Johannesburg is among five cities where construction costs are projected to go high over the next year; this is according to Turner & Townsend’s ‘International Construction Market Survey.
The survey further revealed that the cost of construction is set to rise about 7.5% over 2017/18, against a global average of 3.5%, building costs in the city could average at US$848.3/m2
“In the lukewarm Johannesburg construction market, there is still relatively high inflation (of approximately 6%), which leads to pressure to increase trade wages and higher material costs and plant equipment. The weaker rand adds to import costs, which pushed up the cost of construction by 5.3% in 2016,” the report read.
Markets are considered warmer as competition decreases and prices begin to rise. Hot and overheating markets have a higher number of projects and, consequently, there is less competition for tenders, which tends to drive up tender prices.
Normally, the markets described as hot and overheating can expect high construction cost inflation and those that are cold, lukewarm or warm should have low inflation but not always. In a cold market, the competition is intense among contractors for very little work, reducing cost pressures from previous levels.
“The construction sector has yet to recover to pre-2010 levels. Contractors continue to experience pressures on margins and a lack of liquidity. The office and industrial sectors are oversupplied and this casts doubt on the prospects for a pick-up in growth in these sectors this year,” the report stated.
Further, it highlighted that with the natural resources and mining sector still suffering from the effects of weaker commodity prices, there was a lack of confidence to develop new projects.
However, the survey noted that with the government still prioritizing on infrastructure and power transmission projects with major projects currently under consideration including extensions to the Lesotho Highlands Water Project, and the next phase of the Gautrain extension to Soweto, Mamelodi and the West Rand, as well as a recommitment by government for Eskom to buy renewable energy from independent producers, the sector should receive a boost.
Economic growth continues to be negatively impacted by political uncertainty, weak global demand and the downgrade to sub investment grade. The gradual improvement in the world economy and a projected recovery in commodity prices may support the economy in the year ahead.