Although global construction output is warming up, construction inflation is steady in most parts of the world. Gardiner & Theobald recorded an average building costs inflation rate of 5.8% in 20 countries. This is up from 5.4% in 1998 and 5.6% in 1997.
Western Europe is experiencing an average inflation rate of 3.9%, almost identical to the 4% USA average. Several eastern European and African countries have a double-digit inflation rate, although the Asia rate is now in single figures.
Romania is grappling with the most intense inflationary pressures – as building costs rose 40% in Bucharest in 1999. However, this rate is expected to fall to about 7% this year.
This year’s other hot spots include Kenya, where construction inflation is expected to reach 17%.
Guide to the data
Comparing construction cost data between countries with different economic, political and social systems poses hazards. Because of changing market conditions and fluctuations in exchange rates, the data should be used for broad comparative purposes only. Gardiner & Theobald compiled the costs from its worldwide network of offices and associated companies.
All costs were provided in local currency and converted to sterling using the exchange rates on 26 November 1999. The information on building costs includes contractors’ overheads and equipment costs such as site administration, supervision and co-ordination, trailers hoists and cranes.
VAT is excluded. The average building VAT for Europe is 20%. However, it ranges from a low of 5% in the Czech Republic to 25% in Denmark, Hungary and Sweden. In other parts of the world, VAT on building varies greatly; from 3% in Singapore to 21% in Argentina. VAT is minimal in Australia, China, Malaysia, Saudi Arabia, Oman and the United Arab Emirates.
Where a dash is shown in the tables, no data has been provided by Gardiner & Theobald’s local offices. Approximate costs can be provided on request.
For more information, contact Patrick Gulley at Gardiner & Theobald, on 0171-209 3000.
In Western Europe, prices are generally stable after a period of economic depression.
“The UK market is very active and we see this continuing for some years,” says Roger Fidgen, a senior partner in Gardiner & Theobald. “Low inflation is partly explained by continuing competition between construction companies,” he says.
In France, after six or seven years of depression, the market is now very positive and in Germany, prices are stable overall.
In southern Europe, law changes aimed at curtailing black-market construction are fuelling activity in Italy. A 41% tax break for private sector work has been extended another year as an incentive for legitimate procurement. In addition, to further stimulate the economy, the Italian government is considering cutting the VAT on construction from 20% to 10%. These developments are contributing to a slight increase in construction inflation. Gardiner & Theobald expects building inflation in Italy to rise from 1.6% last year to 2.4% this year, but then slip back to 1.7% by 2001.
Construction in Greece is getting stronger. An inflow of grants from the European Commission, combined with preparations for the 2004 Olympic Games in Athens, will keep construction activity strong.
In northern Europe, activity in Sweden continues to increase as companies invest and the government spends on infrastructure. As a result, prices are rising, particularly for electrical and mechanical equipment, and there are some skills shortages.
Of Europe’s emerging economies, Poland is among the most active. At 8.6% last year, building inflation remains close to the 1998 level, with most increases being absorbed by contractors and subcontractors being forced to lower their margins. Poland has a heavy duty on imported goods, so locally produced products have a price advantage. As a result, an increasing number of foreign investors are stepping up production facilities for construction items.
In Hungary, construction inflation has fallen steadily from 30% in 1994 to 19% in 1998 and 12% last year. With continuing currency devaluation, imported construction products and materials are undergoing significant price hikes. However, building prices are fairly stable when measured against the euro, although they are rising in local values. This pressure should keep building costs rising at a double-digit pace next year.
Construction activity in Saudi Arabia is picking up in the hotel, tourism, commercial and retail sectors, but costs are staying stable. However, labour costs are under pressure because of the government’s policy of encouraging the use of local workers rather than foreigners. The Dubai office reports that the United Arab Emirates is still very active, with extensive infrastructure work in progress. Cost trends vary over the region.
Australasia and Asia
Building inflation fell in the past two years in China, Japan, Singapore and Thailand. The most severe drop was reported in Singapore, where building costs fell 9.3% last year, after a 14.2% drop in 1998.
The dramatic collapse of the Asian financial markets resulted in an almost overnight halt to most building and civil engineering projects in every Asian country. In Hong Kong, the collapse of the property and stock markets coincided with the completion of Chek Lap Kok Airport, causing an 18-month slowdown in Hong Kong’s construction activity.
Prices are already starting to show some strength, with annual inflation
After eight years of construction expansion, inflationary pressures are starting to build. Schedule-driven projects and labour shortages that are driving down productivity are major contributors to upward-creeping construction costs.
The amount of negotiated work is increasing, so margins are better, although this is not reflected in overall cost indices.