While each global region has its own set of challenges, a moderate escalation of construction costs is a certainty for many regions across the world.
In 2022, the U.K. experienced some of the most abnormal construction price increases ever seen, at a rate of 9% to 15%. Energy prices and global supply chain constraints emanating from the Ukraine conflict and China’s zero-COVID policy exerted that upward cost pressure on projects. However, “there is currently a sense that construction cost escalation has peaked,” says Richard Hill, Currie & Brown director in London. He anticipates escalation of 4.3% to 5% in 2023.
The biggest risk to the U.K. construction industry is the uncertain and fragile state of the economy. Britain is the only G7 country with real GDP growth still below pre-COVID-19 levels (-0.4%), and the budget statement recently presented by Jeremy Hunt, new chancellor of the Exchequer, foreshadows a period of economic contraction, says Hill. Continued government infrastructure investment will be key to a strong 2023 construction market.
Continental Europe followed a similar trend. Damien Bouveresse, managing director there, reports more than 20% cost escalation in the last two years with fluctuations due to rising energy and materials prices. He anticipates construction activity will increase in Europe next year with 4% to 9% escalation.
Middle East-North Africa construction should continue to grow next year, led by the UAE and Saudi Arabia. Most countries in the region are posting budget surpluses, emanating from higher oil prices that they say will boost spending on social infrastructure improvements.
UAE Managing Director Doug McGillivray predicts that 2023 construction output in the emirates and Saudi Arabia will exceed this year’s, as growing populations drive a need for new projects and increased infrastructure capacity. He forecasts that Saudi construction costs will rise 7% next year, with UAE costs up 4%, compared to a 2022 escalation of 3% and 2%, respectively.
The main risks are a shortage of contractors to undertake the large volume of work expected to run concurrently, and availability and affordability of labor. Saudi Arabia’s 2030 vision and giga projects dominate the future pipeline, led by NEOM, the world’s largest single project.
In Japan, overall construction prices rose a staggering 15% to 20% in 2022, due to a combination of labor shortages, high energy prices, supply chain disruptions, and the depreciation of the Japanese yen against the U.S. dollar, Japan associate director DinWee Lee reports.
Next year, construction cost escalation will depend heavily on the performance of the yen, as well as on supply chain normalization, according to Lee. In the coming year, he anticipates the yen will increase 5% to 10% in strength against the dollar, stabilizing building material prices and leading to 1% to 3% construction escalation in 2023.
China’s construction industry faced many challenges last year, mainly due to the country’s zero- COVID-19 strategy and tightened financial policies. Alan Lam, managing director there, expects this to change next year, due to the recent update in COVID-19 policy, as well as to China’s plan to pump liquidity into the economy to boost growth and improved real estate financing. Relaxed local border restrictions will also help with labor supply and costs, he says.
The supply chain will normalize, but high demand for copper, aluminum and reinforcing steel will continue into 2023, Lam says, resulting in these materials increasing 10% in cost over the year. Overall, he forecasts construction costs will increase 2% to 4% next year, with strong data center building but slowing semi-conductor construction.