Uphill Trek Ahead As Building Costs Keep Rising

Source : The Business Times, January 07, 2008

Study suggests strain on resources, no let-up this year.

The construction boom here is stretching resources, as costs of building materials look set to keep climbing through 2008.

Already, building costs are almost on par with Hong Kong, double that of Beijing, and just 30 per cent below New York.

And according to a report by construction cost consultancy Rider Levett Bucknall (RLB), Singapore prices jumped 12 percentage points to 15 per cent in 2007.

RLB sees the global tender price index (TPI) going up a further 15 per cent this year.

RLB managing partner Winston Hauw said: 'It will be a very challenging year for the construction market in 2008, given the high demand on construction resources from existing and new development commitments this year.'

RLB's international tender price matrix is based on the pricing of standard commercial and residential building models for the various cities.

For Hong Kong, Beijing and London, the TPI rose by one percentage point, while in New York and Dubai, it fell 4.5 and 5 percentage points in 2007 respectively.

In its analysis of building costs worldwide - which is based on similar construction-related costs - Singapore ranks below these cities, except for Beijing.

Building costs for premium office buildings in London and New York start at $5,916 and $2,857 per square metre respectively. In Asia, the costs for premium office buildings in Dubai, Hong Kong and Singapore start at $2,810, $2,368 and $2,150 psm respectively.

While some factors contributing to building costs are universal, Mr Hauw said construction demand in Singapore has doubled from about $11 billion two years ago, putting a strain not just on material costs, but on labour, equipment and management staff costs as well.

Although the building costs in Singapore are just a fraction below Hong Kong's, rental returns for landlords are higher.

According to the latest data by DTZ Debenham Tie Leung, Grade A office base rents in Hong Kong are $20.67 psf per month, compared to $12.15 psf per month here.

In both cities, vacancy for Grade A office space is 2.8-2.9 per cent.

DTZ executive director Ong Choon Fah said building costs and rental returns alone do not determine the investment potential of a city. 'It also has to do with how these investors choose to allocate their funds,' Ms Ong said. And with regard to Hong Kong, she added: 'It is still very much a China play.'

In a recent report by CB Richard Ellis (CBRE), estimated initial yields (gross) for the prime office sector in Beijing, Hong Kong and Singapore were 7-9 per cent, 4.5 per cent and 4.3 per cent respectively.

For the luxury residential sector, yields were 6-8 per cent, 3.5 per cent and 2.6 per cent respectively.

CBRE executive director for research Li Hiaw Ho said building costs may have some impact when calculating overall yields, but he believes this is minimal.

Instead, in Singapore, as well as Hong Kong, land costs are a much bigger factor. He also noted that while Singapore's land costs are high, Hong Kong's are higher.

On the lower yields here, Mr Li said: 'Lower yields can also mean that there are lower risks appttached to investing here.'

Knight Frank director of research and consultancy Nicholas Mak believes that for potential developers, building cost ranks below land cost, financing cost, and investor rate of return.

'When advising clients during the feasibility study stage, we find they are more concerned with pinning down land costs,' he said.

With respect to building costs, Mr Mak said: 'In a buoyant market, developers are more likely to pass on higher building costs to the buyer, while in a quiet market, the developers may have to absorb this.'