Cost Solutions: Construction Costs Update

Headlines demand that we are facing over-supply, and that developers are pulling back on apartments, yet vacancy rates remain manageable and rents are holding up in most markets. What is happening is an increase in cost per apartment at the same time as demand, and sales prices reducing.

This is leading to some projects not stacking up and a tapering of growth and reduction in the number of projects forecast to come on the market. Many blame this on increases in construction cost and point towards EBA rates or specific examples of rises in core materials such as concrete. The reality is that material and labour prices have had marginal impact on the overall increases in cost per apartment.

Three impacts on construction costs relevant in the current market are: changes in product mix, changes in quality, and lastly labour and materials. The table below shows changes in costs per apartment over a number of periods.

The biggest impact on costs has been the shift from one bed/one bath/no car park stock, to two bed/two bath/one car park. Also significant in the cost mix has been the change in quality and increase in amenity provided by Developers as the race to differentiate their product and cater to a more discerning market heats up.

If your apartment doesn’t have high quality appliances, an elegant facade, and a ‘block’ style roof-top common area, then it isn’t going to sell.

Labour accounts for 35% of overall construction costs on a large project. A 5% increase across all trades on an EBA site would account for an approximate 1.75% increase in the overall construction cost. In many cases material costs are flat, if not negative. Increases in quality have been offset by lower product prices or offshoring.

The scenario in many markets is that mid-large size projects, of the style and quality demanded, cannot be delivered at a price point sufficient for the projects to go ahead. This is causing some projects to be shelved or re-worked, or on sold.

For the first time in a long while, Contractors and Sub-contractors in this space are starting to feel that they have more work currently on their books than they do in the pipeline and are more keenly competing for new work. This has downward pressure on profit margins and ensures tenders are competitive.

It is important to understand that while the apartment market gets a lot of attention, it is only a sub section of the whole. The overall residential market – picking up low rise and sub-divisions – is buoyant. A number of Developers are shifting their focus to these markets and land banking apartment projects for the next cycle.

One of the most active sectors across Brisbane, Sydney, and Melbourne, are low-rise and townhouse projects outside of the CBD. Owner Builders in particular are revelling in this space and are capitalising on the reduced layer of margin.

Forecast Escalation for the 6 month period 1 July 2016-31st December 2016 is as follows: