Construction costs poised on a downtrend

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Published January 13, 2009

Construction costs poised on a downtrend

Tender price index may have fallen 6-8% in Q4, says consultancy RLB

By ARTHUR SIM


(SINGAPORE) Construction costs may have shrunk in Q4 2008 and are likely to be still on the way down, says a top consultancy firm.

Rider Levett Bucknall (RLB) says preliminary figures show its tender price index (TPI) may have fallen 6 to 8 per cent quarter on quarter in Q4.

The drop is significant because in the first nine months of 2008, the TPI - which reflects tender price movements in specific sub-sectors of the construction industry - rose 18 per cent year on year.

RLB said there has been a significant drop in tendering activity and recent tenders appear to reflect an easing of prices - 'largely due to the fall in construction demand as well as declines in material costs, contractors' preliminaries and tendering margins'.

The firm said that in Q3 2008, the TPI showed little movement and 'appeared to have peaked'.

The current downward trend in building tender prices is anticipated to be more fully felt in the market by the second quarter of 2009.

In Q4, construction demand is expected to have been $4 billion - way down from an estimated $7.5 billion in Q3.

At end-November 2008, steel reinforcement cost US$740 a tonne, or 40 per cent less than the July 2008 figure of US$1,251.

Copper prices fell even more. At end-November 2008, copper cost US$3,716 a tonne, or 57 per cent down from $8,683 a tonne in April 2008.

But not all costs have eased.

RLB said prices of mechanical and electrical services have not moderated. And wages for construction workers are anticipated to remain stable in the short term. Some costs have continued to rise. For instance, granite aggregate and ordinary Portland cement have gone up 14.9 and 4.2 per cent respectively since April 2008.

At end-Q3 2008, construction costs in Singapore on a per square metre of gross floor area (GFA) basis were still relatively high.

RLB said the cost of constructing a 55-storey (or more) office building was $5,200-$5,950 per sq m of GFA, up from $4,960-$5,660 per sq m in Q1 2008.

A luxury condominium cost $4,500-$6,200 per sq m of GFA in Q3, compared with $4,000-$5,500 per sq m of GFA in Q1.

But RLB said: 'The current downward trend in building tender prices is anticipated to be more fully felt in the market by the second quarter of 2009.'

Barclays Capital regional economist Leong Wai Ho reckons the fall in costs will help the construction industry 'extract more profits and value added from each dollar of contracts awarded'.

But he added: 'The industry faces a no less challenging environment, given that credit is incrementally more scarce and interest expenses are rising.'

He also said that as most raw materials are imported, construction companies' cost structures are extremely sensitive to the changes in the value of the Singapore dollar.

Citing a survey by DP Information Group, Citigroup said an analysis of the financial results of more than 2,000 construction firms showed 27 per cent of them have short-term debt that exceeds their cash.

Citigroup said there is a significant risk of even healthy companies defaulting on loans if refinancing difficulties persist.

Citigroup economist Kit Wei Zheng added: 'The drop in construction costs should provide welcome relief for construction companies' margins. But the flip side is that it also reflects softening demand conditions in the recession.

'One can reasonably expect private sector construction demand to soften as the recession unfolds, and public sector demand may have to pick up the slack.'

David Liew, managing director of United Engineers Developments, said falling construction costs are 'good news' but the cost savings are limited because construction costs account for only about 20 per cent of total development costs.

Still, he said: 'Falling construction costs may bring more smiles to the faces of contractors, especially those who committed to projects based on fixed-price contracts during the boom, as they will enjoy improved margins having previously factored in relatively higher material prices.'