New York, Hong Kong and London are now the most expensive cities in the world for construction, as populations boom and workforces shrink.
The three financial hubs have seen costs rise the most, with prices as much as 60 per cent higher than many European cities, according to the 2016 International Construction Costs report from Arcadis. The cities, however, also represent some of the best development opportunities, largely due to high demand for prime property and continuing investment in infrastructure.
Currency fluctuations continue to impact the cost of development, with the strong dollar and pound contributing to New York and London’s rankings. Indeed, currency depreciation and slowing cost inflation has seen many Asian and European cities fall further down the rankings.
In the USA, Arcadis forecasts costs will remain high, driven by large-scale projects, labour shortages and appetite from international investors. Union labour and a shortage of workers, particularly those needed for weekend work, have pushed up salaries, while insurance costs have also surged, now accounting for up to one-tenth of a project’s total construction cost.
Despite data in the second half of 2015 showing a loss of momentum, though, America’s ongoing economic recovery is expected to cushion the industry.
Hong Kong Photo: Sanfamedia.com
Hong Kong has is also suffering from labour shortage, fuelled by the demand for workers in other sectors, such as transport, where major metro and high speed rail projects are underway. After record high construction output in 2014, these shortages are now delaying projects, as well as making them more expensive.
Officials now plan to tackle the rising costs of building.
Speaking at the Asia Construction Conference, which was held in Hong Kong this month, Ir Hon Chi-Keung, JP, Permanent Secretary for Development (Work) of the Hong Kong Special Administrative Region Government, said the construction industry is facing “unprecedented challenges”.
“The recent escalation of construction costs will affect the financial sustainability and the shortage of manpower caused decline in productivity,” he commented. “The Government will promote to strengthen cost control in the industry and enhance training to cope with manpower shortage.”
London has also seen output in construction decline, at a time when the UK is taking measures to boost residential housebuilding to meet demand for accommodation.
Output in the construction industry decreased by 0.5 per cent from October, according to the Office for National Statistics, with decreases in infrastructure and private commercial work of 4.3 per cent and 1.5 per cent respectively. Year-on-year, total output in the construction industry decreased 1.1 per cent in November 2015.
“The UK capital is facing a severe construction market imbalance. As contractor capacity fails to keep pace with demand, cost inflation is being heavily driven by a difficult combination of limited bidding resource and supplier opportunism,” explains Arcadis.
“Although stable material costs have taken some steam out of the market, rapid inflation affecting the cost of labor and on-costs such as profit margins, mean that accurately predicting prices has become near-impossible in some areas of the market.”
The 10 most expensive cities for construction, according to Arcadis, are New York, London, Hong Kong, Geneva, Macau, Copenhagen, Stockholm, Frankfurt, Paris and Singapore.
Bangkok, one of the 10 least expensive cities for construction
Other international markets, though, are more affordable. The gradual recovery in the eurozone, for example, has meant that none of the high construction inflation seen in the UK or US is affecting local markets.
In November 2015, construction activity rose 0.8 per cent in the euro area compared to the previous month, according to Eurostat. In Spain, November saw a decline in output of 0.4 per cent after five months of growth in a row. (Overall, construction rose 0.7 per cent in Q3 2015 compared to the previous quarter.)
Rising costs and falling currency values could cause emerging market investors to turn to cheaper cities in the long-term, predicts Arcadis. The cheapest of the 44 markets analysed by Arcadis include Jakarta, Sofia, Sarajevo, Prague, Bucharest, Ho Chi Minh, Kuala Lumpur, Bangkok, Bangalore and Taipei.
“When it comes to development, the world’s major financial centers have always commanded a substantial premium. But the sheer scale of the demand-driven price increases we have seen this year in the likes of New York and London has been remarkable,” comments comments Tim Neal, Arcadis Global Director of Buildings.
“The problem that these cities could soon encounter, however, is that this rapid inflation could soon see many investors and even public sector bodies shut out as prices continue to spiral,”
In the Middle East, despite uncertainty over oil prices, Doha and Dubai remain “relatively stable” locations for developers, benefitting from ongoing access to inexpensive labor and energy.
In Asia, though, the Chinese economic slowdown and weakening demand in many cities, including Singapore and Jakarta, mean that growth in wider Asian markets is expected to ease.
“With so many potential opportunities arising in recent months across newly-affordable markets, it is vital that investors and developers to do their homework,” adds Neal.Google+