Construction costs continue to rise in 2017: Colliers

Construction costs are expected to peak in September at 7.4 per cent a year.
DAVID WALKER/FAIRFAX NZ

Construction costs are expected to peak in September at 7.4 per cent a year.

Construction costs are expected to continue their steady ascent this year, creating major headaches for developers.

Construction costs for residential building rose by 6 per cent last year, well above the long-term average of 3.7 per cent, according to the capital goods price index.

Building costs in the commercial building sector rose 5.6 per cent last year, jumping more sharply in the December quarter. 

When costs rise, margins on fixed price projects get squeezed.
DAVID WHITE/FAIRFAX NZ

When costs rise, margins on fixed price projects get squeezed.

Property consultancy Colliers said anecdotally, developers were reporting much higher cost inflation on specific projects, particularly in Auckland or from specialist sub-contractors.

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However, there might be some relief in store, as the clamps go down on development finance.

Interest rates had already edged up over the last six months, and major contractors were being careful about what projects they committed to, Colliers researcher Leo Lee said.

So "capacity" - in terms of the ability to source the right staff and materials - would be "slightly less thinly spread" and the potential for further inflation could ease.

Lee said capacity pressures should not come as a surprise, considering that a record 72 cranes now dominate the Auckland skyline.

There were now 15 more cranes in the country than there were six months ago, and non-residential building consents in Auckland have reached a record high of $1.82 billion for the year to March.

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Research house NZIER is forecasting the rising cost of non-residential construction to peak at 7.4 per cent by September this year, before moderating to around 4 per cent by the end of next year.

When costs rose they cut into margins where maximum prices were fixed, Lee said.

"Fletcher Building's downgrade in earnings highlights the major issues the construction industry is facing." 

Inflation was on the way back up again, strengthening the Reserve Bank's case for raising interest rates "but the consensus is still for no increase this year, at least".

Nevertheless, with record low vacancy rates across all sectors in Auckland, the demand for construction is not expected to abate any time soon.

In the Auckland office market, tenant demand has reached an eight-year high, pushing up both the value of office buildings and rents.

Colliers predicts that Auckland office rents will rise between 1 per cent and 4 per cent every year for the next few years, a lower increase than in previous cycles.

Space-wise, Auckland metropolitan office space grew to over 1.7 million square metres last year, with only 106,000sqm of it still available.

Some 20,300sqm of new space has been built in the past year which will help avert a critical shortage of non-CBD office space.

But there was "still some way to go" before many buildings were finished.

Office vacancy rates in Auckland:

City fringe - 7 per cent

Auckland south - 7 per cent

Southern Corridor - 8 per cent

West Auckland - 6 per cent.

The North Shore - 4 per cent.

 - Stuff

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