there costs have dropped 10% on the previous 12 months due to the declining value of the Swiss Franc.

Increasingly stringent fiscal austerity programmes, weakening lending capacity of the banking system and the threat of further markets defaulting has led Euroconstruct to revise downward its previous predictions of recovery in construction output. A north-south divide is also becoming increasingly evident with the Nordic countries, Germany and Switzerland set to substantially outperform southern markers over the next two-year window.

With the UK economy once again in recession and hampered by ongoing issues within the Eurozone, construction workload is not expected to rise until 2014. One of the biggest challenges is that the level of private investment in construction projects has failed to make up for the substantial cuts in public sector funding, says the report.

Construction costs in markets that have been less impacted by the global recession are continuing to increase, with Canada, Australia and Qatar all moving up the league table compared with their 2011 positions. The Asia-Pacific region now has four of the top 10 most expensive markets, with Australia, Japan, Hong Kong and Singapore occupying third, fourth, sixth and seventh place respectively. Canada also figured in the top 10 list, jumping two places from last year with construction costs on average 14% higher than in 2011.

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In Canada, costs are substantially higher than in the USA due to strong volumes of activity that has seen employment within the sector reach an all-time high. Since 2011 the USA has seen a marginal rise in construction prices although huge variations still remain between the northern and southern states. With moderate economic growth predicted (2.3%) and unemployment still high (8.2%), the US construction market is likely to remain subdued throughout the year.

Construction costs in Saudi Arabia are substantially lower than in the UAE and Qatar although over the past year prices in Saudi have risen by over 10%. Most countries across the region depend heavily on cheap labour from Asian markets, which is continuing to keep construction prices in check. But growing demand, particularly in Saudi Arabia and Qatar, could create a skills shortage that may see prices escalate in the UAE.

The Singapore government’s move to reduce the reliance on foreign workers could see costs rise in the year ahead whilst in India and Japan the focus on large-scale infrastructure projects should see construction activity and associated costs rise over the coming year.

Mathew Riley, group head of cost and commercial at EC Harris said: “Those countries that are least constrained by debt problems are continuing to invest in construction activities to help fuel their continued growth. In such a scenario the volume of work undertaken is creating an increased demand for both commodities and skills, which is inevitably driving costs upwards. In markets like Qatar and Canada where capital investment has been focused on long-term infrastructure projects, there will be a sustained pipeline of work which is likely to see construction costs rise even further on both a short and medium term basis”.

Another issue that resulted in a significant rise in construction costs was the need to respond to natural disasters. The findings from this year’s report showed that the price of building in New Zealand, Japan and Australia had risen by 13%, 7% and 20% respectively as each market had to rebuild major parts of the country following the devastation created in 2011 by an earthquake, tsunami and major floods.

One of the other elements examined within this year’s study was the impact that the enduring economic slowdown could have on the construction industry’s ability to deliver major projects once the market picks up. The recession has prompted many businesses to reduce their headcount and the number of graduates they take on. Concerns are growing around whether the labour force will be large enough or equipped with the right technical skills to deliver future programmes of work.

The report also looked at the impact that fluctuating commodity prices may have on construction costs over the coming years. Since 2010 the price of several key commodities, including copper and iron ore, has increased dramatically resulting in cost overruns on many high-profile schemes. However, with prices expected to return to 2007 levels when the last construction boom occurred, volatility risk will be reduced, helping to make some projects more viable than before.

Riley added: “Although certain commodities are set to become more affordable some of these materials are still only available in finite volumes. Whether it’s securing access to commodities or to capacity and capability within the supply chain, the underlying message for clients is that they need to start planning ahead in order to guarantee continuity of supply. Unless they can provide early visibility of what they need to deliver their projects, there is a serious risk they may not be able to complete them on time or to the standard required.”

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