Escalation Locked Into a 3.3% Pace
The downturn in the U.S. economy in 2003 failed to blunt inflation for international construction projects. A strong Chinese market helped check a long period of price deflation in Asia at the same time European markets were coming out of their slump. However, worldwide demand still remains relatively weak and global construction inflation is expected to ease in 2004, according to a forecast by Gardiner & Theobald Inc.
In its twelfth annual survey of international construction costs conducted exclusively for ENR, the London-based international project and cost management firm reports that construction inflation averaged 3.3% for 20 nations in Europe, Asia and the Middle East. This is the third consecutive year that building cost escalation for this group of nations has held at 3.3%, after averaging 3.8% in 2000 and 1999. Next year, construction inflation is expected to ease by about a half a percentage point, according to the G&T offices in 16 nations that provided cost projections for 2004.
These figures exclude six nations with extraordinary cost trends that would skew the data. In Europe, construction inflation in Romania is still the most extreme at about 19%. However, this is a vast improvement over the 34% increase in building costs reported for Romania during 2002.
In South America, Argentina is recovering from the financial crisis of 2002 that pushed building costs up over 80%, shattering five years of single-digit inflation. This year, building costs in Argentina fell back to a 5.6% annual escalation rate and G&T predicts that building inflation in the country will be 5.3% in 2004.
Perhaps the most notable trend in international construction costs this year was the reversal of years of deflation that has plagued several Asian nations. In Japan, G&T reports that building costs will increase 0.1% this year. While not a roaring inflation rate, it does check 10 years of falling prices.
Deflation in Thailand also was reversed, with building costs rising 7.1% this year after falling 3.4% in 2002. "The increasing number of projects coming on the market is forcing both labor and material prices to rise," says G&T’s affiliate, Rider Hunt Levett & Bailey Thailand Ltd.
In Hong Kong, building costs will increase 5.1% this year, followed by another 2.4% increase in 2004, according to G&T. This checks a five-year slide in which prices fell a cumulative 40%.
Building costs bottomed out in Singapore during 2002, after falling 9.5% the previous year. In 2003, G&T reports that building costs in Singapore will increase about 2.6%.
The weak dollar is fueling inflation in nations such as Malaysia, where the currency is pegged to the U.S. dollar. "The dollar has also weakened the Malaysian Ringgit, which is affecting the price of imported materials and services," says Mohamad Faiz Hamid, G&T’s representative in the country. Hamid says that prices for bulk steel, aluminum and lift equipment are being hit particularly hard by the currency exchange rates.
"Continental Europe is a mixed bag. The two major markets, Germany and France, have been suffering some time with quite a drastic downturn in workload, but there are the first signs of things getting better," says Paul Ridout, G&T’s senior partner. Eastern Europe is equally varied, though there is "increasing confidence" in those countries joining the European Unions next spring, he says.
Still in economic depression, Germany continues to experience stable or decreasing construction prices, according to staff at the Berlin office of EC Harris GmbH. Germany’s commercial building space is oversupplied, particularly in Frankfurt, Berlin and Munich, says David Lawrence, EC Harris’ regional managing partner for Europe.
In France, costs are scarcely changing in a period of stable demand, notes Chris Gilmore, who heads G&T’s Paris office. In terms of demand, "most people are predicting stability for 2004, which is quite good since most sectors declined in 2003," he says. The recent easing of demand has helped cap the inflationary influence of the 35-hour, legally binding working week introduced by the previous administration, says Gilmore. "Contractors prices were pushed up [but] on
the other hand, it reduced their willingness to recruit. There’s been a great move towards subcontracting," says Gilmore.
Across the Channel, U.K. construction demand is easing. G&T’s most recent inflation forecast, made in the third quarter, was dropped 0.5% to 2.5%, says Ridout. Commercial building demand has reached a trough, showing no signs of recovery. "I’m not sure if confidence is very high at the moment," he says. But continuing investment in residential and rail work is offsetting some of the downturn.
With some anomalies, Italian construction inflation is tracking retail prices at about 2.5% a year, says Alberto Gerola, head of architect/engineer Societa Progettazioni Integrali S.p.A., Milan. However, rebar and labor costs are rising at a much faster pace, he says.
Among the beneficiaries of European Union financing, Greece remains buoyant. "Construction is at its peak because of next year’s Olympics and we have some civil engineering work as well," says George Roditis, principal at cost consultant G. Roditis and Partners, Athens. With the current high activity, construction costs are 5 to 7% above last year, he says. Roditis expects that level of inflation to persist after Olympic work ends, largely because of strong residential construction levels fueled by low bank interest rates.
Having been hugely supported by the E.U., the Irish Republic has shed its "Celtic Tiger" reputation as its economy dims. After the heady 1990s, the economy has made a "soft landing," says Vivian Dow, Senior Partner at G&T, Dublin. Construction deflation persists, with bid prices falling 2 to 3% a year over the last 18 months after half a decade of double-digits inflation, he adds.
In Poland, Eastern Europe’s largest economy, construction prices are rising about 3% a year, says Ian Church, a manger at EC Harris in Warsaw. He suspects bid costs will move slowly as contractors become more aggressive.
In neighboring Russia, an increasing number of tower cranes fill the Moscow skyline, but inflation is "controllable," says Stephen Raybould, the Moscow-based commercial manager of Bovis Lend Lease Ltd., London. After preparations for this year’s 300th anniversary of St Petersburg caused construction to overheat, the market has "got back into line," he adds.
Russia’s dual currency system complicates inflation assessments. "We bid only in dollars," says Raybould. "A lot of professional workers have dollar-based salaries, even though they get paid in rubles," he adds.
In Dubai, strong demand has caused a "significant" increase in materials prices in the last 12 months, says Jeff Higgins, G&T’s resident partner. In addition, new regulations on the quality of workers’ camps will push labor costs up, he adds.
| Parity Index Adjusts For Exchange Rate Swings The Hanscomb/Means Parity Index was designed to clarify the international cost picture, which can be distorted by gyrations in currency exchange rates. The index is based on put-in-place rates for 26 basic items used in the construction of a manufacturing facility. The parity index value in the table shows construction costs at each location relative to Chicago. A parity of 0.89 for Great Britain implies that �0.89 of construction is equivalent to $1.00 of work in Chicago. To calculate a relative index value, divide the parity value of the exchange rate and multiply by 100. In this study, the U.S. dollar is used as the exchange rate for Russia. For example, if a manufacturing facility costs $575 per sq m in the U.S., what would be the approximate cost in Great Britain? Average parity is �0.89 = $1. So, 0.89 x $575 = �512 per sq m. Purchasing parity provides a useful means of comparison since exchange rates can fluctuate significantly, yet the actual in-country costs of goods remain unchanged. Using parities also avoids problems arising from thinking in terms of a fixed percentage difference between countries, which inevitably happens with indexes. |
