International costs

How the international construction market grew to $3.4 trillion
The globalisation of the construction industry is having a profound impact on inflation. Gardiner & Theobald estimates that the international construction market has grown 5.8% in the past two years to $3.4 trillion.

Despite such a robust world market, competition between international contractors and suppliers has helped to keep inflation in check in virtually every region. G&T recorded an average inflation rate of 3.8% for building costs for the 29 countries that reported inflation figures. This is down from the 4.5% rate reported by this group of countries in 1999 and well below the 6.1% figure they averaged five years ago.

These figures exclude Romania, which is struggling with a 56% annual rate of inflation. It also excludes Argentina, Singapore, Japan, Taiwan and China, which all experienced a deflation of construction costs this year.

G&T also tracks inflation in eight US cities. The firm expects construction costs in these cities to increase about 3.3% this year, after climbing 3.9% last year. By comparison, many nations once thought of as volatile are reporting inflation rates below the US average. Building costs are expected to increase by just 2.5% in Thailand, 2.6% in Sri Lanka, 2.9% in Kenya, 3% in the Czech Republic, 3.1% in Slovakia and 3.2% in Egypt. In addition, construction inflation in many western European nations is running below the US figures.

Activity in the UK remains at a high level, but demand and supply are generally in balance. G&T partner Paul Ridout says: “There are various cries of shortages of skilled labour and management, but these are in localised areas and in only some trades.” Unlike the boom-bust period of the 1980s, the industry is more ready to procure internationally and modify project designs to build. “People won’t accept that prices have to go through the roof,” he adds.

Business is most brisk in London and South-east England, where inflationary pressures are the highest in the country. Ridout says: “For the first time since spring 1997, we have had to push up our inflation forecast [for the year] by 0.5%, from 3.5% to 4%, because of increased volume of work.” Elsewhere in the UK, he expects cost increases of about 3%, just above general inflation. G&T expects intense competition in Scotland to drive down costs by about 0.5%.

Europe’s biggest construction market, Germany, is experiencing construction inflation of only 2% or less. With construction tailing off in the capital, the focus is switching to Munich and Frankfurt, increasing inflationary pressures there. Spain’s upward trend in the construction market will continue in 2001 and 2002.

Italy’s annual construction inflation stands at 2-3% – about the same as general inflation, says Alberto Gerola, who heads Milan-based architect and engineer Societa Progettazioni Integrali. Public works are not “very alive”, he says, but tax breaks on new residential projects are stimulating investments in homebuilding. In addition, mergers and acquisitions among banks and other international companies are fuelling commercial activity.

In Greece, the construction market “is better than last year”, says George Roditis, of Athens-based G Roditis & Partners. Huge infrastructure grants from the European Union continue to fuel investment in public works, while preparations for the 2004 Olympic Games are also driving the market. “There is a lot of work, but there is still competition,” adds Roditis.

Of the former Communist economies, Poland is busy, with construction officially growing at more than 10% a year. Krzysztof Stawarz of G&T’s Warsaw office reports that government spending is generating much of the work, which will continue for some years as infrastructure improvements are made to prepare Poland for entry to the European Union.

But much of the state-financed business goes to local contractors, squeezing prospects for foreign construction managers. “Polish prices have been relatively stable,” says Stawarz. Most construction products and materials are locally sourced, and even equipment, such as air-handling units, is increasingly produced in Poland to international standards. Labour costs are rising, with professional salaries becoming more aligned with Western Europe.

Business in Budapest “is still very active”, according to Mark Rea of G&T’s office in the Hungarian capital. “There’s a lot of construction in all sectors, although office development is nearing its peak. But infrastructure markets remain strong. In that context, construction costs are very stable compared with general inflation,” says Rea. “There is still a lot of competition in the market and people’s margins are reasonably tight,” he adds.

Construction demand in the United Arab Emirates has been “reasonably quiet in the last year”, says John Higgins of G&T’s Dubai office. As a result, costs have been very competitive. “Over the last 12 months, [we have] seen the price of concrete driven down to the lowest prices ever and the price of concrete reinforcing bar is also very low,” he says. G&T’s office in Riyadh, Saudi Arabia, adds that both market activity and costs are quiet in that part of the Middle East.