Savills : How high will building costs go?

Since last year, we have been faced with material shortages and rising energy costs, which have led to higher building and construction costs in Europe compared with the historical average. As a result of the war in Ukraine and other geo-political events, these costs have increased rapidly in the recent weeks and contractors have seen their budgets overrun in a very short time period - in some cases even before start of construction.

Using the Netherlands as an example, by analysing data from Bouwkostenkompas we are expecting building costs could rise by 10-15 per cent this year. This is based on several assumptions. Looking at historical data, the average building costs index was approximately 3.1 per cent per year over the period 2000 - 2022, taking into account an increase of 70 index points over a period of 20 years.

Due to the high pressure on construction companies, combined with international supply problems and increasing energy prices, building costs have increased significantly faster in the last two years compared with the long-term average. In fact, the building costs index was approximately 6 per cent, measured from April 2021 - April 2022, taking into account an increase of 8 index points over the previous 12 months.

Following the Q1 2022 index figures, even prior to the Ukraine crisis, we were already facing an increase of 2.73 per cent in building costs. If we extrapolate these figures over the complete year of 2022, this will result in an increase of approximately 9 per cent for building costs.

However, the Q1 2022 data doesn't show the effects of the recent conflict yet. Once these events are taken into account, these figures will be even higher. The most recent price tenders have shown a considerate increase on current project tender/prices issued earlier in 2022.

Furthermore, construction companies are finding it harder to fix prices with suppliers. This is largely due to the (strongly) rising energy prices that affect the production and transport of materials, but also due to some companies stockpiling as much as possible to secure production with higher surrender charges for price increases.

To illustrate this point, European steel prices (HRC) continue to surge, adding pressure on construction company margins - and clients indirectly. Steel rose to €1,400 per tonne in March 2022, up from €460 per tonne in 2020. Rising energy prices and raw materials have forced mills to cut output, although economists expect prices will lower in H2 2022.

Currently, however, not only are prices increasing, but sourcing materials is becoming increasingly difficult, possibly pushing out project timeframes. Ultimately, developers are finding it difficult to agree fixed prices for new schemes up to the start of construction until project delivery.

Taking all of this into account, we believe the predicted 9 per cent increase of construction costs could increase by another 5-6 per cent, adding to a total increase of the aforementioned 15 per cent this year. However, as soon as the markets stabilise, production should return back to normal, meaning building prices will also fall again.

Further information

Contact Marc van Niekerken

Savills Consultancy