Global construction cost performance analysis

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1Overview

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Defining market temperature

Our ratings of markets as cold, lukewarm, warm, hot or overheating rely on several interrelated factors. In a cold market there is typically intense competition among contractors for very little work, reducing cost pressures 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 tender prices.

Generally, those markets described as hot and overheating can expect high construction cost inflation and those cold, lukewarm or warm should have low inflation, but that is not always the case. For example, contractors may reduce margins as they seek to win more work in a cold market, but higher costs of materials can still lead to cost inflation. Across such a wide sample there are a number of exceptions to this rule.

 

This year’s international construction survey reveals a slowly warming industry suffering from skills shortages as global economic conditions improve. A third of the markets surveyed expect to be warmer by 2018, compared to a quarter of markets in our 2016 survey.

The proportion of cities that are considered to be warm, hot or overheating climbed by three percentage points to 58 percent from 55 percent last year.

In last year’s survey, only four cities were identified as hot: Dublin, London, Kuala Lumpur, and San Francisco, with New York and Seattle identified as overheating.

This year seven cities are considered hot: Dublin, London and San Francisco remain hot, while Tokyo, Amsterdam and Dar es Salaam have warmed up from last year. New York is cooling, dropping back from overheating to hot. This year, Seattle and Bogota are considered to be overheating markets.

This trend of a warming marketplace will continue in 2017, with 13 markets expected to grow warmer as confidence returns.

2Commodities crash still limiting growth

Six cities are found to be cold in this year’s survey, compared to just two last year. This is evidence that, while in general the construction industry is heating up, there are still markets suffering.

Russia is still reeling from the fall in commodity prices over 2016, which dented confidence in the market and stopped construction sectors in Moscow in their tracks, while the other cold markets – Doha, Muscat, Perth and São Paulo – are slow to recover from the commodities crash.

While commodities are expected to strengthen further over 2017, our survey finds that the majority of these cold markets are expected to remain that way for the time being.

In Perth, high levels of investment created sufficient spare capacity in the iron ore-producing sector to cope with a spike in demand in previous years. Now that the demand for engineers and mining services is flat the demand for office and residential construction has reduced.

Some of the regions expected to cool off over 2017 include oil and gas servicing markets such as Singapore and Muscat, which are still suffering from the collapse in oil prices, and while prices are recovering it will take a while for the effects of this to filter through into these economies.

3Construction market: where's hot and where's not

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