Uncertainty remains the watchword for the UK political and economic environment. Our sector continues – with good reason – to fixate on Brexit, political instability and a mixed London market. But as we continue through a period of economic transition, what’s happening to construction costs in the UK and what does it mean for real estate?
Yet Turner & Townsend’s recent International Construction Market Survey, which includes analysis of the average construction cost of commercial and residential projects in 46 markets around the world, found that construction costs in London are set to rise only 2.8% this year compared with a global average of 4.3%.
This level of global construction inflation owes much to economic growth, with the IMF predicting that global GDP will climb 3.9% in 2018.
But in the UK, growth will be more sluggish. Tendering conditions have cooled in the capital, reflecting a development market that remains competitive for asset acquisition, but is increasingly considered in its appetite to spend on construction.
For the second year running, London retains its place as the world’s fifth most expensive city in which to build, having fallen from third in 2016. In 2018, the average cost of construction in London it likely to climb to £2,677/sqm, against New York’s £2,787/sqm, up 3.5% on last year.
UK blowing hot and cold
Has Brexit alone resulted in the cooling market conditions? It feels like a case of “wait and see” until a final EU exit deal is on the table. Meanwhile, there are other, clearer trends taking hold and important areas where the UK real estate and construction sector should take action to prepare for the likely future construction market conditions.
For example, there are significant variations in cost inflation between different sectors. In London, the cost of commercial construction is now forecast to increase just 1.9 percent this year, compared with 3.0 percent for retail and 5.3 percent for residential. The housing crisis continues to hold up demand while commercial projects face greater uncertainty.
There is also evidence that devolution is acting as a counterweight to a post-Brexit slowdown, with hotspots of investment in infrastructure and housing in cities such as Birmingham and Manchester. Our survey shows that tendering conditions in the North, Central and South regions are all described as warm, indicating that strong demand is nudging up prices.
Underpinning all of this, there is one dominant factor pushing up construction costs across different locations: the cost of labour.
Every UK market covered in our survey reported a skills shortage. In London, labour costs – which include wages, taxes, insurance and benefits – have hit an average of £34.00 per hour. Nationwide, labour costs have risen to an average of £27.90 per hour.
There are clear capacity constraints in key areas and these need to be mitigated by an intelligent response from real estate clients to procurement. There is an increasing trend in the UK towards single stage tendering, with clients pushing for and the contractors taking on greater cost and time risk. Margins are tightening and labour costs increasing. Add the possibility of more costly imports and there could be choppy waters ahead for project delivery.
The global skills challenge
The capacity and skills shortage is not new to UK construction, and there is increasing evidence that it is a challenge worldwide. Almost 60 percent of the markets surveyed reported skills shortages. Just 6.5 percent showed a surplus of labour.
Shortages are not confined to well-developed markets like New York, Zurich and London, but are also having an impact in locations with relatively low labour costs, such as Bangalore, Johannesburg and Kigali.
Of course, there is no silver bullet. But between government policymakers, major clients and industry leaders, there needs to be collective recognition that the size and importance of our industry means we must work together to bring about behavioural change and sustain investment in the skills and new technologies we need to be competitive.
Facing an uncertain future, it’s important that we take on these challenges together and keep pace with the rest of the world.
Steve McGuckin, global head of client programmes, Turner & Townsend