London has slipped to being the second most expensive city in the world in which to build, according to the latest Arcadis 2023 International Construction Costs (ICC) report.
According to the study of comparative construction costs across 100 global cities, the UK capital city was overtaken by Geneva, with New York coming third and San Francisco fourth.
A number of factors impacted costs including high levels of inflation, which continued to affect most cities in the report. As a result, many of the top 10 most expensive cities remained unchanged from last year, including hotspots such as Munich, Copenhagen, and Zurich.
Five of the top-10 were also cities with dollar denominated or dollar pegged currencies, including Hong Kong, while Boston and Philadelphia were new entrants thanks to a combination of dollar appreciation and the ongoing impact of local inflation.
According to the report, entitled New Horizons, European market costs were particularly impacted by the invasion of Ukraine over 2022, over and above the worldwide increase seen in energy costs, with the resulting disruption to local manufacturing supply chains and regional-specific energy markets adding 5-6% to the region’s inflation.
Despite these economic headwinds, including material price inflation reaching 30% in the middle of the year, the UK construction market remained resilient in 2022, with housing, industrial and infrastructure driving growth. While material price inflation looks on track to fall to 6% by mid-2023, however, labour shortages will continue to bite, with a market slowdown looming and challenges ahead for many in the sector.
The 2023 Arcadis ICC Index covers 100 of the world’s large cities across six continents. The cost comparison was developed covering 20 different building types, including residential, commercial, and public sector developments, and is based on a survey of construction costs, a review of market conditions and the professional judgement of Arcadis’ global team of experts. The calculations are based in USD and indexed against the price range for each building type relative to Amsterdam.
On the whole, cities in the UK and Ireland (UK&I) ranked highly for construction costs. All sat within the top 25 most expensive construction locations in the world, except Belfast which ranked 38th.
Improved building standards and low carbon building design were significant contributing factors on construction pricing in the UK. This was also true of the wider European market. Short term cost uplifts associated with upgraded specifications in both the UK and Europe ranged from 5-7% for new homes, and 7-10% for commercial buildings. However, with the need to mitigate against climate change and more stringent carbon reduction targets coming to the fore, sustainable buildings in prime locations were increasingly in high demand. This is resulting in the application of a ‘green premium’ when it comes to how the most sustainable assets are being valued.
This means it is critical for owners and investors to take a long-term view when prioritising expenditure in order to preserve value. It will be important to balance current asset, owner and occupier needs with the additional costs associated with, for example, complying with future energy performance and decarbonisation standards, and mitigating against the effect of climate change exposure. A ‘do nothing’ approach – although often perceived as lower cost and lower risk – has the potential to accelerate what Arcadis has termed the ‘obsolescence horizon’, driven by net-zero requirements.
Simon Rawlinson, head of research and strategic insight at Arcadis, says: “Inflation in the UK exceeded 10% during 2022, the highest level seen for decades. Despite market turbulence triggered by the Ukraine War and rapidly rising interest rates, demand for construction in the UK remained strong throughout 2022. We anticipate a small contraction in 2023 as residential markets slow in response to higher interest rates.”
Peter Hogg, UK cities director at Arcadis, adds: “Despite the relatively high construction costs seen over the year, the UK – and the London market in particular – remain really good places to invest and construct, offering the potential for strong long-term returns for investors. Competitive sustainability credentials make our capital a desirable city and continue to attract talent from across the globe.”
Most expensive cities to build in the UK and Ireland:
While London was obviously the most expensive city to build in the UK, Bristol was ranked the second most expensive and the 13th most expensive globally, just behind Oslo.
Manchester was the third most expensive city in the UK, and the 15th most expensive globally, behind Seattle. Dublin is the most expensive place to build in Ireland, ranked 16th globally and just ahead of Birmingham, which is the 17th most expensive city to build in the world, and more expensive than Los Angeles (18th), Tokyo (19th) and Las Vegas (20th).
