International Construction Cost Commentary - Rider Levett Bucknall

St David’s II in Cardiff which will effectively
remove demand for retail development for
some time. A number of key mixed use
developments in the South West region
have also been cancelled or delayed while
confidence remains low.
The South West and Bristol Region is
following the National Trend with the
downturn leading to redundancies among
contractors, construction consultants,
property agents and developers.
Public sector works carries on however,
particularly in the Defence, Education
and Health Sectors, with major projects
development programmes planned over the
next five years, for example the Defence
Training Academy in Wales.
We believe the next 12 months will be
a difficult and challenging period for the
construction market, however the low
levels of activity within the commercial
sector will to some extent be offset by
continued public sector spending.
Manchester
As with other UK and Global markets
the Manchester and North West
market has seen a significant decline in
construction activity in the last 6 months.
As the economy continues to languish,
construction activity is likely to deteriorate
further through 2009.
The residential sector has been hit
particularly hard, with North West house
values suffering more than the UK average
and with a substantial stock of apartments
within Manchester remaining unsold. Local
Registered Social Landlords have revised
their strategies away from constructing
shared ownership homes toward a rental
accommodation bias.
The commercial office market is
experiencing a slowdown, as a number of
major office schemes completing in 2009
and 2010 have yet to secure occupiers,
providing a surplus of accommodation and
deterring developers from progressing new
projects. It is predicted that Manchester
city centre office rents are likely to perform
worse than in any other major centre
outside London. Two major occupiers who
were recently looking for nearly 200,000
square feet of accommodation have put
searches on hold.
A number of key developments in the
North West have been cancelled or
delayed, including Liverpool Football
Club’s new stadium (£350m) and Stockport
town centre redevelopment (£500m).
Other large commercial developments
are rumoured to be in delay or are being
scaled down.
The downturn has now led to redundancies
starting to escalate among contractors,
construction consultants, property agents,
developers and even legal firms, with
insolvencies also starting to rise.
However, quasi public sector schemes
remain a strong contributor to the
market. North West universities such as
Manchester Metropolitan, Liverpool and
University of Cumbria all have significant
capital projects in the pipeline, and the
Government’s Housing Market Renewal
Programme has over £500m of funding
allocated to five key North West regions.
Although the contraction of the market
has led to more competitive levels of
tendering, care should be taken regarding
advising that overall construction prices will
fall significantly due to the continued high
price of materials and the poor levels of
exchange rates.
In summary, whilst the outlook for the
commercial sector is poor, public sector
spending is compensating to some degree,
so it is not all bad news. However, the next
12 months will be a difficult and challenging
period for the North West construction
market.
Sheffield
Construction work has slowed down
dramatically across the area. The
Sevenstones retail development, which
will provide 860,000 ft2 in the heart of the
city centre has been delayed until at least
4th Quarter 2009. This has had a knock
on effect on ancilliary demolition projects,
which have also been shelved. The Moor
development, which is set to revive the
main pedestrian shopping area in the city
with its indoor market has also been put
on hold.
Residential, office and hotel developments,
which commenced prior to the global crisis
are continuing to be completed, however
new schemes are slow to reach the market
Birmingham
The Birmingham market has been severely
hit by the credit crunch. Major schemes
have been put on hold due to a lack of
availability of finance and recent cuts in
interest rates have not yet filtered through
to the market.
We envisage a reduction in tender prices
over the next 12 to 18 months driven
by increased competition for a reduced
workload and reducing material prices,
driven down by a sharp reduction in
worldwide demand. However, due to the
decrease in the value of sterling comparable
to currencies used in trading commodities
and construction materials, the full effect of
the reduction in material prices will not be
realised in the UK.
Contractors and subcontractors are
reducing margins in order to secure
workload.
This cannot be sustainable in the long term,
and we see this resulting in a reduction in
the general contracting market if market
conditions and workload do not improve in
the near future.
The upside of the reduction in tender
prices will provide clients with funding
with a window of opportunity to procure
projects at lower cost than has been
recently available.
Dubai
The rapid ascent of the Dubai construction
market has been slowed somewhat by
the fall-out from global economic woes.
Recent announcements of several major
high-profile projects such as the Trump
International Hotel and Tower being
deferred or postponed, have followed hard
on news of sharp falls in property values
and the retreat of overseas investors.
These effects are of course demonstrative
of the impact of extremely problematic
global economic conditions, but they
also demonstrate the enormous external
investment in Dubai from around the globe.
However, it has to be said that no-one
could be better-placed to withstand the
economic storm than the Emirates, given
the huge value of natural resources and the
fact that a recovering global economy will
once again demand the key product, namely
oil, reliance on which the UAE is seeking
to diversify away from by building into the
service, tourism and industrial markets.
As the Dubai construction economy
scales back to shelter from the storm,
the outcome will be significant reductions
in the annual levels of construction cost
increase to which we have become
accustomed. Depending on the severity of
the ongoing economic difficulties and the
point at which the bottom is reached, there
is of course the potential for large-scale
deferral of work, as is evidenced by the
sheer volume of currently ongoing work.
That can be very rapidly affected by funding
and viability concerns, which would spill
over into demand for labour and materials.
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INTERNATIONAL CONSTRUCTION COST COMMENTARY: January 2009