GENERAL PROPERTY

Construction costs ease but significant challenges in the near term

Photo: Ginasanders
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WHILE Sydney remains the most expensive city for construction in the country, overall major Australian cities are now cheaper to build in when compared to other global cities.

According to Arcadis’ 2022 International Construction Costs index, which ranks the cost of construction in 100 global cities, Sydney has fell 11 places in the rankings over 2021, pulling in at number 40.

In fact all Australian cities were comparatively less expensive over 2021, with Melbourne falling from 41 in 2020 to 49, Brisbane falling from 42 to 50, Adelaide from 55 to 60 and Perth from 45 to 61.

“The 2022 rankings don’t mean that it has become cheaper to build in Australia, but rather that the cost of doing so did not increase as much as in other cities, in US dollar terms,” said Matthew Mackey, executive director of cost and commercial management at Arcadis.

In other words, the decline in index placement has more to do with Australia’s dollar against the USD, disruptions to demand brought on by COVID and cost increases being absorbed into the supply chain.

“Currency effects aside, for most of 2021 the Australian construction industry was affected by project uncertainty linked to Covid, which had a dampening effect on demand in most cities. This fed into competitive pressure, and we saw construction firms and their contractors absorb cost increases rather than pass them on fully,” said Mackey.

On the other hand, Brisbane, which was more impacted by border closure than lockdowns saw a 12.1% increase in building costs over the year.

While Sydney and Melbourne, which were more effected by lockdowns than border closures, saw a more mild 1.5%  and 2.3% rise in costs respectively.

“We saw stronger evidence of cost increases being passed through late in 2021 and we expect that to fuel significantly higher construction tender price inflation in 2022. Indeed, that is already happening in many capital-city markets as materials, commodities and labour cost pressures bite,” added Mackey.

Arcadis is currently forecasting a 4% to 5% building tender increase in both Sydney and Brisbane, with a 3% to 4% increase in Melbourne, 5% to 7% in Perth and 2% to 3% in Adelaide.

While in NSW and Victoria infrastructure tender prices are expected to climb by 6% and 5% in Queensland over 2022.

“It’s fair to say that the Australian industry has been in a bubble for the past two years and insulated from global shocks, but that landscape has changed – we are now much more exposed,” said Mackey.

Mackey added that fluctuating energy and commodity prices’ impacts on key materials such as steel, timber and concrete are likely to become the most significant challenges to construction costs in the near term.

With labour supply also remaining constricted, while demand lifts and contractors become increasingly unwilling to take on price risks.

The Omicron variant’s impact on labour and material supplies has already recorded a drop in the construction activity  over December and January.

“Looking ahead, we see skills and labour shortages as being the defining issue for the construction sector over the next decade,” concluded Mackey.

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