“What is happening to build costs?”
My agency colleagues are now all talking regularly about the need for more new speculative development. The question that soon follows to myself and my Building Consultancy colleagues is: “Why can’t we build factories/warehouses/offices cheaper?” When they say “cheaper” they mean “a lot” cheaper and probably to the build prices that were to be found 3 or 4 years ago when we were in recession.
I have looked at the Building Cost Index (BCIS) data and commentary around their published facts and projections on building costs. Before I put forward some of the general statistics one example, caught my eye with a quote from the Department for Business, Innovation and Skills (BIS)
“brick production rose by 6% in 2nd quarter 2014 compared with the previous quarter and by 20% compared with a year earlier. Brick deliveries over the same comparison periods rose by 9% and 4%. With deliveries outweighing production, brick stocks fell. Stocks in 2nd quarter 2014 were equivalent to nine weeks of current deliveries, down from 10 weeks in the previous quarter. Historically, the number of weeks in stock in terms of current deliveries tends to range from between 10 and 20 weeks, but rose to 50 weeks at the height of the recession.”
The way that property values have recovered with rentals increasing and investment yields hardening means that new build options are a lot more realistic for many companies again. Just as values have recovered though, costs have increased, this is just the thing frustrating my agency teams at the moment.
If we look at the BCIS quarterly briefing in November 2014 it says some interesting things:-
In 2nd quarter 2014, tender prices rose by 1.6% compared with 1st quarter 2014, and by 5.1% compared with a year earlier. It is anticipated that tender prices will continue to rise over the second half of 2014, which is supported by contractors who responded to the recent BCIS survey of contractors.
BCIS also use a contractor’s ‘capacity utilisation’ measure – how busy are the builders? This measures how many builders are at ‘full or almost full’ capacity this is the index:-
Period % of firms operating at full/almost full
The ‘capacity constraint’ factors – contractors too busy, is something that we are getting some feedback through our own work in Building Consultancy as we compile and manage building tenders, BCIS sums some of this phenomena up as follows:-
“Currently, some capacity constraints are expected to put upward pressure on tender prices as contractors struggle to cope with the increase in workload, leading to higher annual price rises over the next couple of quarters. It is anticipated that annual tender price rises will be around 7% in the next couple of quarters, with annual increases slowing to 5.6% over the year to 3rd quarter 2015. With contractors starting to cope with the increasing workload over the second year of the forecast, tender price rises are expected to slow to 4.5%. With strong increases in demand continuing over the remainder of the forecast period, and with upward pressure from input costs, it is anticipated that tender prices will rise at a steady 5.0% – 5.5% per annum. The pre-recession peak in tender prices is likely to be surpassed in the remainder of 2014, and tender prices are predicted to rise in the order of 30% over the next five years.”
If values do not i
ncrease to match the build cost increases then this will have to drive efficiencies elsewhere – cheaper designs perhaps or better value construction methods?
One think looks fairly sure – build costs look set to increase.