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High costs and growth fears must quell complacency

Arcadis recently released its annual International Construction Costs Index, revealing that London is the most expensive city in Europe and the second most expensive city worldwide in which to build.

For those of us who work in the industry, the findings may not come as much of a surprise. Many of us are currently experiencing first hand the significant imbalance in London’s expensive construction market.

It’s evident that the capital remains attractive to international investors, with the strength of the dollar in particular putting US investors in a positive position. We’ve also seen demand rippling outwards to sub-prime areas in London, as well as other cities across the UK, where the potential for long-term development value is now greater than in central London.

Yet although strong demand from domestic and international investors should see volumes of new construction growing by over 4 per cent a year, rising costs and limited resources are leading to the delay of some projects.

Volatility hits viability

During 2015, prices rose by at least 7-8 per cent in London. Unpredictable patterns of high inflation affecting the cost of labour and profit margins have made the accurate prediction of construction prices difficult. Ultimately, this volatility is directly threatening the viability of commercial and public sector building projects such as offices and residential developments.

Inflation, however, is not the sole reason behind a turbulent market. Looking specifically at new orders, our forward indicators have highlighted a bullish supply chain that is being adversely affected by the failure of work to come through as quickly as expected.

“Although the supply chain is still recovering from the downturn, the industry is being challenged to deliver viable schemes in a difficult market”

In fact, the results show that new orders growth for 2015 in general was surprisingly weak. Although it’s difficult to pinpoint exact causal factors, indications suggest growth may have been affected by the general election, or a broader loss of momentum during the year.

However, early positive signs are beginning to emerge, with much more focus on agreeing prices and starting on site. As such, we expect to see the rate of inflation falling to 4-5 per cent in London during 2016.

Potential slowdown

More broadly, there is also evidence of a much wider slowdown in construction markets due to global economic uncertainty, lower tax receipts, weak construction activity and stabilising employment growth.

Although development in the UK has been challenging, the outlook for the UK construction market is looking positive as we start the New Year. Our strong economy will doubtless support a healthy construction workload and the numerous large-scale infrastructure projects that are set to spring into action.

That doesn’t mean we should rest on our laurels. Although the supply chain is still recovering from the downturn, the industry is being challenged to deliver viable schemes in a difficult market. There is now a real opportunity to ‘reset the dial’ on projects coming forward in 2016 and 2017.

Simon Light is UK client development director at Arcadis

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