As inflation cools in western Europe and the US, it’s roaring away in eastern Europe. Gardiner & Theobald surveys the world and tells us what it sees

World roundup

Construction cost escalation across the globe has been cooling in China, western Europe, Australia, Japan and the US. However in eastern Europe many countries are experiencing double-digit tender price inflation, fuelled by the enlargement of the European Union.

The average building inflation for 23 countries in Europe, Asia, the Middle East, Latin America and North America slipped to 5.6% from 6.2% for the same group of countries the previous year.

Six eastern European countries and Finland accounted for most of the global construction cost escalation, with the average tender price inflation for this group of countries at 11% this year, compared with 9% in 2006.

In other regions, inflation was more tame. For nine western European countries, excluding Finland, G&T reported an annual rate of 3.5%, down from 4.8% for the same group a year ago. Likewise, eight nations in Asia, Africa, North America and the Middle East averaged construction inflation of 4.4% in 2007, down from 5.4% in 2006.

That group of statistics excludes two notable exceptions which would have skewed the overall results: inflation is still out of control in Argentina, where it increased 24% for the second consecutive year, and in China, Hong Kong was an anomaly, with bid tender prices rising 13.1% in 2007, compared with a 1.6% increase in Shanghai.

Across Europe, construction price rises are beginning to be tempered by ramifications of the US-led sub-prime home loan fiasco. “The credit crisis has definitely had an effect on construction that would have been going ahead at some point next year,” says David Lees in G&T’s Berlin office.

“In the UK there is some uncertainty, certainly in the commercial market,” notes Nick Rowe, a G&T partner in London. “We have seen some schemes put on hold.”

However, while the rising value of the euro is pushing up import prices to the UK from continental Europe, Rowe sees little effect of the weakening dollar on trans-Atlantic imports. “There’s not a lot of UK construction procurement in the States,” he says.

Some eastern European countries have also been affected. “In Poland, a lot of projects aren’t going forward,” says G&T’s Jan Holyst, in Warsaw. “It has affected the market generally.” However, Poland’s high demand for construction is boosting prices across the board, including steelwork, gypsum, cladding, rebar and concrete blocks. Building inflation in Poland increased 12% this year after jumping 20% in 2006.

With contractors able to pick and choose, bidding prices were “chaotic” says Holyst. “Now there is a more sensible approach to tender levels. Contractors are able to spread the workload and deal with the situation in a more responsible way,” he adds.

Booming construction also is beginning to lure Polish workers back from Western Europe, especially the UK and the Republic of Ireland. “There is some evidence of a drift back,” says Holyst. Pay for site labour has risen about 20% in the past year and by 10% to 20% for professional staff, he says.

A newcomer to the EU – Romania – also is experiencing a boom, says G&T’s Gavin Moore in Bucharest. “The market in the capital has gone into overdrive,” he adds. As a result, bid prices have risen by up to 18% this year and good workers are becoming scarce. “Skilled Romanians have moved to western Europe,” says Moore.

In London, there may be a little less inflation, but outside London it is continuing to rise, according to Rowe. “Contractors are being hit by high labour prices with demand outstripping supply,” he adds.

“With increasing labour demand in Poland we are going to see a bit of a reverse migration,” he says.

German construction is continuing to pick up says Lees. Labour is available, although rates for semi-skilled and skilled staff have risen 15% over the past year. This helped push building inflation in Germany to 6.1% this year, up from 3.9% in 2006 and 0.6% in 2005.

After years of frantic construction in Dubai, construction costs continue to rise by more than 20% a year with staff pay going up by as much as 100%, says Jeff Higgins, at G&T’s Dubai office in the Emirates. Contractors are importing workers from the Subcontinent “faster than they can build facilities for them to live in,” he adds. “Earlier this year we thought cost pressure would ease, but then you hear of other massive schemes. We don’t see inflation easing here.”

Methodology

This report has been prepared by Gardiner & Theobald using its worldwide network of offices and associated companies. All costs were provided in local currency and have been converted to pounds for the purpose of comparison at exchange rates current on 26 November 2007. VAT has been excluded.

The International Construction Cost Survey was compiled using data provided by others. Although every effort has been made to ensure that the information contained in this report is correct, no liability can be accepted for any errors or omissions. Furthermore, because of constantly changing political and economic conditions, this data is for comparative purposes only and should not be relied upon or otherwise used without prior reference to Gardiner & Theobald, 32 Bedford Square, London WC1B 3JT. Telephone 020-7209 3000, email Brian Livingston on b.livingston@gardiner.com, or fax 020-7209 1840.

Building type definitions

City-centre heated offices

Self-contained building of size and height typical of major cities in country. Building costs include accommodation to a good finish with raised floors, carpet, suspended ceilings, heating, lighting and power, but excluding partitioning

City-centre air-conditioned offices

Self-contained building of size and height typical of major cities in country. Building costs include accommodation to good finish with raised floors, carpet, suspended ceilings, air-conditioning, lighting and power, but excluding partitioning Factories, warehouses, industrial Large, single-storey unit of steel portal frame and profiled aluminium cladding, with an eaves height of at least 6m, on an out-of-town site, finished to a basic shell with services and heating to the office space (approximately 5% of area)

Out-of-town business park

Self-contained low-rise building in campus location. Costs include high-quality cladding and accommodation to a good finish with raised floors, carpet, suspended ceilings, air-conditioning, lighting and power, but excluding partitioning

High-rise apartments

Multistorey buildings typical of the major cities in a country. Apartments finished to a high standard and all floors served by lifts

Shopping centre

Major shopping developments incorporating retail space, pedestrian areas and service areas, but excluding car parks

High-quality capital city hotel

High quality hotel in excess of 400 bedrooms, conference facilities, extensive restaurant, lounge and foyer areas, leisure facilities including indoor pool, retail and service areas. Costs exclude furniture, fixtures and fittings

Provincial/suburban hotel

Medium-sized hotel, conference facilities, extensive restaurant, lounge and foyer areas but no pool or other leisure facilities. Costs exclude furniture, fixtures and fittings