GVA’s Building Cost Update report reveals that development activity has decreased in recent months, albeit from a very low base.
With a weak economic and property market outlook, and with development finance still severely constrained, GVA reports that it is unlikely that there will be much change in the amount of development activity over 2012/13.
David Martin, Director and head of the Building team at GVA’s Birmingham office said: “Past performance indicates that a downturn in development and construction activity should lead to a fall in tender prices, and this is something which is being closely monitored by GVA.
“However, the general trend in tender prices has been upwards since spring 2010. The Building Cost Information Services (BCIS) records this trend and forecasts that prices may continue to rise further in the coming months, though this is being led by the demand for London offices. Meanwhile, the remainder of the country is becoming constrained by the lack of work, which could well see further falls.”
Material prices saw strong growth in 2010 and this continued during 2011. According to BCIS, annual price rises in material products peaked at eight per cent per annum in early 2011, though have now moderated to approximately five per cent. The price rises are predominantly due to rises in steel prices, as manufacturers have passed on the increases in raw material commodity prices.
Other construction products to see double digit price rises over the past 12 months include crushed rock, concrete reinforcing bars and sawn wood. While initially these price rises were being absorbed in the tender process, more lately tender prices have crept up.
Continued/…
David Martin added: “This ongoing increase in material prices, with particular regard to steelwork, has seen contractors struggle to hold tender prices at lower levels. The cost of this is being passed directly onto developers and funders and is placing an increasing burden on development margins.
“In these continuing uncertain times, we have several schemes which have been competitively tendered, though which are subject to ongoing delay as funding is finalised. Meanwhile, contractors are understandably reluctant to hold their tender figure for any significant period of time, particularly when it is known that the material suppliers have significant price rises of up to 10 per cent in the pipeline. Coupled with the increasing demands on building design performance through Building Regulations, this is further squeezing the opportunity for development to take place.”
Conversely, labour cost inflation remained low, at one per cent per annum during 2011. The majority of wage agreements have remained well below inflation or frozen and there is no shortage of skilled labour. Wage increases are expected to be muted over the next two years, with workloads still considerably below pre-recession levels.
It is clear that uncertainty regarding the fragile state of the economy continues to hamper the start of new schemes across all sectors. Whilst the level of commercial property development remains low, sentiment does appear to be improving marginally.
There are some encouraging signs within the sector, with several high profile projects under construction, such as Two Snowhill, New Street Gateway and the new Library of Birmingham. However, a concentration of UK construction activity is limited to London and the South East. Regional construction activity in the short-term is not likely to recover significantly due to a combination of poor viability, the weak outlook for occupier demand and the time needed for the industry to re-build capacity.
Any recovery is only likely to commence from next year onwards if favourable economic circumstances permit. This growth however is likely to be sluggish as cuts in public sector spending deepen and tax rises take hold.
David Martin concludes: “The construction market remains weak despite recent reports indicating an increase in tender prices over the past 20 months. Labour costs for contractors have generally remained static, or have seen increases in line with inflation, though material prices continue to accelerate due to the volatility in raw materials.
Continued/…
“This has resulted in tender prices being put under real pressure by the increase in input costs. Contractors are generally reluctant to fix these costs and are bidding at cost – or below – in order to win work in a competitive market place.
“This is likely to increase the post-contract activity of contractors in order to re-coup their costs through gaps in contract documentation. The onus is on construction consultants to ensure that all documentation is as accurate as possible.”
