EC HARRIS RESEARCH 2012 | INTERNATIONAL CONSTRUCTION COST REPORT

INTERNATIONAL CONSTRUCTION COSTS: A CHANGING WORLD ECONOMY

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EC HARRIS RESEARCH 2012 | INTERNATIONAL CONSTRUCTION COST REPORT

INTRODUCTION
Why does construction matter? In simple terms its the discipline that ultimately helps to build a better world. If we look across the globe there are a number of trends that are creating a need for future construction activity. In some locations improved transport links are required to help cope with greater levels of social mobility, whilst in other places new housing is needed to deal with rising levels of urbanization. Furthermore, in the MENA region some countries are focusing on delivering better public infrastructure such as hospitals and schools, to address public discontent and foment social and economic development. However at the same time, major parts of the globe are also continuing to struggle with deficit issues and ongoing fiscal austerity programmes means that in some locations, construction activities are constrained and where it does happen, successful cost control has never been more important. Construction activity can often act as a reliable bellwether for economic performance yet its a complex issue that can be affected by a number of different factors demand, labour availability, commodity prices and inflation all have an impact on construction costs. Beyond these macro-economic factors there are black swan events that are impossible to predict but can also have a major bearing on both the level of construction activity and the cost entailed in delivering schemes. In our eighth annual International Construction Costs report we set out to analyse how things had changed since last year and whether certain trends were beginning to emerge that may offer some insight on how the global construction market would evolve over the coming years. There were a number of key issues that we wanted to consider within this years study - was the gap between construction costs in OECD and non-OECD countries beginning to narrow? How big of an impact was the Eurozone crisis having on construction activity across the wider region? What would lower commodity prices mean for future projects? In the pages that follow we provide an overview of how construction costs are varying across the globe today, offer some analysis on why prices in particular markets have changed since last year, and share some insight on what this means for our clients within each region and what areas they should focus on to ensure their projects remain commercially viable. Paul Moore Cost and Technical Research Leader EC Harris Mathew Riley Group Head of Cost and Commercial Management EC Harris

SUMMARY
If there is any pattern to this years league table it is that the final position reflects the general economic wellbeing of the countries. Greece, Portugal, Spain and Italy have all slipped while Canada, Australia and New Zealand have moved up the table and Qatar, which will see a huge boom in building and infrastructure investment for the 2022 World Cup, has now overtaken the UK. Further cuts in UK construction prices has seen the UK slip a couple of rungs down the league table of international costs and is now in 15th place overall, when compared with 52 other countries covered in the survey. The outlook for the construction sector remains tough over the next couple of years and the problems with the UK economy are compounded by the ongoing problems of the Euro. With the UK economy now officially in a double dip recession, construction workload is not expected to rise until 2014. In London, the office market has a good deal of potential and the pipeline is strong; for those clients with money to spend, there are ample opportunities to benefit from the current low level of prices. However confidence - or lack of it - and funding problems are two of the main stumbling blocks which are slowing down investment whilst away from London the commercial office market is stagnating. Overall there is little sign of private investment in construction projects increasing, which is needed to help make up for the substantial cuts in public sector investment. Any international cost comparison is of course complicated by changes in currency exchange rates and the recent chaos in the Eurozone has seen the value of the Euro fall by around 10% over the past year. Price increases within the Eurozone countries have therefore been mitigated by the falling value of the Euro; when measured in local currency, price movements in those countries may be more pronounced. Switzerland once again tops the league table of construction costs with prices some 62% higher than in the UK. This differential has fallen from the 70% premium in 2011, but part of this is due to the 10% fall in the value of the Swiss Franc which is now linked to the movement of the Euro currency. At the other end of the scale, a number of countries in Asia (India, Indonesia and Taiwan) all have construction costs which are around one third of those in the UK. Although a number of construction materials are often purchased at world market prices, labour rates of less than US$5 a day are a main contributory factor to the low construction costs in these countries.

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ECONOMIC GROWTH: EUROPE 2011 - 2012

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ECONOMIC GROWTH: OUTSIDE EUROPE 2011 - 2012

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EC HARRIS RESEARCH 2012 | INTERNATIONAL CONSTRUCTION COST REPORT

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MAINLAND EUROPE
Western Europes recovery came to a standstill at the end of 2011 according to the UN World Economic Situation and Prospects (WESP). In 2012, the aggregate GDP of Western European countries is expected to contract by 0.3%, after growing by 1.5% in 2011, and only a modest rebound of 0.9% is expected for 2013. The debt crisis, increasingly stringent fiscal austerity programs in the crisis-stricken countries, and weakening lending capacity of the banking system, are the key factors which are impacting severely on consumer and industrial confidence across the region. The economic recovery of the new EU member states in Central and Eastern Europe (CEE) is expected to slow noticeably in 2012, affected by fiscal austerity policies. Aggregate GDP in the CEE region is expected to slow from 3% in 2011 to just 1.7% in 2012, before strengthening to 2.8% in 2013. The transition economies of South-Eastern Europe are expected to stagnate in 2012, growing a mere 0.6% in 2013. The knock-on effect of the continuing crisis, coupled with the increasing perception that Greece will default and exit the Eurozone, has led Euroconstruct to revise downward its previous predictions of recovery in construction output. The new forecast indicates that output will fall by 2.1% in 2012 and then increase by 0.4% in 2013 and by 1.7% in 2014. The civil engineering sector is predicted to be the worst performing over the next three years, with an annual average rate of decline of 1.4%, mainly due to austerity measures taking a toll on public spending allocations. Non-residential construction is expected to see an annual decline of 0.4% while the residential sector is forecast to grow by 0.9% per year to 2014. Both non-residential and residential renovation work are expected to increase, driven by the green agenda emphasis on reduced energy consumption. Looking at the markets in more detail, the collapse of the Spanish, French and Italian markets has had a great influence on the aggregate figures. On a country level a general north-south divide is becoming increasingly evident with the Nordic countries, Germany, Switzerland and Poland set to substantially outperform their southern counterparts in the period 2012-2014. For the 2012 to 2014 period, the Euroconstruct network predicts that overall construction performance will fall broadly into the following four categories: A small group of two Denmark and Norway - are projected to reach construction growth in excess of 2% a year on average

A much larger group of nine - Austria, France, Germany, Hungary, Poland, Slovakia, Sweden, Switzerland and the UK - are expected to see modest growth of between 0.1% and 2% a year

A group of five countries - Belgium, the Czech Republic, Finland, Italy and the Netherlands - are likely to see zero growth or moderate declines of between 0% and 3%.

Three countries - Portugal, Greece and Spain - will see construction activity remain in deep recession with downturns in construction output of up to 21.1% expected between now and 2014.

The economic crisis has also left the Europe real estate industry in a state of limbo, with investors focusing on core cities, such as Munich, Warsaw, Berlin, Stockholm, London and Paris, attracted by a combination of 'safe haven' status, high liquidity levels, income security and diversification benefits. Similar to the construction sector, polarisation of the European markets is increasingly in evidence, with very limited transactions across southern Europe. The appetite for secondary products in all markets is expected to remain weak. While prices in Europe still more or less follow the pattern of Central and Eastern European countries being low cost, and Western nations being more expensive, some of those certainties are now breaking down. Switzerland remains the most expensive country with Denmark in second position and Sweden third, while at the other end of the scale prices in the Former Yugoslav Republic of Macedonia, Romania and Bulgaria are all around 50% of UK costs. However, Portugal is now the 4th cheapest country in Europe with prices cheaper than Bosnia, Czech Republic, Serbia and Hungary. The largest economies in Europe, France and Germany, have similar pricing levels, some 8 to 12% above the UK.

EC HARRIS RESEARCH 2012 | INTERNATIONAL CONSTRUCTION COST REPORT

NORTH AMERICA AND CANADA

United States Construction prices in the US showed only a marginal rise when priced in US$, but a combination of those rises and a fall in UK prices meant that prices in the US are now very similar to those of the UK. However, the US is a huge country and construction prices can show big variations between the North East Seaboard and the poorer states of the Deep South. U.S. economic growth is expected to be a fairly moderate 2.3% during 2012 and at 8.2% the U.S. unemployment rate has still not shown any meaningful improvement. The Federal Reserve remains prepared to take action as needed to protect the U.S. economy in the event of an escalation in financial stresses. Volatile energy prices, European debt concerns and a wait and see approach to the November presidential elections are creating a continued sense of uncertainty. On the upside, U.S. corporate profits are healthy and the factory sector shows upward momentum with factory outputs up 5.7% from a year ago. The U.S. construction recovery is very subdued. The housing construction market shows signs of improvements at a gradual pace and construction of new single homes has increased marginally but the housing sector woes have not vanished as of yet. Commercial building is beginning to edge up while institutional buildings and public works are still in retreat. Federal budget cuts for major programmes are likely to continue and state and local government spending remains weak. Construction material costs increased by around 3% in 2011 and a modest 2% increase is forecast in 2012. On the upside, the multi-family residential sector is now edging up, comprising both apartments and condominiums in the major U.S. cities. Commercial building is up by 11%, driven primarily by major renovations. Freight rail engineering and construction is set to grow to support the strength of mining, and oil and gas has shown 4% growth in first quarter 2012. Expansion of the Panama Canal is spurring a 6% growth in port development on the East and West coasts to prepare for the larger ships that the expanded canal will support. However beyond some investment in high-speed rail overall transportation funding is uncertain as funds dry up and U.S. Congress continues to take a pre-election short term approach. Most state and local governments cannot advance transportation programmes without Federal certainty. Public Private Partnerships have little traction with only a handful of projects forecast to reach financial close in 2012 in California, Texas and North Carolina. Educational, healthcare and public buildings new starts are in decline due to federal government funding uncertainty, healthcare policy uncertainty and declining private endowments. Canada Construction costs in Canada are approximately 16% above prices in the UK and construction costs there are substantially higher than the US. Canadian construction activity is strong and construction employment is forecast to remain at an all-time record high for the next decade, as natural resource projects peak. Canada will need an estimated 320,000 new workers between 2012 and 2020 to keep up with current construction demands and the number of expected retirements from the baby boomers. There is national competition for skilled workers that focuses on specialized labour markets created by the increase in resource projects such as mining, oil and gas, pipelines, electrical generation and transmission. Many of these projects are in remote, northern locations, and the scale of this work generates significant demand requirements across many provinces. Regionally, Prince Edward Island, Ontario, Manitoba, Alberta and British Columbia follow the overall national pattern of recovery and expansion. Employment in some regions is growing as much as 20 percent. Saskatchewan and Newfoundland and Labrador report very strong employment growth, and at peak times, major resource projects exhaust the available workforce for skilled trades and occupations in these provinces.

ASIA PACIFIC
The economies of China and India continue to dominate the region but both are now showing signs of faltering. Chinas latest GDP growth figure, indicating a rise of just 7.6% in the 2nd quarter 2012, was the lowest figure since the financial crisis. The Chinese government has been determined to slow down the rate of growth, after the extremes of 2009 when it pumped nearly 14 trillion yuan (1.4 trillion) of stimulus money and new bank loans into the economy to safeguard the country from the financial crisis. That injection of cash caused inflation to rise from less than 3% in July 2010 to a high of 6.5% in July 2011, but the rate has since fallen back to 2.2% in June 2012, its lowest amount in 29 months. Some economists have warned that deflation is looming and the producer price index, has shown negative growth for the past 4 months. The other regional giant, India, has seen its growth rate fall to 5.3%, the lowest in seven years, following the double-digit pace of growth that the country enjoyed in 2004-08. Should the economy show major signs of slowing, the social costs could be considerable with job creation being one of the main aims of government for one of the biggest demographic bulges the world has seen. One of the problems which needs to be solved is a budget deficit of nearly a tenth of GDP. The country needs to cut wasteful fuel subsidies, reform tax and foreign-investment rules and needs to speed up big industrial and infrastructure projects. The construction sector in India is expected to show strong growth in 2012 on the back of increased spending on infrastructure and industrial schemes. Infrastructure spending in particular is expected to rise by over 20% as the government focuses on this sector. Against the current global uncertainty the Singapore economy managed to maintain a reasonable GDP growth of 4.9% throughout 2011, although this figure is expected to fall in 2012 to between 1 -3%, the majority of which is tipped to come from within the services sector. In the first half of 2011 construction demand in Singapore rose significantly although this was followed by a sharp contraction in the second half of the year. Overall, construction accounted for 4.2% of GDP in 2011; public sector construction accounted for 53% of the spend, with significant public money going on infrastructure and public housing programmes of work. Since the turn of the millennium the number of foreign workers in Singapore has grown by over 70% and the Singapore government has

since taken clear steps to reduce the reliance on foreign workers and enhance productivity. There will be a cost to achieve this, and a substantial reduction in foreign construction workers could force up construction prices in the year ahead. The Japanese economy has been sluggish for much of the past 20 years and the current expectation for growth is around 2% in 2012. The country is still recovering from the effects of the devastating tsunami which struck in March 2011 and the construction industry is expected to see growth of around 2.5% in 2012, greatly assisted by the reconstruction programme for roads, housing, ports and energy. Construction prices across the region continue to show huge variations with prices in Singapore and Hong Kong higher than in the UK. Prices in Singapore are now approx 10% up on the UK while Hong Kong is around 4% higher. Japan remains the most expensive country in the region with prices 31% above the UK. While price increases in local currencies have, in most cases, been relatively modest, the position compared to the UK has been boosted by falls in UK prices and currency fluctuations. At the other end of the scale, India has the lowest construction costs in the survey with prices some 75% below the UK. Prices in India are well below other countries but nevertheless the region provides 5 of the lowest 7 countries. Prices in Taiwan and Indonesia are approx 3540% of UK prices while construction prices in Malaysia, China and Vietnam are running at just under half the cost.

EC HARRIS RESEARCH 2012 | INTERNATIONAL CONSTRUCTION COST REPORT

MIDDLE EAST
Prices in Qatar and the UAE showed very little movement over the past year with costs in both countries are very similar and within a couple of percentage points of the UK. Prices in Saudi Arabia are substantially lower at around 70% of UK prices, although they have risen by over 10% over the past year. Most countries across the region depend heavily on the use of cheap labour from the Far East on construction projects. United Arab Emirates The UAE government continues to drive the economy forward through a strategy of diversification and investment. The Emirates of Abu Dhabi and Dubai continue to see expansion in urbanisation through a relatively young and growing population, which in turn fuels demand in real estate and infrastructure. As the hub of regional tourism, the UAE generates significant revenue from the sector and the instability in the wider region has highlighted the UAE as a safe haven. This has had a positive impact upon the local market although the Euro debt crisis is having the effect of restricting the ability to raise funding to fuel real estate developments schemes. Having right sized over the past two years the UAE construction sector appears set to return to near full capacity following government announcements linked to a number of major projects, with a particular focus on social infrastructure. High construction demand from neighbouring countries in the region, such as Kingdom of Saudi Arabia and Qatar, will place further pressure on capacity which may result in unbalanced price escalation for the UAE. At the start of 2012 The Abu Dhabi Executive Council announced their major spending programme with a focus on government investment in projects that have significant strategic impact for the Emirate. The spending programme reaffirmed the governments commitment to the 2030 Vision and provides a focus on large scale infrastructure projects together with the improvement of education, healthcare facilities and social / national housing. The Abu Dhabi market is witnessing large numbers of projects, started in 2009/2010, now coming to completion at a time of restricted demand. As a result the rental levels for commercial office and residential units are decreasing whereas the retail market in Abu Dhabi remains under supplied and the associated rental levels remain steady. New projects coming on line reflect this current supply profile. After the market lows of 2009 Dubai is now showing signs of recovery; the local economy grew by 3% in 2011 with growth of around 4.5% expected in 2012. Some projects previously placed on hold are now being reviewed and restarted as the Emirate looks to restructure to attract investment. Investor focus in Dubai is linked to well located, high quality, income-producing assets. Investors are increasingly focusing on customer requirements and financial viability as the market continues to shift away from speculator driven developments. Qatar In order to deliver both the World Cup and the National Vision, Qatar is expected to invest heavily in both capital projects and infrastructure over the next decade. Estimates of the investment vary in the press from $60 billion up to $220 billion (although the reality is probably somewhere in the middle). The Qatari government has reportedly allocated 40% of its budget between now and 2016 to infrastructure projects alone, and many significant programmes of work are already in the planning or construction stages. Despite a policy focused on developing non-associated natural gas reserves and increasing private and foreign investment in non-energy sectors, oil and gas still account for more than 50% of GDP, roughly 85% of export earnings, and 70% of government revenues. Due to the strong focus on large infrastructure projects in Qatar, much of the capital investment forecast for the next decade is funded by governmental (or quasi-governmental) entities. Although there continues to be a significant number of commercial/residential projects under development with private investors, a large proportion of the non-hydrocarbon investment is being funded by a small number of key stakeholders, including Qatar Foundation (Education City / Downtown Doha); Qatari Diar (Doha Convention Centre, Lusail & others); Barwa (various commercial/residential developments); KAHRAMAA (Power & Water), Qatar Rail Company (Metro, National Rail, LRT) and Ashghal (Roads, Public Works). Kingdom of Saudi Arabia Sustained growth continues in the largest economy in the GCC, stimulated by high oil prices and continued investment in infrastructure such as new airports, highways and the six economic cities. This has led to increased interest in the Kingdom's booming construction industry

from manufacturers and suppliers of construction material and construction professionals from all over the world. The construction industry is estimated to grow from the $80.2 billion of contract awards in 2011 to $86.1 billion by 2013 with the majority of the investment expected to come from the government. Other sectors seeing continued growth are housing, fuelled by the increase in demand from the expanding young population and tourism / leisure mainly near the religious shrines of Mecca and Medina. However, there is also an increase in the hotel sector in Jeddah and Riyadh due to a lack of supply. Recently, construction of the worlds next tallest building commenced in Jeddah overlooking the Red Sea and Obhur Creek. The Kingdom Tower will be the centrepiece and the first construction phase of Kingdom City Jeddah a new urban development of more than 5.3 million sq m of land.

In order to deliver both the World Cup and the National Vision, Qatar is expected to invest heavily in both capital projects and infrastructure over the next decade.

EC HARRIS RESEARCH 2012 | INTERNATIONAL CONSTRUCTION COST REPORT

100 119 87 83 47 36 53 48 65 121 91 83 57 49 69 76 46 41 58 84 50 43 42 57 69 46 48 59 58 80 111 137 50 59 78 46 75 56 55 37 39 53 56 57 40 55 108 21 29 29 36 114 68 42 49 56 61 96 65 24 48 50 39 51 113 100 90 77 100 123 122 132 156 70 95 141 95 148 134 75 79 81 93 123 80 84 127 144 187 69 70 86 100 64 78 109 63 121 74 132 133 174 63 64 79 123 128

UK Austria Belgium Bosnia & Herzegovina Bulgaria Croatia Czech Republic Denmark France Germany Greece Hungary Italy Latvia Macedonia The Netherlands Poland Portugal Romania Russia Serbia Slovakia Slovenia Spain Sweden Switzerland Turkey Ukraine Qatar Saudi Arabia UAE Algeria Ghana Morocco Tunisia South Africa China Hong Kong India Indonesia Japan Macau Malaysia The Philippines Singapore South Korea Taiwan Thailand Vietnam Australia Canada New Zealand USA

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Cost Comparison UK = 100 < 50 51 - 60 61 - 80 81 - 100 101 - 120 121>

The figures indicated are an average of the cost construction range for each country - please see associated cost construction chart on the page 10.

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EC HARRIS RESEARCH 2012 | INTERNATIONAL CONSTRUCTION COST REPORT

COMMODITY PRICES
Commodity prices for most materials are expected to fall or show only modest increases over the next 7 years. This is in marked contrast to the price movement over the past couple of years where some dramatic increases were recorded for certain commodities. The uncertainty in the global economy is the main reason for the expected slowdown in prices. Copper prices ramped up between 2009 and 2011 but a long slow decline is expected to bring prices down to below their 2007/08 price levels

Iron ore prices soared by a factor of 6 from 2007 to 2011, primarily because of an end to long term negotiation of prices and reliance on spot prices. A long decline in prices is expected through to 2017, as a result of an expected fall in demand and the settling down of the spot price system

Oil prices are also linked to the global economy and are expected to show a very slow decline over the next 7 years

The price of Australian coal which is a key material in steel production was hit by extremely bad weather in early 2011 which led to a 70% price hike between 2009 and 2011. The price of coal fell in 2012 and is expected to continue to fall back over most of the forecast period.

WORLD COMMODITY PRICES 2005 - 2019 (Based on IMF and World Bank gures)
220.0 200.0 180.0

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160.0 140.0 120.0

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CLIENT INSIGHT
With the global economy likely to remain volatile over the next couple of years, construction firms, consultants and clients alike will be operating in an increasingly challenging marketplace. Whether its mitigating against rising construction costs or trying to do more within a constrained budget, there are a number of key areas that the industry will need to focus on to ensure their projects remain commercially viable: Gaining access to labour: In the Eurozone one of the biggest challenges around successful project delivery in the coming years is likely to be securing access to a sufficient volume of labour capacity. As a result of the economic slowdown many players within the UK and Mainland Europe have reduced their headcount, slowed down on hiring young talent and effectively tried to do more with less. As the market picks up we will inevitably see a shift in this approach however theres likely to be a lag period during which clients are competing for a smaller pool of consultants and contractors. In order to manage this risk it is key that project directors begin to plan well in advance and offer early visibility of their schemes so that the market has a chance to respond appropriately. Skills shortage: With all of the cutbacks in depressed markets, the industry has lost some specialist skills and, coupled with lower graduate intakes, the ability for organizations to bounce back when demand returns will be constrained. Again, early visibility of pipeline activity will start to create confidence in the market for organizations to reinvest in new talent. In healthier economies like Asia the volume of activity planned may see many parties competing for a relatively small group of technical specialists. Mitigate against inflation: In some markets across the Middle East the level of investment particularly in large-scale infrastructure schemes could create inflationary pressures. To help manage this clients may need to review their supply chain engagement strategies to determine how they can best mitigate against rising inflation whilst close monitoring will also be required to ensure that as demand increases companies do not become overstretched and fail to deliver. Manage the complexities created by M&A activity: The duration and severity of the global recession has brought about greater levels of industry consolidation particularly in European markets. In some instances this can create increased levels of risk when it comes to delivering construction projects successfully. When this happens, clients must adopt a more hands-on approach and not look to pass the onus on to contractors to ensure it doesnt affect project viability. Across the globe greater levels of due diligence is required when selecting their supply chain partners at both the outset of a project and throughout the entire scheme to ensure that risk is managed successfully and cost overruns ultimately avoided. Minimise outturn costs: In depressed markets a greater focus is still needed on controlling outturn costs. Whilst the attraction of low unit costs is wholly understandable, our experience of managing major programmes of work has shown that the lowest bids are often not achievable and ultimately end up costing clients more in the long run. A more strategic approach, that places a higher value on human capital and good design, is required to ensure that projects can be delivered within the agreed budget and to the level that is ultimately desired. Take a global view: One interesting trend to watch out for over the coming years could be an increasing amount of intercontinental trading. For example, if inflationary pressures become a major concern for clients in the Middle East, they could use their location to their benefit and adopt a more strategic approach around how they use their capital e.g. increasingly look to purchase manufactured products from struggling economies in the Eurozone whilst importing cheaper labour capacity from Asia.

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EC HARRIS RESEARCH 2012 | INTERNATIONAL CONSTRUCTION COST REPORT

DETAILS OF THE SURVEY

The indicative figures above have been calculated from a survey of construction costs in 53 different countries, which was conducted across EC Harris offices worldwide. Data was collected in cost per m format for a wide spectrum of building types covering industrial, offices, retail, residential hotels, etc. All buildings are deemed to be international, and constructed to Western European specification standards, but there will always be differences in specification for the same building constructed in different countries. Procurement and contractual arrangements can also have a substantial effect on costs. Site labour costs remains one of the key drivers, while the sourcing of materials, including the use of imported mechanical and electrical engineering plant, can have a profound effect on prices. The full EC Harris publication gives cost per m figures for 44 different building types, across all sectors.

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EC HARRIS RESEARCH 2012 | INTERNATIONAL CONSTRUCTION COST REPORT

For more information, please contact:

Paul Moore Cost and Technical Research Leader

t +44 (0)20 7812 2584 e paul.moore@echarris.com Mathew Riley Group Head of Cost and Commercial

t +44 (0)20 7812 2296 e mathew.riley@echarris.com Tim Robinson Head of Cost and Commercial Management, EC Harris Asia

t +852 2263 7470 e tim.robinson@echarris.com Nick Smith Head of Cost and Commercial Management, EC Harris Qatar

t +971 2417 0337 e nick.smith@echarris.com

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