International construction market survey 2016

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.
2.9%
construction cost price inflation recorded
in this survey, 0.7% lower than last year
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.
Figure 1: Current construction market
Cold Lukewarm Warm Hot Overheating
Moscow Beijing Amsterdam Dublin New York City
São Paulo Brisbane Bangalore Kuala Seattle
Lumpur
Doha Hong Kong London
Houston Istanbul San
Francisco
Johannesburg Kigali
Kampala Munich
Melbourne Nairobi
Muscat Paris
Northern Scotland
Ireland
Perth
Sydney
Santiago
Seoul
Singapore
Toronto
UAE
UK central
UK north
UK south
Warsaw
Zurich
10
Turner & Townsend