London's construction market is set to outpace the rest of the country going into 2011, according to the latest quarterly Market View released today by EC Harris, the Built Asset Consultancy. Rise in material costs could result in business failure, EC Harris predicts.
The EC Harris report predicts that London tender prices are set to move out of the red in the second quarter of 2011 and grow by 2.5% across the following 12 months. This will be followed by a stronger increase of 3.5% going into 2012-2013. The situation in London is in stark contrast to the rest of the country where the recovery is expected to be much slower. National tender prices are forecast to decrease by 3.3% to the second quarter of 2011, and then increase by just 1.2% in the year to the second quarter 2012. Beyond this national tender prices are anticipated to grow by 2.6-2.8% in 2013-14.
Private sector leading recovery
With the public sector spending being severely cut, this London upturn will be led by the private sector. According to EC Harris, developers are already looking to take advantage of a lack of Grade A offices and an anticipated uplift in residential values which will drive the commercial office and private residential sectors.
Paul Moore, Head of Cost Research at EC Harris explained: "Despite the expected huge drop in public sector activity, we believe that the prospects for the private sector remain optimistic. There is a significant amount of pre-planning activity taking place in London, and it only needs a few of these major schemes to go ahead for us to see a significant increase in schemes being bid in 2011."
Commodity price inflation and business failure
The recent rises in the price of key commodities such as iron ore, oil and copper, coupled with considerable inflationary pressure on factory gate prices is driving up material costs by between 15-20% per annum. Although labor prices remain depressed, worldwide demand for commodities is increasing, particularly in China and India, which could damage the already tight contractor margins and lead to some corporate failures.
Paul Moore continues: "Developers and contractors need to recognize that the game has changed and may require a different solution to their relationship. Some form of collaboration or transparency between parties is desirable in order to manage the risk that this increase in commodity prices presents and ensure that the developer's return on investment is secured against their contractors going under."
The main industry forecasters indicate that infrastructure workload should substantially outperform the rest of the industry, averaging around 11% this year and 9% in 2011, although the forecasts were produced before the announcements of cuts in public spending which could see much of this increase forestalled.
Pressures in infrastructure contractors remain despite the apparent upsurge in workload. On the cost side, higher commodity prices are likely to see tender prices increasing sooner rather than later. Overall, the lower expectations for infrastructure are likely to be balanced by increasing input costs with the result that infrastructure tender prices are expected to fall by 0.7% over the year to the second quarter of 2011, but then recover to show a rise of 3.2% over the following year. The EC Harris Market View is compiled on a quarterly basis using EC Harris' in-house tender price data and accompanying analysis from Experian and CPA. The EC Harris Tender Price Index dates back to 1989.
Source: EC Harris Built Asset Consultancy