Construction costs in London are rising, but Manchester is catching up

Rising demand for infrastructure work coupled with a global skills shortage is pushing up the cost of construction projects in London, according to research by Turner & Townsend.

Costs are set to rise 4.1% in 2017 according to the International Construction Market Survey 2017 (ICMS). 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.

The report analyses input costs – such as labour and materials – and charts the average construction cost per m2 for commercial and residential projects in 43 markets around the world.

London, which ranked third in 2016’s report, has fallen to fifth place behind Hong Kong and San Francisco, despite costs in the city soaring by 5% over the past twelve months to reach US$3,214 per m2. The drop in ranking reflects the depreciation of the UK pound against the US dollar since the EU referendum.

Meanwhile, 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.

While London is classified as a ‘hot’ market, there are signs that the traditional north-south divide in build costs in the UK is starting to close. The construction market in the north of England is one of only 14 worldwide expected to grow warmer in 2017, with the region 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.

Comparably, the report says that southern and central England are set to see construction price inflation fall from 3.5% to 2% and 3.8% to 3.5% respectively.

Globally, New York has overtaken Zurich as the most expensive city in which to build, with an average cost of US$3,807 per m2 followed by San Francisco (US$3,549 per m2) and Zurich (US$3,528 per m2).

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.

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

“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 over half (24) of the 43 markets analysed reporting labour shortages compared to 20 markets in 2016, the report reveals.

“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.

“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,” McGuckin added.

“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 house-builder, we are always looking to adapt to make overall construction costs cheaper with different and pioneering technologies, such as Building Information Modelling (BIM).”

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