Rider Levett Bucknall's January 2009 International Construction Cost Commentary released today forecasts extremely subdued levels of growth for 2009 and 2010.
Prepared by Rider Levett Bucknall Research and Development, the bi-annual International Construction Cost Commentary (ICCC) uses global cost data to derive indexed measures of relative costs of construction within and between markets. In order to set this in the context of the wider economic environment, analysis is also provided on global, regional and local issues affecting markets.
Mark Lochran, National Director, Rider Levett Bucknall commented, "The advent of the global credit squeeze has resulted in a drastic slowdown in global growth, with the effects being felt by all economies worldwide."
"For construction, the time-consuming process of freeing-up of financial markets and credit availability may be required before the re-establishment of confidence in residential, commercial and retail sectors, which only then will result in more projects coming to market. However, in most locations, what we are seeing is that the difficult market conditions are providing an excellent tendering environment for clients of the industry who do have liquidity of funding."
The report, which charts tender price index movement for leading cities from around the world between July 2008 and January 2009, found that two thirds of cities surveyed had zero or negative tender index movement. The biggest rises in tender price growth period were Darwin (4.1%), Adelaide (2.8%) and Perth (2.3%). Dubai's tender price index (TPI) rose by only 1.8% during this period.
The biggest mover, Darwin, recently announced that international giant Inpex will be investing $12bn in a new gas plant in the city in two years time, which is keeping optimism high and the economy buoyant in the Northern Territory. Front-end engineering and design for the plant will be starting soon and a Govt. task force has been formed to ensure adequate social and economic infrastructure is put in place in time for the influx of workers and their families to Darwin over the coming years.
This coupled with intervention works in remote communities, continuing works on the Darwin City Waterfront Project, and continuing and upcoming Defence projects at all major NT Defence bases will see tender prices continue their upward trend.
Notwithstanding the current global credit crunch, with this scale of development earmarked for Darwin, we expect the construction industry to remain strong over the coming period.
In Dubai, the rapid ascent of the 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.
The recent TPI figures support the view that growth has moderated significantly and in very many cases fallen into negative territory. Only 6 months ago, Rider Levett Bucknall reported that the biggest rises in tender price growth between October 2007 and July 2008 were experienced by: Singapore (18.7%), Dubai (15.8%), Hong Kong (14.6%) and Perth (8.3%). Not only is it important to acknowledge that growth has moderated worldwide, but that most construction markets peaked in the third quarter of 2008.
"Our analyses clearly show the change occurring in the third quarter, although the signs had been there earlier in the year in various locations. As a result, construction industries across the globe face more challenging times ahead as funding becomes less readily available and more costly. Though interest rates have fallen, banks' reluctance to fund risk is now a major factor in getting projects off the ground, even if demand exists.", continued Mr. Lochran.
Rider Levett Bucknall's report indicates that in 2009, New York, London and Honolulu are the most costly cities in our global analysis in which to build. In Australia, Perth is the most costly, followed by Darwin, then Adelaide, which took over from Sydney as the third most costly Australian city.
Though still 41% more costly than Sydney and 17% more than Australia's most costly city, Perth, New York has begun to experience a downturn in construction activity across all sectors. While construction continues on prior-funded privately financed projects, it is apparent that the area is bracing for a protracted and severe economic slowdown.
The market for office space as well as luxury high-rise residences has dropped off. This, coupled with the dearth of private financing, has resulted in significant layoffs among the city's largest developers.
London is 39% more costly to build in than Sydney and 14% more than Perth. London has seen in the last quarter a significant fall in the demand for building materials generally and in the price of steel in particular. With the falling price of oil and waning demand for raw materials, the previously forecast inflationary pressure on material prices has disappeared Rider Levett Bucknall forecast all-in tender price levels in London to decrease by between 2.5% and 5.0% during 2009 and up to 2.0% in 2010.
Mr Lochran commented that the cities which had experienced the most contraction in construction costs since the release of the July 2008 ICCC were Singapore (8.2% decrease in construction costs), Hong Kong (7% decrease) and Macau (5.5% decrease).
Singapore entered economic recession in the third quarter of 2008, as the global financial crisis began to impact upon the local economy in most sectors. Singapore's GDP contracted by 0.6% year-on-year, with the construction industry registering a slower but double-digit growth of 12.8% for the same period.
The government has adjusted its GDP growth forecast downwards to 2.5% in 2008 from the earlier forecast of 3%; and -1% to 2% in 2009.
Underpinned by high construction demand for 2008, the Building Construction Authority (BCA) had estimated that construction demand could reach an all time high of around S$30 billion. The BCA All Buildings Tender Price Index (TPI) for the third quarter registered a 14% year on-year increase. Rider Levett Bucknall's TPI remained at an average tender price escalation of 18.3% for the first 9 months of 2008 as compared with 2007.
However for the fourth quarter, building tender prices eased, arising from a significant fall in tendering activity, and declines in contractors' margins and building material prices. This declining trend is anticipated to continue through 2009, as the property and construction markets consolidate further.
Tender prices in Hong Kong have risen continuously since 2005. However, in the midst of the current global financial crisis, which has worsened since September 2008, it has now become evident that the rising trend in tender prices has reversed and that the Rider Levett Bucknall Tender Price Index peaked in the third quarter of 2008. Since August 2008, there have been fundamental shifts in two key factors, namely the surge in commodity prices and the Macau construction boom, which led to the rapid rise in tender prices in Hong Kong in the past two years. Commodity prices have now fallen rapidly against a much stronger US dollar, and also a number of major projects in Macau have been suspended.
The unemployment rate of construction workers is expected to increase in the early part of 2009 as a large number of workers return to Hong Kong from Macau.
The current overall construction market profile, as depicted by the Rider Levett Bucknall Construction Activity Cycle below, shows activity levels weighted much more on the downside of activity than in the July 2008 ICCC, reflecting an ongoing softening of mood in many countries' industries.
For further information, contact Carly McIver on +61 2 9922 2277 or email carly.mciver@au.rlb.com