Picture across the markets

Top nine cities globally

The past two years have seen market conditions change significantly. After an initial decline in project and fit-out activity during the pandemic and cash conservation phase, the investment appetite has started to recover as more corporate end users push ahead with their decision-making and investment in their capital plan and workplace strategies.

The following shows a the global of key cities that are strategically important to Shell. Our internal cost data shows how these compare against each other, with equal representation from Asia Oceania, EMEA and the Americas.

Figure 3: Corporate occupier fit-out cost summary (US$/m2)

Even though Canada contained the pandemic better, it saw its annual GDP fall recently, and further easing may continue in the next five years.

The election of President Biden has had major implications for the US economic strategy. The promise of a once-in-a- lifetime injection of funding to upgrade the nation’s aged infrastructure, as well as broadening the definition of infrastructure to include investments in broadband internet and electrifying transportation, looks set to lift construction activity, with potential positive spill-over effects on US neighbours.

Most Asian construction markets weathered COVID-19 relatively well and, on balance, are running warmer than the global average. Most cities had a warm or lukewarm construction market, with the current economic verve in both Hanoi and Ho Chi Minh City, coupled with China’s investment in the development of the Greater Bay Area as an international scientific and technological innovation centre, with heavy investment in Guangzhou and Shenzhen, leading to double digit rises in build costs in these locations.

Meanwhile, Singapore and Chennai (India) are cold after being hit disproportionately hard by COVID-19. Restrictions pushed Singapore’s activity down recently to a ten-year low. Chennai experienced unprecedented reverse migration during lockdown, disrupting project timelines. Positively, most markets are now warming with hints of faster growth than seen over the past two years.

COVID-19 disrupted construction markets in Africa more than elsewhere, leaving most markets running lukewarm or cold, and many observers expecting the continent to take at least two years to return to pre-pandemic levels of output. However, the more buoyant countries of those surveyed, Kigali (Rwanda), Kampala (Uganda), and Lagos (Nigeria), expect to gain momentum.

Inflationary pressures bite

Typically, higher price inflation occurs in hot or overheating markets. However, the unique situation that COVID-19 has presented has meant that higher inflation is being seen across the board, partly due to labour and supply constraints.

The uncertainty caused by COVID-19 saw many projects placed on hold and cancelled across the world, which quickly shrunk pipelines of work across many markets. With fewer projects underway, demand for construction resources declined and competition spiked, lowering prices.

One of the biggest impacts the COVID-19 pandemic has had on the construction industry, driving inflation, is its ripple effect across global supply chains. There are several contributing factors that are constraining global supply chains for building materials. When layered on top of one another, they are creating a ‘perfect storm’, causing considerable price spikes in some building materials.

We anticipate that production capacity will increase relatively quickly as staff return to work from furlough or part-time working arrangements and social distancing measures are eased. However, there is likely to be a degree of supply chain ‘scarring’ and it will take time to rebuild production capacity, especially to replace production facilities that have been closed down. With travel still restricted, countries relying on heavily migrant labour forces for their construction projects will continue to experience labour shortfalls as demand rises.

The next layer is the growing level of construction activity we are seeing in many markets, due to government stimulus and changed consumer preferences from the pandemic. The last layer is the surge in freight demand, driven by an increase in e-commerce and the restrictions on travel, which is resulting in significant global shipping delays.

Fluctuating exchange rates will also affect the cost of imported materials and equipment used in construction projects, which can significantly add to project costs. Where a local currency has depreciated against the currency of the supplier country, the cost to purchase these imports will be higher and will push up construction costs.

Materials: a global power shift

Material availability has undoubtedly recast the client and supplier dynamic and there is currently a shift in power from client to supplier in some markets.

Materials are no longer commodity products readily available on demand. There are fewer suppliers and manufacturing facilities in some countries than before the pandemic, prices are volatile, and delivery is not always guaranteed.

In this unpredictable market, clients like Shell are rapidly understanding how much their brand equity counts with suppliers in specific markets.

The most expensive global construction markets

Worth noting is the method we use to compare construction costs for the most expensive places to build is highly dependent on the exchange rate and is reflective of the costs at time of data collection in the first half of 2021. As all costs are converted into USD, the strength or weakness of a currency against the USD will have an impact on the average cost of the four building types and the overall ranking.

We have picked out the cities most relevant to Shell RE in the chart below.

Figure 4: Most expensive place to build (m2), average cost of four building types in USD (locations relevant to Shell)

Construction labour costs

These costs are the costs to the employer, not just the wage, which means that they include travel expenses, pension contributions, health insurance and any other benefits. In some cases, this can bump labour costs up substantially above the wage.

Evidently, there is still a significant disparity between construction wages around the world, and we isolated the key geographies below.

Consideration also needs to be given to education, skill level and productivity when comparing construction costs, as this can vary significantly between high-cost and low-cost labour markets. In high-cost markets closer attention is paid to labour productivity and will often have higher investment into labour- saving machinery. Whereas, in low-cost labour markets, cheap labour often means it is more cost effective and efficient to have more labour employed on a project.

Figure 5: Average hourly wage (USD) by region

Labour availability change over the coming two years

It is interesting to see that potential future shortages were more acute in developed markets, which could be considered as more mature than emerging markets. This is both in terms of economic development, but also in the age profile of employees.

The availability of labour is set to increase in the Middle East, Africa and parts of Asia, where current shortages exist, partially driven by intra-country migration. Existing shortages cover many types of trades, but many are general labourers and pressures may be alleviated once borders open further encouraging freedom of movement.

Figure 6: Labour availability change over the coming three years (locations relevant to Shell)