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Construction materials’ cost up: Can UAE builders keep prices in check?

Construction materials’ cost is rising anywhere from 4% to 30% depending on item, according to real estate advisory firm Colliers Middle East.

Zawya reports that the cost of construction in the UAE won’t experience more than 1.8% jump in the next 12 months, quoting Colliers International.

It expected a continuation of strong competition between contractors who would absorb the cost increase, reduce profit margins and keep prices down.

“The report said that between the first quarters of 2017 and 2018, the average cost of construction materials increased by 3.1 percent, while overall construction costs increased in the range of 1.8 percent to 2.3 percent,” said Zawya.

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Costs vary per building type

Bob Flanagan, Colliers International’s managing director for project management and cost consultancy services, told Thomson Reuters Projects that a shell and core commercial office building that cost AED3,600 UAE ($980) per sqm to build in first quarter 2017, now AED3,665 ($1004) per sqm in Q1 2018 pricing.

Construction materials’ share in the total construction cost stands at 50% to 60%, he said, adding while “overheads, labour and contractors’ margin” are the other main influencing costs.”

Changes in material costs impact construction costs in relation to building types.

“For example, if there is a spike in the cost of concrete, this will affect the cost of a shell and core office building much greater than it will influence the cost of a five-star hotel,” Zawya reported Flanagan as saying.

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Rise in materials’ cost

Colliers said the industry has witnessed a notable upward movement in construction materials. There are many factors for this ascending trend, which include increased cost of production for locally manufactured materials, a recent drive by Chinese authorities to close down factories that do not conform to pollution control regulations, increased cost of materials imported from regions experiencing a growth in construction such as Europe, and world pricing for the likes of steel.

“Rebar is affected by world pricing and supplies from Turkey, Iran and China. The increase in diesel is due to the subsidy cuts by the government; and a major component of electrical cables, copper, rose by 27% between 2016 and 2017,” Flanagan said.

Image courtesy of Colliers

In January, Reuters reported that China, the world’s top steel maker, had cut 115 million tonnes of legal capacity and 120 million tonnes of illegal capacity since the start of 2016 as part of anti-pollution drive, helping drive up steel prices within the country and the world, Zawya reported.

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“For the average building, this material cost increase when comparing Q1 2017 to Q1 2018, is an add-on of 3.1%,” said Colliers.

On the bright side, in April of this year the World Bank has predicted that copper and crude oil pricing will remain relatively flat for the period between 2018 & 2019, with iron ore and aluminum prices decreasing by 6.3% & 3.4%, respectively, as reported by Colliers.

“With no major material inflation predicted, combined with another period of expected strong competition between contractors, it is forecasted that construction cost inflation will not exceed 1.8% for the next twelve months,” said Colliers.