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Building costs remain high in Europe, annual study finds
Europe has five of the top 10 most expensive construction markets with Switzerland, Denmark, Sweden, France and Belgium all featuring in the rankings compiled by global built asset consultancy EC Harris.

Hong King is the most expensive, followed by Switzerland, Denmark, Sweden, Macau, Australia, Japan, France, Singapore and Belgium. The cheapest locations to build are India, Indonesia and Vietnam

The report says that as Europe continues to struggle against the headwinds of Eurozone woes, deficit reduction and challenging export markets this represents a major competitive challenge for European markets.

Constructions costs in Belgium, France, Sweden and Denmark have increased by 3 to 4%, cementing their position in the top 10, according to the report which covers building costs in 47 countries around the globe.

Although building costs have fallen in the UK over the past 12 months, the UK has maintained its position lower down the rankings due to a combination of the weaker pound and inflation in some European markets.

The European Commission forecasts that Eurozone GDP will shrink by 0.4% in 2013, following a contraction of 0.6% in 2012. During 2013, France and the Netherlands are expected to contract alongside Spain, Italy and the weaker economies of southern and eastern Europe. Looking forward to 2014, only Slovenia and Cyprus are expected to be in recession. Construction markets are expected to shrink by 2.8% in 2013, and by the time recovery starts in 2014, according to EuroConstruct, activity levels will have fallen to volumes last seen in the middle of the 1990s before the launch of the Euro.

It is inflation that is a significant issue in Hong Kong which experienced inflation of around 7 to 9% during 2012. Hong Kong recovered quickly from the 2008 downturn, bolstered by high levels of tourism, consumer spend from the Chinese mainland and a booming residential market.

The report says that Hong Kong’s construction market has remained buoyant through the delivery of infrastructure and new commercial and residential space in previously industrial areas. Output grew by 15% in real terms in 2012, triggering significant cost inflation. Looking forward, with continuing growth and an ageing construction workforce, Hong Kong could face further inflationary pressures in years to come.

The fall of the Yen against world currencies and the weakening of the Australian Dollar have caused substantial fluctuations in relative construction costs this year. The most significant movement has been the 5% appreciation of the Chinese Yuan. Not only has this contributed to China moving up the construction costs rankings, it will also make Chinese imported materials to the UK and other developed markets more expensive.

‘Currency fluctuations have had a substantial effect on relative construction costs over the past year, particularly the fall of the Yen and the appreciation of the Chinese Yuan. This not only makes Chinese imported materials to other countries more expensive, but has also contributed to China moving nearly half way up the global rankings,’ said Simon Rawlinson, head of Strategic Research and Insight at EC Harris.

‘There could be a knock- on effect in the UK in 2014 if the construction recovery takes hold, with more expensive imported materials contributing to the potential for inflation in UK construction markets,’ he added.

One of the other elements examined within this year's study was the impact that fluctuating commodity prices have had on construction costs over the last year. Since 2011 the price of metals has fallen progressively, despite increasing after January 2009, when they were influenced by demand for raw materials in the BRICS countries of Brazil, India and China and the high volumes of commodities trading.

‘With new sources of supply coming on stream, investment houses moving away from the commodity markets and a substantial reduction in the growth rates of the BRICS it is not surprising that prices have fallen in the short term,’ explained Rawlinson.

‘Some forecasters are predicting an end of the commodities super cycle and claim that commodities have already entered a sustained period of below trend price growth. This development will be of huge importance for low cost construction economies, where material costs are a more significant component of project costs,’ he added.

Construction prospects in the Americas illustrate many of the global trends which will affect construction markets over the next few years. Recovery in the USA’s housing market promises to provide an engine for growth into the medium term, whilst public spending cuts introduced following the resolution of the fiscal cliff in the USA and widening budget deficits in Brazil will affect levels of investment in transport and social infrastructure.

The report also says that the continuation of the shale gas and oil boom in the USA and Canada, which drives infrastructure and production spend, contrasts with a slowdown in investment in mining and minerals, which so far has affected countries outside of Brazil including Argentina and Guinea.

Amidst a general shift to spending on social infrastructure in the wake of the Arab Spring, there are increasing signs of a more general recovery of construction markets in the Middle East region, particularly in the United Arab Emirates and Qatar.

Preparations for the World Cup in Qatar in 2022 are the most obvious manifestation of accelerated growth, but there are positive signs emerging from Saudi Arabia which is in the process of building six new economic cities and the UAE, which has a much larger construction market and a promising pipeline of projects. However, if the UAE does stage a recovery, it will be competing with both Saudi Arabia and Qatar for resources.

China is by far the world’s largest construction market and as a result any slowdown in the rate of investment will be felt widely, the report points out. Hong Kong and Singapore, the region’s major international hubs have relatively mature construction markets that in the medium term are expected to grow at a slower rate than the rest of the region.

By contrast Malaysia, Indonesia and the Philippines have very ambitious investment for economic diversification and social infrastructure programmes and are likely to see significant growth in construction over the next few years.
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