International costs: 2006

Global materials price inflation easing off

The surge in materials price increases that swept through the global construction industry in 2004 began to subside in 2005. In its 14th annual survey of international construction costs, Gardiner & Theobald reports that the average construction inflation for 30 countries in Europe, Asia, the Middle East, Latin America, and North America, slipped back to 4.9%.

A year earlier, higher steel prices helped push construction inflation in these countries to 6.3%. Before that, global construction inflation was running at 3-4% for several years.

Steel prices “have levelled off”, says Nick Rowe, a G&T partner in London. Mark Rea, of G&T’s Budapest office, adds: “Steel is no longer the hot issue it was last year. Prices have become more stable in the last six months or year.”

The other global price driver, energy, is starting to translate into discernable construction cost inflation with recent fuel prices hikes beginning to be felt in bid prices, according to Rowe.

Overall, the international inflation rate for construction is likely to ease further in 2006.

The 16 countries providing forecasts for 2006, predict that building costs will increase 4.4% next year. The same group of countries reported a 5.3% increase for 2005. In the US, G&T’s New York office is forecasting construction costs to increase 7.7% in 2006, after climbing 8.4% in 2005, 11% in 2004 and 2.8% in 2003.

The continents

In Europe, construction inflation jumped from 2.5% in 2003 to 4.9% in 2004 and fell back to 3.1% in 2005.

The European inflation rate is being moderated by Eastern European nations, which are bringing double-digit inflation under control. In Romania, inflation has fallen from 40% as recently as 2001 to 7% in 2005 and is likely to drop to 5% in 2006. In Slovakia, construction inflation dropped from 10% in 2004 to 3% in 2005.

In Asia, construction inflation for 13 countries tracked by G&T fell from 7.7% in 2004 to 6.4% in 2005. In New Zealand, construction inflation went from 1% in 2003 to 14% in 2004 before tracking down to 5% last year.

In addition, recent deflation in Singapore, Japan and Taiwan has been reversed. In Hong Kong, building costs fell 33% between 1999 and 2002. This year they rose 3.8%.

In South America, economic powerhouses Argentina and Brazil have successfully capped inflation this year, helping to stem construction costs. “In 2005, Argentina materials and labour costs have increased on average the same rate as overall inflation,” says Pablo Iraolagoitia of G&T’s associate RED Consulting & Management. Construction inflation in Argentina fell from 25% in 2004 to 12%, and G&T predicts it will decline to 4% in 2006.

But the legacy of economic turmoil that devastated Argentina in recent years continues to weigh heavily on construction costs. “Since the devaluation of the local currency in 2002 construction costs have increased about 180%,” says Iraolagoitia. “In the same period of time, labour costs rose just 60%.”

Costs for steel rebar, glass and aluminium have increased 300% or more in Argentina due to absence of market competition. “During the next couple of years, we expect that labour costs will increase at a higher speed than materials,” Iraolagoitia adds.

In Brazil, “construction costs are moving upward at about 9% per year”, according to Colin Evans of G&T’s associate Colin Evans Associates. “But in relation to the US dollar, costs have increased tremendously.” Spread over seven years, its impact on prices will be local rather than national, he believes.

Europe

The UK has been a magnet for labour from Eastern European countries that recently joined the EU. But the industry is still short of skilled workers, says Rowe. Eastern labour is plentiful, “but they don’t tend to be skilled”, Rowe adds.

With German construction still in recession, prices show no signs of rising, according to David Lees in G&T’s Berlin office; he sees no upturn within another two years. “Price reduction is continuing,” he adds.

French construction prices have risen about 2.5% since this summer “largely due to fuel costs”, according to Chris Gilmore in G&T’s Paris office. Over the previous years “we were talking about 1.5%”, he says. Gilmore expects construction inflation to reach 4% next year.

Hungary’s demand for construction is “ticking along well”, with plenty of residential projects, says Mark Rea in G&T’s Budapest office. Having recently joined the European Union, Hungary has shed the risks associated with Eastern Europe, he adds. At the same time, “prices are becoming more and more in line with Western Europe. The days of being able to build much cheaper in Eastern Europe are gone,” he says. And with wage hike claims conditioned by previously high general inflation, there is definite pressure on labour prices, he adds.

In Poland, “there is considerable volume of work and there is much more competition as well,” reports Jan Holyst at G&T’s Warsaw office. Residential accommodation is much in demand while the government’s infrastructure spending is fuelling growth, he adds. Nevertheless, prices are stable although demand is putting inflationary pressure on pay rates, he says.

Croatia “is buoyant in all departments”, says Peter Walker of G&T’s Zagreb office, although prices of materials and labour are static. Steel costs continue to rise, so “there is a lot of forward buying. But the escalation relates to demand rather than lack of supply,” says Walker. “A stable exchange rate keeps prices steady.”

Hot spots

Dubai remains “one of the most booming markets in the world”, says Kerry Dodds of G&T’s office in the Emirates. “The amount of money being spent is phenomenal,” he says. “Over the past few years, costs generally have risen 10 to 15% and as much as 20% for some materials.”

In South Africa, “demand is high, especially in the residential sector”, says Calvin Setzkorn of G&T’s associate Schoombie Hartmann Preller in Pretoria. “We have seen a jump in prices over the past 18 months and margins have increased as well.” Construction costs in South Africa rose 14% in 2005, following an 18% jump in 2004.