Cost inflation impacting on development

Rising construction costs and capacity constraints are putting pressure on developers and, in turn, on supply, the latest Colliers market analysis says.

Wednesday, May 10th 2017, 1:00PM

by Miriam Bell

Colliers International have just released their monthly New Zealand Research Report and it predicts that construction costs for new residential and commercial buildings will continue to rise in 2017.

These increasing project costs, along with capacity constraints, will continue to create major headaches for developers – particularly Auckland commercial property developers.

And this puts pressure on supply at a time when an increase in supply is desperately needed across sectors.

Colliers International research manager Leo Lee said developers and consultants have reported higher than indexed cost inflation on some projects, particularly in Auckland.

The latest Capital Goods Price Index puts annual growth in commercial construction costs at 5.6%, which is higher than the 26 year average, and a sharp increase from the previous quarter, he said.

“Anecdotally, cost inflation has been higher than that. Developers and consultants have been reporting even greater cost inflation on specific projects, particularly in Auckland.

“Specialist sub-contractors in particular are driving cost inflation.”

However, the report also said that some relief is likely as development finance becomes more difficult and expensive to secure.

Lee said interest rates have been edging up as banks pass on the costs of their overseas borrowing.

“The increasing cost of finance will likely lead to the deferment of some projects. We’re already seeing major contractors becoming cautious about the projects they commit to.

“The upside is that capacity pressures will ease, leading to a potential easing of cost inflation.”

He added that record low vacancy rates across the office, retail and industrial sectors will continue to stimulate construction activity, again particularly in Auckland.

“We’ve already seen new non-residential building consents in Auckland reach a record high of $1.82 billion in the year to March.”

NZIER has forecast that non-residential construction cost inflation will peak at 7.4% by September, before easing back to 4% by the end of next year.

The report comes on the back of Colliers’ recent Auckland Residential Development Report which found that a record number of Auckland apartments will be completed over the next two years.

This was despite constraints on the sector, which included increasing building costs, construction industry capacity and a tight labour market.

At the time, Colliers International spokesperson Alan McMahon said it was a challenging time for residential development, but confidence within the sector remained high.

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