By looking at current market outlooks in 46 regions or locations across 33 countries, we found 21 showing signs of heating up in 2018. This compares with 14 out of 43 a year ago.
Encouragingly, the improvement this signifies is being felt in markets across the globe, with a hefty majority of the markets in Africa, Asia and South America picking up pace.
What adds to this sense of optimism is that markets, such as Singapore, had been “cooler” in the survey for several years, but are now starting to heat up. In last year’s survey construction markets in Santiago and Singapore were expected to cool in 2017. Today the reverse is expected.
As markets warm we should expect to see more construction projects starting. So, with a widening spread of global markets heating up, this should translate into higher levels of activity across the globe.
More than half the markets we tested were regarded as warm, hot or overheating for current market tendering conditions. This suggests construction is edging closer to capacity in many parts of the world.
Five cities were “hot” – Dublin, Melbourne, Munich, Sydney and Tokyo. Meanwhile, Amsterdam, San Francisco and Seattle were described as “overheating”. With far more markets heating up than cooling, we should expect to see globally shared resources coming under pressure.
But there are big markets among those that have cooled. London’s construction market had been pegged as hot last year. This year’s survey finds it “lukewarm”, pointing to a chilling effect from Brexit uncertainty.
When tested this year, the construction market in New York City had also eased. Not as dramatically as in London, New York City had moved down a notch from hot to warm. This, however, looks less like New York City catching a cold and more like a pause for breath and contemplation as it digested the possibility and impact of rising interest rates.
Whatever their respective temperatures, both remain important markets and, despite both markets softening slightly in the year, construction costs still increased and skilled labour shortages remain a challenge.
The cities our survey found to be “cold” tended to be those sensitive to changes in commodity prices – Doha, Moscow, Muscat, Perth and São Paulo. So, with commodity prices on the up these too might begin to provide a warmer climate for construction.
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.
Markets are considered warmer as competition decreases and prices begin to rise, as demand increases in relation to supply. Hot and overheating markets have a higher number of projects, and consequently there is less competition in bidding 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 inflation in overall construction costs.
The average construction cost increase for the 43 markets in last year’s survey came in at 4.1 percent. This compares with our forecast in last year’s report for global cost increases in 2017 of 3.5 percent. The difference is consistent with growth in construction activity surprising on the upside in 2017. It is worth noting that the rise is slightly inflated by the addition into the mix of Jakarta and Shanghai where prices jumped 8.0 percent and 7.5 percent, respectively, in 2017.
The average construction cost increase for 2018 is forecast at 4.3 percent. This again is consistent with a global construction market that is expected to get busier. It compares with IMF global inflation forecasts for 2018 of 1.7 percent in the advanced economies and 4.4 percent in the emerging economies.
Why do construction costs increase as global growth increases? As contractors come closer to filling their order books they can be more discerning about which projects to bid for and they can submit higher tender prices. Deeper into the supply chain higher demand drives costs of materials, equipment and labour higher. Skills shortages occur. Projects are undertaken by less skilled labour with less experience. This extends the project’s duration, leading to more rework and rectification and ultimately to higher costs.
For the 46 markets included in this year’s survey:
Almost all markets saw construction costs rise in 2017. Three of them experienced either negligible inflation or a fall in construction costs (Doha 0.1 percent, Muscat -1.0 percent and Perth -1.0 percent).
Perth continued to see a decline in construction costs as residential and commercial construction remained in a slump and contractors cut prices as the competition for work intensified. In Muscat, a flat real estate market was the main reason behind it seeing construction costs fall.
There are no regions expecting to see declines in costs in 2018, which may reflect the great optimism emerging across the globe. The lowest forecast for construction cost inflation is 0.3 percent in Madrid.
At the other end of the scale, Beijing, Buenos Aires and Istanbul saw cost inflation in 2017 reaching 10 percent, 31.7 percent and 10 percent respectively. The expectation is that Buenos Aires will see inflation escalate to 35 percent in 2018, a rise to 15 percent in Istanbul, while in Beijing construction cost rises are expected to ease to 7 percent.
|Region||City||Cost inflation in 2017||Forecasted cost inflation in 2018|
|Africa||Dar es Salaam||6.0%||5.0%|
|Asia||Ho Chi Minh City||2.0%||3.0%|
|North America||San Francisco||5.0%||5.0%|
|North America||New York City||3.5%||3.5%|
|South America||Buenos Aires||31.7%||35.0%|
|South America||São Paulo||4.6%||4.1%|
This content is part of the International construction market survey 2018