Have you seen the mammoth Sheraton Huzhou hotel in China? The structure resembles that of a donut and is thus aptly called the ‘Donut Hotel’. The building was constructed in 2013 when China was riding the waves of the economic prosperity that the country had been blessed with over a period of almost 2 decades. Similar masterpieces are strewn around the country, starting from Guotai Art Center in Chongqing to the magnificent Ring of Life in Fushun.
There is no mistaking the link between a strong economy and a flourishing construction industry. It is a tricky balance to maintain because the slightest unease in the global market can cause serious repercussions for the construction industry. Case in point the global construction industry in 2016 when the recuperating world’s economy had been hit with the fluctuating commodity market prices.
Falling oil and steel prices were symptomatic of a faltering commodity market in 2016 when cheap Chinese steel flooded the market and production of oil far outstripped demand. The effect on the construction business was quick to follow. Singapore relies heavily on servicing the oil and gas industry and the falling income meant that construction industry felt a ‘cooling’ effect. The OPEC nations tried to handle the faltering prices but were not left unscathed.
Or take the example of demonetization in India which caused massive upheaval in the country and caused the economy to slow down. Such form of rash, self-inflicted actions can only be bad news for construction.
While it may be a long time coming, the global construction business got back its stride in 2017. The USA is enjoying rapid economic growth, European markets are catching up and China continues to surprise. This rising optimism and improved economic performance are what global construction requires to tackle the problem of an ever-evolving world.
CRUISING SPEED FOR THE CONSTRUCTION INDUSTRY
A decade after the global financial crisis, the world has finally reached cruising speed in 2019. Things are up for employment levels, profit rates for businesses and investment returns and inevitably for construction.
The U.S. is growing rapidly with its GDP escalated at an annual rate of 3.2% in the last quarter of 2017. Unemployment rates are plunging and business profits are soaring. While it may be hard to believe but President Trump’s move to deregulate certain industries and promises of a large infrastructure project (AKA ‘The Wall’ amongst other things) has created huge optimism in the construction business. Combine this with the tax cuts, people, mostly the upper income will be more eager to spend on construction.
Europe might still be playing catch up but the tide is definitely turning for EU. The EU economy grew at 2.6% in 2017, while countries such as Germany, Netherlands, France, and Italy were some of the strongest performers. Asia will also not be outdone, as countries such as China and India consistently report some of the highest growth rates in the world.
HEATMAP
A positive business environment supports evolution in the construction industry and promises more business for the sector. In other words, higher business profits mean greater investment, which in turn will lead to higher employment rates and an inevitable rise in demand for housing, hotels and commercial developments. It also means the government will now have the funds to boost infrastructure spending such as airports, roads, hospitals and so on.
Often times, the development level of a country is a good indicator of how well the local construction would be faring. Taylor and Townsend, a renowned construction company, have introduced the idea of the heatmap. This map rates the different markets of the world using a scale such as cold, lukewarm, warm, hot, and overheating.
A city is marked as cold when the economy is facing a slump and there is intense competition between the contractors and thus greater pressure to reduce prices. On the other hand, hot and overheating markets are those where the economy is flourishing and have huge projects but fewer competition. For instance, Seattle is said to be overheating. This is shown below.
Global political affairs continue to play a strong role in determining the state of the market. For instance, London has historically been a hot market. However, the fear of Brexit has made a dent in the construction business and cooled the market considerably to be labeled as lukewarm in 2017. A similar story is being played in the Middle East, where rising extremism and a hobbled oil market has reduced revenue for these oil producing giants. This has led to fewer expenditures in extravaganzas such as resorts and stadiums. And more concentration of funds to necessary housing needs such as flats, infrastructure spending and so on.
ALL THAT GLITTER COSTS MONEY
According to the Taylor and Townsend study the average construction cost in 2018 increased by 4.3% when compared to the previous year. This is accordance with the IMF predictions of higher growth rate in the global scenario. But why does construction cost rises hand in hand with the growth rate of a country?
The economies who enjoy high growth rate are those who are also likely to experience a warm or overheating construction market. This is an indication of higher demand for construction services with the same or limited resources available thus contractors are now in a favorable position to bid higher prices.
Deeper into the supply chain higher demand drives costs of materials, equipment, and labor. Skills shortages occur. Projects are undertaken by less skilled labor with less experience. This extends the project’s duration, leading to more rework and rectification and ultimately to higher costs.
The top 5 most expensive cities to be built in the world have been clustered in countries which have historically been the center of commercial activity.
For this article, six different types of buildings were assessed; Apartment high-rise, Office block prestige, Large warehouse distribution center, General hospital, Primary and secondary school and Shopping centers including a mall. It is, however, worth noting that the method used to compare the least and most expensive places to build is highly dependent on the exchange rate. A country with a weak currency against the USD will seem like an inexpensive place to build and a country with a strong exchange rate will seem expensive.
FEWER HANDS AVAILABLE TO BUILD A NATION
A significant factor influencing overall construction costs is the wages of labor, including additional expenses such as travel costs, national/health insurance, pensions, and other benefits of employment.
There is extreme variation in the wages of construction workers around the world. No longer having the cheapest labor, Chinese construction workers now average USD5 per hour. At the other extreme, workers in New York and Zurich are edging closer to USD100 per hour, compared to an average labor rate of USD28 per hour across all regions. While the lowest construction wages are in Africa and India where hourly wages can range from USD 1–3.
Typically, regions with the lowest-paid construction workers tend to have manually intensive methods of construction, whereas regions with more expensive labor look for labor-saving methods of automation to improve their productivity and limit the numbers of staff they have to employ.
In cheap labor countries, there is likely to be less automation because it is cheap and plentiful. Where labor is very expensive or scarce you can expect to see fewer workers on site and many tasks are carried out using labor-saving machinery. To gain a clearer picture of the cost of labor on a project, consideration should be given to productivity and how this affects the size of the project’s workforce and duration on site.
Nonetheless, one cannot deny that finding skilled man force is a tough job. Murray Rowden is the expert on infrastructure development and needs in America and he was quoted saying, ‘The infrastructure industry is under pressure to do more with less. There is huge competition for skills, an expectation of higher standards in delivery, growing sustainability objectives and increased levels of offsite construction.’
WATCH OUT! CHALLENGES AHEAD!
Construction Global, an online magazine, reports on the happenings of the global construction market around the world. They state that one of the most pressing issues that has been reported in almost all major markets of the world is the dire skill shortage.
One common thread around the world is that governments are investing heavily in projects to promote easier movement of people and reduce congestion. Road and rail are the top two spots in the list for growth sectors globally. A recent World Bank report stated: “Infrastructure development lies at the nexus of economic growth, productive investment, job creation, and poverty reduction.”
Taylor and Townsend report the same. They believe after analyzing, the challenges that local contractors face in delivering projects on time and on a budget at a profit, skills shortages remain firmly at the top of the list. The spread of greater opportunity, higher education, and loftier aspirations are making recruitment into construction harder. Of course, there isn’t a simple answer for the construction industry, but investing in more technology, technical skills, and training, and more advanced construction techniques are essential.
Directly linked to the skills shortage are two further key challenges: rising costs and stagnating productivity. This emphasizes the imperative to attract and retain top talent. Those firms that do invest in technology and talent are likely to be the strongest survivors when growth in the global economy softens again, as inevitably it will.
THAT’S SO TRENDY!
The results from the World Green Building Trends 2018 report has revealed that 47% of those surveyed expect the majority of their projects to be 60% environmentally friendly by 2021. The report, published by Dodge Data and Analytics, shows that the international market for green construction projects has grown significantly in the last ten years.
Demand for green building activity is poised to double in some regions, according to the information provided by approximately 2,000 construction industry professionals in over 80 countries that were surveyed for the report. The biggest reasons for green construction given were: client demands, environmental regulations, healthier buildings, and market demands. Respondents citing higher initial costs as a top obstacle dropped from 76% in 2012 to only 49% in 2018.
According to KHL Group, countries with the highest percentage of those in the construction industry doing a majority of green projects currently include; Australia (46%), China (Hong Kong) (42%) and Ireland (40%). Looking ahead to the future, countries with the highest percentage who expect to do a majority of their projects green by 2021 include the UAE (66%), Australia (64%), Norway (64%) and Spain (61%). Other countries with notable high levels of growth in this area include Mexico, India, and Colombia.
