Cost inflation makes UK eighth most expensive country in the world to build

The relative cost of construction in the UK has been rising consistently over the past year compared to global competitors. One key driver has been construction inflation driving up prices even whilst the strength of sterling has kept import costs down.

With many construction markets in the doldrums, it comes as no surprise, then, that Arcadis’ International Construction Costs report, which benchmarks relative building costs in 43 countries across the globe over the past 12 months, found that the UK has climbed six places since last year and is now the eighth most expensive country for building in the world.

"A key factor behind elevated costs is the sheer weight of demand for prime residential assets with their high specification levels and corresponding high costs."

On the face of it this may not come as a huge shock. However, one thing that will no doubt give the industry and its clients food for thought is that construction costs in Central London are currently higher than even the most expensive country in the world for building; Switzerland. Delving into the findings we can see that cost inflation in London stems from more than high inflation.

In fact, a key factor behind elevated costs is the sheer weight of demand for prime residential assets with their high specification levels and corresponding high costs. Such is the scale of the Central London price growth that it, undoubtedly, somewhat skewed the overall UK result.

Looking at the bigger picture, over the past year construction costs throughout the world have been affected by significant currency fluctuations, commodity prices and increasing demand for development in recovering economies.

European countries are dominating the cost league with high-cost locations Switzerland and Denmark holding their places at the top. Elsewhere, currency devaluation in many emerging markets means that relative costs have dropped considerably in these areas. For instance, costs of construction are 60 to 70 per cent lower in India, Indonesia, Malaysia, Thailand and Vietnam than in the UK. A positive aspect of this differential is that comparatively low costs in major Asian markets are encouraging increased inward investment which will underpin wider economic growth.

One factor that cannot be ignored in the current market is the price of oil, which has halved since September 2014. Energy prices are a small component of construction costs so the deflationary effect will be limited. However, in oil producing countries, falling levels of investment may have a wider knock-on effect on the health of construction markets.

As we look ahead, the UK construction industry is forecast to grow around five per cent this year. And as London remains attractive to investors, being a high return, low risk location, it will continue to see a prime housing boom and sustained growth in 2015. This will clearly impact on construction costs with London potentially seeing price escalation of between five to seven per cent for the coming two to three years.

It will be interesting to see where the UK sits in next year’s report but, based on this year’s findings and the forecast for 2015, it’s likely that we’ll see the UK climb even further up the rankings.

Simon Rawlinson is Head of Strategic Research at Arcadis