好色先生TV

Construction costs in the UK have slipped a couple of places down the 鈥渓eague table鈥� of international costs and the country is now 10th in Europe and 14th overall, compared with all countries covered in the EC Harris survey of international construction costs. Despite a rise in construction activity during 2010, the outlook for the UK construction sector will be tough over the next couple of years and the fall in construction tender prices, which started in 2008, is expected to continue well into 2012 for most of the country.

The problem of comparing prices across countries manifests itself in the difficulty in dealing with exchange rates. Compared with the UK, construction prices in Switzerland have soared and are now 70% up on the UK from being 60% higher in 2010. However, the value of the Swiss franc has risen by 17% against the pound over the past year, which effectively means that prices in Switzerland are cheaper (if you are being funded from within the country).

While the economic and construction climate are both difficult in the UK, there are a number of countries across Europe where the difficulties are more pressing. The need to bail out the Irish, Spanish and Greek economies is creating ongoing problems in those countries that will not be solved in the short-term and the decision of the European Central Bank to raise interest rates to control inflation cannot have helped. The more immediate results on construction costs have been price cuts of about 14% in Ireland, 8% in Spain and 5% in Greece. With the economies of those countries still struggling, and Portugal鈥檚 debt status reduced, demand for construction services can be expected to fall, along with costs falling in those countries in real terms.

Recovery in the UK economy is expected to be slow and this is likely to have a knock-on effect on the construction industry, not least because of the decimation of public sector workload. Construction order figures in the first quarter of 2011 showed major falls across all sectors and were 23% down on the average quarterly figure for 2010. Pricing on major schemes has remained keen as contractors look for workload at the expense of profit.

Obviously there are pressures on contractors, not least from commodity price rises, although the feeling is that the worst commodity price hikes are now behind us. Labour rates are unlikely to shift over the next couple of years and the 1.5% increase agreed by the main construction union in June is unlikely to translate into real rises on site. As a result, the expectation is that in London, tender prices will continue to fall through this year and recovery will only occur in mid-2012. Across much of the country however, workload is less assured and recovery in tender prices is forecast to be later than in London and is not expected until the second half of 2012.

Commodity prices

Commodity prices across the world have shown some sharp increases over the past 12 months with steel, copper and oil prices close to all-time highs. For contractors tendering on fixed-price schemes, the risks can be substantial as they could be exposed to large pricing risks where procurement has not been finalised, with resultant risks to clients.

Recent worldwide price increases have been driven by a number of common factors:

• increased demand across the world, as countries/regions recover from the recession
• the growing role of the BRIC countries as consumers and not just producers
• difficulties in supply
• the emergence of commodities as targets for speculative investment.

The price increases of a number of commodities have been driven by additional factors. Steel prices, for example, have been responding to the emergence of a new pricing structure for iron ore and coking coal and to the floods in Queensland earlier in the year, which led to a substantial ramping up of the price of coking coal. Oil prices have responded to higher demand and lower supply, partly as a result of unrest in Libya and Nigeria. Demand for copper meanwhile is outstripping supply, and the expectations of high demand in 2011 is boosting prices. Higher copper prices will hit electrical, plumbing and mechanical services installations.

However, there are signs that the worst of the commodity price rises are now behind us. Oil prices are already 10% below their peak and the Economist Intelligence Unit Global Forecasting Service indicates falls across a number of key commodities in 2012 and 2013. When a new equilibrium is reached, however, it is likely to be substantially above the level of two years ago.

Europe

The slow recovery from the worldwide recession has hit the construction sector in most countries and construction price movements have generally been restrained. Economic growth in western Europe has been slow and the Economist鈥檚 forecast for the Eurozone is an increase of 1.9% this year with a further 1.7% in 2012. Construction prices in France, Germany and Italy have remained virtually unchanged over the past year and remain 13%, 7% and 1% respectively above the level of pricing in the UK. Despite the weakness of the pound in world markets, the exchange rate against the euro has had little effect on pricing as the euro also remains weak.

In eastern Europe, there are more signs of recovery, with growth in the new members of the EU expected to be 3% this year, followed by a further 3.6% increase in 2012. The economies of both Poland and Russia are expected to grow by 4.2% this year, with a further 4.2% in 2012 for Poland and 4.5% for Russia. Construction prices in Russia, when measured in UK sterling, rose by 9% over the past year, according to the EC Harris figures. In contrast, construction prices in Poland fell by around 5% and construction prices in the country are about 30% cheaper than the UK and running at a similar rate to prices in Greece and Croatia. The fall in prices in Poland comes despite the increased investment in major infrastructure works in the country, including the ongoing preparation for the Euro 2012 Football Championship which has involved the building or refurbishment of five major football stadiums. Poland has been able to take advantage of large injections of structural funds that have been directed primarily towards road improvement projects, and this sector has created most of the construction workload.

International investors have traditionally put all central and eastern European (CEE) markets into one basket, but the activities of recent years have proved that this approach should be revisited. Neither local currency nor the internal markets behave the same in every country of the region and there is a big difference between some of the smaller markets, such as the Baltic States, which are heavily dependent on foreign investment and the larger ones such as Poland and Russia, where there are strong domestic markets and well established export industries.

After an almost complete freeze of investment since the credit crunch, institutional investors demonstrated an increased interest in acquiring commercial properties across all sectors
in the second half of 2010. While this activity is far from the kind of real gold rush experienced three or four years ago, it is seen as a symptom of a regained confidence in the CEE market. Due to the natural limitation of built assets supply on the market, investors are starting to consider different forms of forward purchase and are even willing to take on part of the development risk as joint venture partners. This indicates a real change of attitude among investors (who traditionally would have not considered any development risk) and can also be
seen as a demonstration of confidence in the market.

The former Soviet satellite states and the countries which made up Yugoslavia are the cheapest in Europe, with costs on the whole running at a level of 50-65% of UK costs. As noted earlier, Croatia is one of the exceptions to that rule, while prices in the Czech Republic are running at a similar rate, at about 65-70% of UK prices. While both countries are outside the euro there has been little variation in their currencies against the euro which might affect the comparison.

North America

Average construction prices in the US remain below those of the UK and the differential has remained approximately the same as last year, with construction prices about 10% lower than the UK.

It is evident that the US economy is slowly coming out of a major recession, although it will take several more years for the economy to fully absorb the overhang from the serious economic imbalances. The US has been slower than most Organisation for Economic Co-operation and Development governments to switch to fiscal tightening; the country will run a budget deficit of 9.1% in 2010/11 but a combination of economic recovery and spending restraint will reduce the deficit in 2012-15 (Republican and Democrats leaders finally agreed on 1 August to a $2.4tn deficit reduction over 10 years). As recovery progresses, construction costs are likely to rise as demand for buildings increases. The increase in commodity prices and some materials suppliers鈥� attempts to pass on the increase of fuel surcharges are inevitably going to influence construction costs.

Even though the financial sector seems to be returning to health, financing remains a challenge for contractors across the US. The depth and the duration of the recession have severely strained contractor working capital and the market is now entering a dangerous time for bidders. In the early portion of the recession, bidders were likely to be cash-rich from revenues from earlier projects; however as the situation recovers, bidders are in a position where they have little or no cash from current projects, just as they are looking to increase activity.

America鈥檚 recovery is now two years old and the economies of most states are growing once again. However not all states are growing at the same speed. As might be expected, the North-east and Mid-west have enjoyed relatively strong performances with GDP in New York and Massachusetts up by 5.1% and 4.2% respectively. At the other end of the scale, Florida鈥檚 economy grew just 1.4%, and Nevada鈥檚 continued to shrink.

Construction costs in Canada are marginally above prices in the UK although the differential has fallen over the past year partly due to a fall in the value of the Canadian dollar. Canada鈥檚 economy has performed strongly in the past, partly as a result of Canada鈥檚 close ties with a buoyant US economy but with the US now facing a period of slower growth this likely to be less of a driving force. Nonetheless Canada鈥檚 economic growth looks secure due to its large reserves of natural resources. Canada is the leading crude oil supplier to the US and the tar sand reserves in Alberta are huge. Extraction of oil from the tar sands is mired in controversy and there are huge environmental objections. However as oil prices increase, the extraction of oil from the tar sands is likely to play an important part in Canada鈥檚 economy.

Middle East

The Middle East is still showing signs of recovery, with generally more reserved investment decisions being made. Both the market and the Arab spring have benefited various specific sectors and locations. Huge social expenditure programmes have been announced in many countries for affordable housing, education, health and transportation sectors, but getting the projects started is slow. However Saudi Arabia alone is seeking $500bn in investment opportunities in transportation, energy and education, according to a recent report by Bloomberg.
Dubai has seen a restructuring of debts and an imminent decision to move to 鈥渆merging from a frontier market鈥�, which in turn will increase the appetite for external investment. We are seeing some projects come back here but only in a small way, although the leisure and hospitality sectors are boosting the markets somewhat. With the announcement of the World Cup 2022 going to Qatar, there is much talk of a booming market in Doha but it will take a while for this to convert to significant expenditure or sudden increase in construction costs.

The region has traditionally relied on oil revenues, but there is real evidence that a number of countries are moving away from oil reliance. In the UAE, long-term plans are in place to diversify the economic base away from hydrocarbons, insulating the economy from commodity price volatility. In Saudi Arabia, the government aims to develop more value-added, energy-based industries and to use oil wealth to develop the low base of marketable skills, technology, research and development. Bahrain鈥檚 long-term performance, on the other hand, will depend on several crucial factors:

• the country鈥檚 ability to cope with dwindling oil production
• its ability to compete with other Gulf states developing similar services and manufacturing industries
• its efforts to develop the local skills base and reduce unemployment among nationals.

Pricing in the region is grouped quite closely and is on the whole about 90-100% of UK costs. Bahrain is the most expensive of the Gulf Co-operation Council (GCC) countries, with prices running at around 11% above UK prices; at the other end of the scale is Saudi Arabia where prices are about 60% of UK prices.

Construction workload in the region is expected to be steady towards the end of 2011. In Qatar and Saudi Arabia a shortage of skilled labour is expected to push up labour costs. In addition, since there are a relatively small number of contractors eligible to operate in Qatar and Saudi Arabia, as workload increases higher profit margins are also expected to kick in. Inflation is expected to be very similar in the UAE and Saudi Arabia, but is expected to increase significantly in Qatar as a result of global energy demand. By mid-2012 it is anticipated that construction costs in the GCC will be very different to historic performance, with Saudi Arabian prices rising at a sustainable pace and prices in Qatar reaching similar levels to those witnessed towards the end of 2007. We are now starting to see pressure on commodity prices that is similar to the market in 2007 and as the market recovers this will translate into increased prices.

Asia Pacific

China and India are now the two main drivers of economic growth across the world and what happens to the economies of those countries takes on greater global significance with each year that passes. It is fortunate therefore that the Chinese economy is expected to continue to grow at a rate close to 9% each year, while growth in India is expected to be not far behind.
However growth of that magnitude comes at a cost and in China, consumer price inflation of 5.5% in May was at a 34-month high, forcing the government to continue its tightening of monetary policy while raising concerns over a slowdown in the economy. The interest rate hike on 6 July was the third this year and brought the rate paid on one-year deposits to 3.5%.

ustained demand for residential, industrial and infrastructural expansion has generated the need for a multitude of new construction projects, with increasing numbers being funded from the private sector. Investor sentiment in China has traditionally been among the highest in the Asian economies due to robust domestic consumption and growth optimism, supported by a global recovery. In the first four months of 2011, foreign direct investment in China increased by 26% year-on-year to US$38.8bn (拢23.8bn), with about 23% of that investment directed at the real estate sector.

The Indian economy is also racing ahead, with underlying consumer and producer sentiments in the country continuing to be upbeat. However, India has a high fiscal deficit and rising inflation which is posing a potential threat to the current growth cycle. If inflation picks up, there is a danger of a cut in government spending which would reduce construction expenditure. The construction sector is a key contributor to the Indian economy and the sector employs approximately 31 million people and accounts for 6-8% of GDP. The construction industry in general has been growing at 9-11% year-on-year, primarily due to increased domestic and international manufacturing activities and industrial growth.

Overall, construction prices across the region show huge variations. India and China are low-cost countries with prices running at about 70% and 55% respectively below UK costs. According to the EC Harris survey, Japan remains the most expensive country - primarily due to the high cost of living - and construction costs were recorded at about 24% above UK prices. However, the construction costs survey was carried out before the tsunami which swept across so much of coastal Japan and in the aftermath of that tragedy, construction prices can logically be expected to rise as rebuilding starts.

Pricing levels in Singapore and Hong Kong are now fairly similar, running about 10% below those in the UK, with continuing strong demand in these two regional rivals helping to maintain tender levels. Construction prices in Singapore rose by about 5% over the past year, although the rise was primarily down to the rise in value of the Singapore dollar; if priced from within Singapore, then prices showed a small fall. Singapore鈥檚 economy is seeing strong double-digit growth and the recent boom in the construction sector has led the government to introduce a number of measures to cool demand.

Nevertheless construction workload continues to show significant increases, not least in the residential sector where demand has rocketed. Looking ahead, demand is expected to increase in the private sector throughout 2011 and into 2012, with more residential and commercial developments, while public sector works will include the development of the Mass Rapid Transit downtown line (stage three) and a number of public housing projects.

Although prices in Hong Kong are very similar to Singapore, there are pricing variances between particular asset types, such as five-star hotels, and Hong Kong is going through a boom, with retail sales in May up 21% compared with a year ago. Labour rates increased by 4.9% over the year while consumer price inflation was running at 5.2%. As money has become available Hong Kong has been going through a housing boom, despite measures taken to cool the market. But continued low interest rates and rising demand mean that residential construction should continue to press ahead. Increased demand for contractors鈥� services are also guaranteed by the work on a number of infrastructure projects including the Mass Transit Railway鈥檚 West and South Island lines and the $8bn development of the old Kai Tak airport.

Paul Moore is cost and technical research leader at EC Harris