Building costs climb with industry boom

Published July 6, 2007

Building costs climb with industry boom

Material prices surge but demand may hit new peak

By ARTHUR SIM
AND JANICE HENG


(SINGAPORE) The construction sector may be hitting the high notes but the simple truth is that one can't get building materials for a song. Their price has climbed with the boom in the industry.

While the cost of concreting sand came under the microscope earlier this year, a detailed study has revealed that, away from the headlines, the cost of other key materials like structural steel, clay bricks and ready mix concrete has also been going up.

Bundling the numbers together, construction cost consultancy Rider Levett Bucknall (RLB) has estimated that costs for Q1 2007 - captured by its in-house Tender Price Index (TPI) - were 15 per cent higher year-on-year (YOY).

The index registers changes in the cost of both, materials and labour. Labour costs, incidentally, have risen 15-20 per cent over the past six months.

RLB, formerly Rider Hunt Levett & Bailey, noted the 'considerable pressure on construction resources, given the current volume of construction demand as well as the anticipated demand over the second half of 2007.' In fact, it estimates that the previous construction demand peak of $24.4 billion achieved in 1997, 'will be tested and possibly surpassed based on a projection of current trends'.

The costs have climbed, in part, on account of Indonesia's decision in February to ban the export of sand. Even though concreting sand comprises only a small portion of the overall construction costs, the move also caused some disruption in aggregate supply, it noted.

Other materials also became dearer. The cost of structural steel, for example, has risen by 17.8 per cent. The price of copper, meanwhile, has fluctuated sharply, rising by almost 80 per cent over two years before registering a YOY decrease of 1 per cent in May 2007.

RLB says the prices of many materials are largely determined by the global commodities market which may react to speculation, foreign exchange fluctuations and geopolitical factors. Such gyrations, however, make life difficult for contractors who hope to tender for construction contracts.

A recent Goldman Sachs report, which was bullish on the industry in general highlighted certain investment risks, including execution risks, given the very tight project schedules and capacity, and the possibility of default of main contractors.

So far, at least one redevelopment project - Safra Toa Payoh - has been put on hold due to rising costs.

The government's e-procurement portal, GeBiz, also revealed recently that the Housing and Development Board did not award at least four recent public tenders for building contracts. One industry player claimed that this was on account of the prices quoted.

Nevertheless, industry players are confident that, given the overall climate, they can weather the rising costs. Property developer United Engineers Group, which also has construction capabilities, believes the outlook will be positive for the next two to three years.

United Engineers group managing director and CEO Jackson Yap added: 'In a booming property market where property prices are steadily rising, there would still be sufficient or additional margins to buffer against rising costs.'

Woh Hup director Eugene Yong said: 'There's uncertainty, but that's the normal situation. That has not changed. The uncertainty is whether you have correctly priced in the risks,' he said. The concern, he added, was not with new projects: 'It's existing contracts that are the issue.'

The construction boom has given contractors more bargaining power. UE's Mr Yap says: '(Contractors) are able to bargain for more margins from developers as there is currently a shortage for contracting resources. However, due to this shortage in contracting resources, projects will also take a longer time to complete.'

Mr Yap also points out that construction materials are just one component of construction cost. The industry faces other challenges too.

Labour resources are tight particularly for supervisors and project managers, and dormitories and transportation resources for workers are also a constraint, he said. Equipment like cranes and piling machines is also witnessing shortage, and therefore sale and rental prices have also gone up.

Other developers are monitoring prices closely. A spokesman for CapitaLand said: 'We will continue to review the impact of the increase in materials costs on a case by case basis with the respective consultants and contractors.'

If the rising construction costs have not been met by much alarm, it is probably because the returns from construction and property development are high.

Knight Frank director, research and consultancy, Nicholas Mak notes that the prices for new developments have risen faster than the construction costs.

Indeed, the latest official figures reveal that overall private home prices rose 20.6 per cent YOY with the high-end sector rising even higher. When compared to an estimated 2 per cent increase in development cost due to price hikes in sand and granite, increases in construction cost do seem negligible. Mr Mak added: 'In a booming property market, there is a lot more opportunity to pass on increases in construction costs to buyers.'


http://www.businesstimes.com.sg/mnt/...06_07_2007.jpg

Published July 6, 2007

Building material suppliers in crunch too

By ARTHUR SIM
AND JANICE HENG


(SINGAPORE) Singapore may be just in the nascent stage of the current construction boom but the strain on resources is becoming a concern even for suppliers.

TV Narendran, deputy president (operations) of NatSteel Asia, said: 'In Singapore, the industry practice is to hold prices for seven to twelve months and this means that the steel supplier has to bear the risk of fluctuating input costs and market prices.'

So far, the steel price increases alone have not had much impact on property prices. 'Steel accounts for about 5 per cent of the project costs. So even a 15-20 per cent increase in steel prices has an impact of less than one per cent on project cost,' explained Mr Narendran.

Wee Piew, chief executive of mainboard-listed HG Metal Manufacturing, notes that price increases have been 'more pronounced' since the first half of this year. 'Global demand is very strong, especially from the Middle East and Russia. Steel from Turkey and the Ukraine, which used to come here, is now being channelled to those markets.'

The supply of Chinese steel is also 'much more controlled now' due to a cut on export tax rebates, he added. With pressure on both demand and supply, prices are high. The price for deformed bars for construction has risen 35 per cent to US$540 per tonne since January, he said.

Even construction companies which are not directly affected by rising material prices are seeing a strain on resources.

Mainboard-listed Tat Hong Holdings's share price has appreciated 75 per cent since the begining of the year on the back of the construction boom.

Tat Hong supplies construction machinery including cranes, and its CEO, Roland Ng, said: 'We believe that rates will continue to be driven by strong demand conditions and tight supply for cranes in this region. We continue to observe a long lead time required for crane manufacturers to deliver on new orders and are not aware of any factors that will drastically alter the situation in the near future.'

Mainboard-listed Tiong Woon Corporation Holdings, a crane and transport services supplier, has also benefited from the boom and its share price has more than trebled since the start of the year.

And Tiong Woon executive director Tan Swee Khim expects crane rates to keep rising by 10 per cent year-on-year for the next two to three years at least.

'Demand is not really coming from the intergrated resorts in particular, but across the industry, including private projects, infrastructure and refineries. The situation on the supply side is not likely to improve much.'

There is some uncertainty of how the construction boom will play out. An industry player said: 'Given the limited pool of contractors, subcontractors and suppliers in the local market, it is not surprising that developers may not be able to secure tendering commitments from the larger established contractors who may already have ongoing projects and tendering commitments with existing clients.'