North/south construction costs gap narrows

16 May 2017 | By Denise Chevin

The gap between construction costs in the north and south of England is beginning to close, according to new research from Turner & Townsend.

The construction market in the north is set to experience the highest construction cost price inflation in the UK outside of London – at 3.6% this year compared to 2.9% during 2016.

Meanwhile construction price inflation in southern and central England is set to fall from 3.5% to 2% and 3.8% to 3.5% respectively, according to the International Construction Market Survey, published today.

The report analyses input costs – such as labour and materials – and charts the average construction cost per sq m for commercial and residential projects in 43 markets around the world.

It also revealed that construction costs in London are set to rise by 4.1% in 2017, fuelled by strong demand for infrastructure work and skills shortages in the UK, although this is marginally lower than 2016 when inflation cost inflation in London was 5%.

London, which was ranked as the third most expensive city in which to build in 2016’s report, has fallen to fifth place behind Hong Kong and San Francisco, despite costs in the capital soaring by 5% over the past 12 months to reach US$3,214 per sq m. The drop in ranking reflects the depreciation of the UK pound against the US dollar since the EU referendum.

A total of 60% of cities assessed by the study are identified as “warm, hot or overheating” – where the market is characterised by a high number of projects and intense competition for physical resources and labour that drives up prices. 

The report calls for increased investment in innovative technologies, new construction methods and better use of data to manage costs and boost productivity in the sector.

As a whole, international construction costs are forecast to increase by 3.5% in 2017. The major exceptions to escalating costs are the commodity-reliant markets of Singapore, Muscat, Kuala Lumpur and Santiago, where the development market has cooled in light of falling global prices for raw materials. 

Steve McGuckin, global managing director – real estate at Turner & Townsend, commented: “This year’s survey indicates a slowly warming construction industry suffering from increasing labour shortages in an improving global economy.

“London has long been the engine room of the UK construction industry, but the market in northern cities is starting to pick up steam. The devaluation of sterling has woken foreign investment up to the opportunities in many other UK regions, and Manchester in particular has emerged as the most attractive alternative to the capital – as can be evidenced in the huge volume of high rise schemes and residential activity.” 

Skills shortages continue to prevail across the world with more than half (24) of the 43 markets analysed reporting labour shortages compared to 20 markets in 2016.

Extreme variations in the cost of labour between regions and skill levels are also prevalent with construction workers in Zurich and New York edging closer to US$100 per hour. By comparison, UK workers in the sector typically receive around US$ 41.10 per hour.

McGuckin continued: “As more markets report skills shortages than ever before in the history of this study, it is clear that construction is not doing nearly enough to tackle this issue, which if not addressed has the potential to become a crisis.

“Against this backdrop, the UK construction industry needs to boost productivity levels. There is an urgent need for contractors and clients to embrace innovative technologies and new methods of construction, as well as using data analytics and better programme management to increase output.”

Shraga Stern, director of Decorean, one of the largest construction contractors operating in and around London, said: “The reports that London is the world’s fifth most expensive city for construction is cause for concern at a time when housing needs are so high.

“This report should act as an alarm bell for the construction industry which must work as a whole to find innovative ways to tackle the issue. As a housebuilder, we are always looking to adapt to make overall construction costs cheaper with different and pioneering technologies, such as Building Information Modelling.”

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