Global cost performance analysis
Our survey has found that while average global construction prices are increasing, the rate of price inflation is generally slowing. The classic economic theory of demand and supply driving cost inflation also requires careful consideration. In over-reliant markets, wider macro-economic and political drivers will make costs volatile in the year ahead.
With similar results to our 2015 survey, this year sees most markets rated as lukewarm or warm, indicating moderate competition among contractors. See figure 1.
Defining market temperature
Our rating of markets as cold, lukewarm, warm, hot or overheating rely on several key interrelated factors. In a cold market there is typically intense competition among contractors for very little work, reducing cost performance from previous levels. Markets are considered warmer as competition decreases and prices begin to rise. Hot and overheating markets have a higher number of projects, and consequently there is less competition for tenders, which tends to drive up prices.
It should be noted that within cold markets, cost inflation may rise in the 12 months ahead. However, we expect that cost inflation will be at a lower rate as the volatility in these markets is higher due to their over-reliant state.
Many of these markets could also be described as two-speed, with significant construction resources tied up in the speculative development of apartments. Typically, any sector that has a high exposure to residential construction trades, such as plastering, tiling, painting and joinery, is hot with significant cost escalation. The result is that sectors like offices, warehouses, retail, health and manufacturing, are described as lukewarm or warm. New York City and Seattle are the only markets worldwide to be considered overheating. Prices were up by four and five percent respectively in 2015, and in the case of Seattle are expected to rise eight percent in 2016. This is due to shortage of contractors and skills, little competition on bids and significant price hikes.
In a hot market, there are plenty of construction projects around with little competition on tenders, and construction prices are likely to be rising at a faster rate. Dublin, Kuala Lumpur, London, and San Francisco are rated hot, and these markets are expected to see costs rise by between three and six percent in 2016.
In our survey, Moscow and São Paulo are the only cold markets, which can be largely attributed to the economic contractions affecting Russia and Brazil. Both countries have been hit hard by the decline in oil prices, with Russia still suffering from the effects of western sanctions, and the valuation of Brazil’s currency much reduced. São Paulo actually recorded among the highest cost increases in 2015, at seven percent. Both can expect to see prices rise in 2016, with cost increases of five and eight percent forecast respectively.
Among the markets rated as warm and lukewarm, cost increase expectations for the next year are greatly varied. While currently lukewarm, Kampala is forecast to see the highest rise of any market at almost ten percent in 2016. Similarly lukewarm-rated Muscat and UAE expect no increase at all on 2015 prices.
Beijing stands out as approaching the end of this construction cycle, which is evidenced by the biggest fall in construction costs over 2015 at ten percent. Costs are expected to remain steady through 2016.
Read our full global cost performance analysis