London has the highest construction costs in Europe and the second highest in the world, a new study has revealed.
The findings from Arcadis’ annual International Construction Costs Index report show the cost of building in the capital in 2015 was on average 20 per cent higher than in Paris.
According to the AJ’s sister title Construction News, London was also found to be the second most expensive city for construction in the world, just behind New York in the analysis of 44 cities.
The study claimed that London faced severe market imbalance in construction with a combination of limited bidding resource and supplier opportunism contributing to cost increases.
This led to spiralling cost inflation, threatening the viability of London’s commercial and public sector schemes, according to Arcadis, and challenging its ability to respond to growth opportunities.
In total, Arcadis’ price inflation indices found that the cost of construction had increased by 18 per cent in the capital when compared with the 4th quarter of 2013.
The study found that rapid rises in labour costs and overheads had made it difficult for contractors to accurately predict prices for projects, particularly in the office and residential market.
This has had a trickle-down effect on the supply chain, according to Arcadis, with insolvencies among smaller companies increasing, a widespread rise in cashflow failures, and problem projects in the city damaging contractors’ profitability.
Despite these problems, the report said London remained attractive to overseas investors, who were now looking to invest in “lower-value” areas of the city that have greater potential to provide long-term profits.
Arcadis UK client development director Simon Light said: ’In London, the synchronised recovery is losing momentum.
’With inflated construction costs and high land values threatening the viability of commercial and residential development, workloads look to be losing steam even before the capital’s infrastructure boom really takes flight.
’Delayed investment decisions are reducing actual workload and we are seeing early signs of a return to reason in procurement. There is now much more focus on agreeing prices prior to starting on site, ensuring no loss of value should current construction volumes be maintained.
’We expect to see the rate of inflation fall to 4-5 per cent in London for 2016 and for a real opportunity to ‘reset the dial’ on projects coming forward in 2016 and 2017.’