“For example, [consider] a shell and core commercial office building that cost 3,600 UAE dirhams/sq m to build in first quarter 2017. Due to construction cost inflation, one would expect the same building to have increased by circa 1.8 percent to 3,665 dirhams/sq m, for comparable 2018 pricing.”
According to the construction update, the first quarter 2018 construction cost for a low-to-medium rise apartment, medium specification, ranged between 3,275 dirhams/sq m and 4,288/sq m. For high rise apartments, high specification, the construction cost estimate ranged between 5,688 dirhams/sq m and 6,440 dirhams/sq m.
Flanagan attributed the less than proportionate increase in construction cost in relation to material cost to the competitive pressures within the contracting market.
“In a competitive market, it is common for contractors to absorb short up-swings in material prices by reducing their expected profit margin” he said.
Another factor, he pointed out, is construction materials’ share in the total construction cost, which stands at 50 to 60 percent, while “overheads, labour and contractors’ margin” are the other main influencing costs.
Flanagan noted that the extent to which changes in material costs impact construction costs depend on the material in relation to the building type.
“For example, if there is a spike in the cost of concrete, this will affect the cost of a shell and core office building much greater than it will influence the cost of a five-star hotel,” he said.
According to information provided in the update, materials registering the biggest cost increase between the first quarters of 2017 and 2018 include rebar, up 30 percent; diesel, up 22 percent; electrical cables, up 13-16 percent; transport, up nine percent and timber, up six to 12 percent.
“We have shown the major materials that have increased,” explained Flanagan, while noting that each material has its own cause for increase and that demand within the UAE wields the least influence in terms of determining the costs.
“For example, rebar is affected by world pricing and supplies from Turkey, Iran and China. The increase in diesel is due to the subsidy cuts by the government; a major component of electrical cables is copper, which rose by 27 percent between 2016 and 2017.
International factors contributing to higher material costs, as cited in the report, include increased cost of materials imported from regions experiencing growth in construction such as Europe and the anti-pollution drive by Chinese authorities to close down factories violating pollution control regulations.
In January, Reuters reported that China, the world’s top steel maker, had cut 115 million tonnes of legal capacity and 120 million tonnes of illegal capacity since the start of 2016 as part of anti-pollution drive, helping drive up steel prices within the country and the world.
Flanagan clarified that the value-added tax (VAT) system had only a negligible effect on the cost of materials as contractors can recover the VAT.
He said a sustained recovery in oil prices will have an indirect impact on material and construction cost inflation.
“That is when oil prices reach a point that increases government spending on infrastructure, which in turn will increase the demand for construction,” he said.
(Reporting by Anoop Menon; Editing by Michael Fahy)
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