By Gary Emmett, Construction Economist, Turner & Townsend
Retail construction is most active in emerging markets, and these are the areas experiencing the largest increases in construction costs. These include China, India, Middle East, Eastern Europe, Russia and South America.
Meanwhile the mature economies of Europe, North America and Japan are seeing much lower levels of development, with refurbishment of the stock of aging centers dominating the market. The mature economies’ lack of growth reflects shortages of new sites, lack of finance and growth of online retail. In the mature economies, construction costs are fairly stable at present, creating certainty of cost for those able to undertake new developments.
These are the conclusions from the International Construction Cost Survey 2013, scheduled to be published in October this year. This is an annual review of building costs, including materials and labor, in the countries where Turner & Townsend, a leading global program management and construction consultancy, has local teams. Some of the regional findings published in Retail Property Insights, the Journal of the International Council on Shopping Centers include:
After declining 6% and 7%, respectively, in 2011, both large and neighborhood shopping-center construction costs increased in 2012 and 2013 in the United States. Building costs per sq m) for 2013 range from $1,100 to $1,600 for neighborhood shopping centers (including supermarkets) and $1,600 to $2,500 for large shopping centers (including malls). In Canada, building costs per sq m run from C$1,900 to C$2,500 in 2013. Costs are high in some regions due to high levels of natural resource-related construction.
Retail-sector investment is low in Western Europe, reflecting the maturity of the shopping-center market in the region, and the weaker economy. Nevertheless, development has not completely dried up, with some large projects recently completed in Spain, France and Italy. Retail construction costs in Western Europe—including the United Kingdom, Germany and The Netherlands— increased between 1% and 3% in 2012 and are forecast to increase between 0% and 2% in 2013.
Construction costs are generally lower in Eastern Europe than Western Europe, but are rising due to high wage increases and general inflation resulting from its region’s growing economies. Retail construction costs increased by up to 4% in 2012. However, costs are rising off a low base in the region. Istanbul was the most active retail market in the region in 2012 with several new shopping centers built, followed closely by Moscow and St. Petersburg. Strong GDP growth per capita is forecast for the region, particularly for robust retail markets in Poland, Russia, Turkey, Ukraine and the Czech Republic.
Construction costs in the Middle East have increased between 2% and 3% since mid-2012 and are expected to increase more rapidly in the future due to a robust construction market. Abu Dhabi has replaced Dubai as the growth center for new retail, with nine schemes underway. Qatar, already with an extensive residential and gas-plant construction program, is now also preparing for the 2022 World Cup.
Construction activity in South Africa slowed after the country hosted the 2010 World Cup. Since then, high inflation has affected construction costs. Wages are low but rising causing construction costs to keep increasing. The region has well established suburban shopping centres.
The Indian economy is growing strongly, especially in Mumbai, Delhi, Chennai, Bangalore and Hyderabad. Incomes, the size of the middle class and demand for quality retail are all rising. India has one of the fastest-growing retail sectors outside China with up to 700,000 sq m under construction. Construction wages, like construction costs, are low in India, but they are increasing quickly.
Despite signs of slower growth, China has the largest pipeline of construction worldwide. Retail construction costs varied widely (CNY3,800-5,000 for neighborhood centers, CNY5,000-7,000 for large centers) in 2012 and are estimated to grow at approximately 5% for 2013. With little free space, Singaporean construction tends to be dominated by refurbishment and renovation. However, higher growth rates are being experienced in Malaysia and Vietnam.
Currently there are few new retail projects in Japan but refurbishment of aging centers continues. Construction costs are expensive but stable, with the falling currency offering more opportunities to overseas investors. A new policy, “Abenomics,” is designed to reflate the economy by quantitative easing, lowering the value of the currency, and boosting consumer spending. This should eventually provide more opportunity for retail growth.
An overvalued currency and high levels of construction in a booming natural-resources sector make Australia an expensive place to build (currently A$1,800-2,000 for neighborhood centers). Labor costs are some of the highest in the world (currently A$40-70).
Local conditions, material costs, and expenses associated with imported materials and equipment have resulted in construction costs—including for retail—rising markedly in emerging markets such as China, Eastern Europe and the Middle East. At the same time, cost increases in mature economies, such as North America, Europe and Japan, have remained mostly subdued in the aftermath of the GFC. This construction cost dichotomy is likely to persist in 2013 as large pockets of opportunity for retail development still exist around the globe.