London second only to NY for construction costs

London is the most expensive city in Europe and the second most expensive city worldwide in which to build, according to the latest International Construction Costs Index published by Arcadis. 

The Index, which analyses the relative costs of construction across 44 major construction in London.  The cost differentials are significant; the cost for international 5 star hotels, for example, are 20% higher in London than in Paris, and 50% higher than in Dubai.

Unpredictable patterns of high inflation affecting the cost of labour and profit margins have made accurate prediction of construction prices very difficult, and are also threatening the viability of commercial and public sector building projects such as offices and residential developments. The findings come as the fatest rise in in new work since October 14 is in commerical construction according the latest Markit/CIPS survey published this week.

Yet despite rapidly growing costs, Arcadis’s report highlights that the London market remains attractive to international investors, with the strength of the US dollar in particular putting US investors in a positive position. But with prime areas of the city no longer as profitable to build in, demand is rippling outwards to sub-prime areas in London, as well as other cities across the UK, where the potential for long-term development value is greater.

Simon Light, Arcadis UK Client Development Director, commented:
“The global cities in this year’s index are crucial engines of growth, reliant on the investment and stability that construction can bring to deliver a sustainable economic future. The macroeconomic view is encouraging, with the recovering Eurozone set to generate steady growth for the EU construction industry over the next three years.

“In London, the synchronised recovery is losing momentum. With inflated construction costs and high land values threatening the viability of commercial and residential development, workloads look to be losing steam even before the capital’s infrastructure boom really takes flight. Delayed investment decisions are reducing actual workload and we are seeing early signs of a return to reason in procurement. There is now much more focus on agreeing prices prior to starting on site, ensuring no loss of value should current construction volumes be maintained. We expect to see the rate of inflation fall to 4-5% in London for 2016 and for a real opportunity to ‘reset the dial’ on projects coming forward in 2016 and 2017.”

Across the globe, financial hubs New York and Hong Kong join London as the costliest locations for construction in the world, with cost premiums in these cities ranging from 40 to 60 percent in comparison with other European counterparts. Middle Eastern commercial centres meanwhile, remain around the mid-point of the rankings, with the likes of Doha (12th) and Dubai (19th) continuing to benefit from low-cost labour and energy.