International costs: 2003

Inflation continues to slide worldwide
Inflation overseas in 2002 proved more stubborn than many estimators thought it would be. A year ago, fear of a deep recession in the USA led many to believe that inflation would fall dramatically. That didn’t happen, but worldwide construction inflation weakened for the second consecutive year and should decline again in 2003, according to a forecast by Gardiner & Theobald.

In its 11th annual survey of international construction costs, the London-based quantity surveyor reports that construction inflation averaged 3.2% for 22 nations in Europe, Asia and the Middle East. This is down from a 3.7% annual inflation rate in 2001 and 4.4% in 2000 for the same group of countries. Next year, construction inflation should slip another 0.3%.
These inflation figures exclude several nations with extraordinary cost trends that would unbalance the data. For example, construction inflation is still rampant in Romania where costs increased 34% this year after climbing 40% in 2001. Argentina’s financial crisis shattered five years of cost stability, sending building costs in Buenos Aires soaring 91% this year.
Cost stability also fell victim to the Middle East conflict. In Israel, building inflation jumped from 1% a year ago to 6.7% this year. Local cost consultants are bracing themselves for another 7.2% increase in 2003.

Other nations have made tremendous strides in containing inflation. Five years ago, most Eastern European nations were battling double-digit inflation. This year, it is down to zero in the Czech Republic, 1% in Poland and 5% in Hungary. In Cyprus, building inflation was slashed in half from 11% in 2001 to 5% in 2002.
Several international markets are struggling with the problem of deflation. The most severe case is the Hong Kong market. Although construction inflation is negligible in Shanghai, prices have fallen through the floor in Hong Kong. This year, costs in the city are expected to fall 7.1%. the fifth consecutive year of decline. Deflation also is reported in Taiwan, Japan and Germany.

Germany’s continuing economic difficulties have left construction prices stagnant or falling; prison building and road construction are among markets targeted for private investment.
Germany’s construction gloom is casting a shadow over neighbouring Poland. With Germany providing less work for migrant labour, Polish teams are being forced to return to a market oversupplied with people. As central Europe’s largest nation, Poland is well served by construction labour, says Gardiner & Theobald’s Jan Holyst, who is based in Warsaw. A skilled construction worker earns €5.50 (£3.70) an hour in Poland compared with a wage of €33.66 (£22.67) an hour in Germany, according to the Gardiner & Theobald survey.

“Tender levels are still very competitive,” says Holyst. “There has been increased competition this year, which is reflected in the downturn in the value of work available.” He says increases in the prices of materials, equipment and labour are being absorbed by contractors and their supply chains.

French construction costs have recently begun to decline, according to Peter Lewis of Gardiner & Theobald in Paris. Contractors are being forced to bid more competitively because of this reduced spending. “Large increases in labour costs are complicating the pricing situation for contractors, with large increases for some trades caused by severe labour shortages,” he says.

In the UK, one of Europe’s busier markets, bid price levels are increasing about 3.5% a year, says Paul Ridout, a partner in Gardiner & Theobald in London. “Over the past few years, there’s been a general increase in workload and there’ve been lots of threats of shortages. But, in fact, it has stayed very much in balance.” After a busy construction period, prices in Hungary appear to be falling or remaining stable in terms of materials and equipment, partly influenced by currency exchange shifts, says Mark Rea, who works in Gardiner & Theobald’s Budapest office. According to Rea, the Hungarian currency’s growing value against the euro and dollar “is making imported items cheaper in local terms”.

Spain’s rapidly growing construction sector is pushing construction inflation to 3.5%, or about 1% more than for general retail inflation, with energy intensive materials experiencing the biggest increases.

Dubai is considered by many to be the centre of activity in the Middle East. Initiatives by the tiny emirate to promote leisure and business opportunities continue to stimulate construction. An important incentive is the recent decision to allow foreigners to acquire real estate, says Gardiner & Theobald’s resident partner Jeff Higgins.

Booming construction and a reported shortage of contractors of the “right calibre” are causing prices to creep up, says Higgins. And, indigenous labour is “always a problem”, he adds. But “flexible” government attitudes to workers immigrating to the area from the Indian subcontinent and farther afield meets the demand. Skilled construction workers in Saudi Arabia get paid about €3.70 (£2.50) an hour.

Saudi Arabia’s construction prospects are being boosted by relatively strong oil revenue, reports Brian Tingate from Gardiner & Theobald’s Riyadh office. He says it is likely that government spending in Saudi Arabia will increase next year, particularly in the health and education markets.
But demand for construction remains slack, keeping a firm lid on construction costs. Bid prices are “extremely competitive”, says Tingate. “Government expenditure is being controlled extremely tightly. There’s very little public work. The private market is moving reasonably well, with retail development, banks, shopping malls and leisure developments.”