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Construction costs in Johannesburg set to rise 7.5%

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Johannesburg has been ranked fourth among the top five global cities where construction costs will increase over the next year, with the cost of construction set to rise about 7.5% over 2017/18, against a global average of 3.5%, professional services company Turner & Townsend’s ‘International Construction Market Survey’ revealed on Thursday.

“In the lukewarm Johannesburg construction market, there is still relatively high inflation [of around 6%], which leads to pressure to increase trade wages and higher material costs and plant equipment. The weaker rand adds to import costs, which pushed up the cost of construction by 5.3% in 2016,” the report pointed out.

It stated that building costs in the city could average at $848.3/m2.

Markets are considered warmer as competition decreases and prices begin to rise. Hot and overheating markets have a higher number of projects and, consequently, there is less competition for tenders, which tends to drive up tender prices.

Generally, those markets described as hot and overheating can expect high construction cost inflation and those that are cold, lukewarm or warm should have low inflation, but that is not always the case.

In a cold market, there is typically intense competition among contractors for very little work, reducing cost pressures from previous levels.

“The construction sector has yet to recover to pre-2010 levels. Contractors continue to experience pressures on margins and a lack of liquidity. The office and industrial sectors are oversupplied and this casts doubt on the prospects for a pick-up in growth in these sectors this year,” the report stated.

Further, it highlighted that with the natural resources and mining sector still suffering from the effects of weaker commodity prices, there was a lack of confidence to develop new projects.

However, it noted that with government still prioritising infrastructure and power transmission projects and major projects currently under consideration including extensions to the Lesotho Highlands Water Project, and the next phase of the Gautrain extension to Soweto, Mamelodi and the West Rand, as well as a recommitment by government for Eskom to buy renewable energy from independent producers, the sector should receive a boost.

“Economic growth continues to be negatively impacted by political uncertainty, weak global demand and the downgrade to subinvestment grade. The gradual improvement in the world economy and a projected recovery in commodity prices may support the economy in the year ahead,” the report read.

Global Outlook

New York, San Francisco, Zurich, Hong Kong and London are the most expensive places to build, with half of the world’s construction markets suffering from skills shortages.

Labour costs in leading markets have also hit new highs, with construction workers in New York and Zurich paid nearly $100/h.

New York has overtaken Zurich as the most expensive city in which to build, with an average cost of $3 807/m2.

London, which ranked third in 2016’s report, has fallen to fifth place behind Hong Kong, despite costs in the city soaring by 5% over the last year. The fall in ranking reflects the depreciation of the pound against the dollar since the UK referendum on European Union membership in June 2016.

Fifty-eight per cent of cities assessed by the study were identified as warm, hot or overheating.

The number of cities considered to be hot in 2017 has almost doubled since last year and includes New York, Dublin, London, San Francisco, Tokyo, Amsterdam and Dar es Salaam. Seattle and Bogota are identified by Turner & Townsend to be overheating markets with costs in these cities expected to rise by 5% and 4.4% respectively.

The major exceptions to escalating costs are the commodity-reliant markets of Singapore, Muscat, Kuala Lumpur and Santiago, where the development market has cooled in light of falling global prices for raw materials.

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