Coronavirus: Hong Kong Construction Costs Slip As Covid-19 Pandemic Stifles Activity, Putting Some Pressure On House Prices

Hong Kong dropped from third to eighth in a global construction costs index as building activity took a knock, potentially subduing new-home prices Building costs dropped by 3 to 4 per cent in the first quarter to an average of HK$4,200 to HK$5,000 per square foot, Arcadis says in report
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Coronavirus: Hong Kong Construction Costs Slip As Covid-19 Pandemic Stifles Activity, Putting Some Pressure On House Prices

Hong Kong's construction costs have dipped amid a drop in building activity during the pandemic, theoretically putting pressure on the prices of new homes, according to Arcadis, an Amsterdam-headquartered design and consultancy firm.

Hong Kong dropped from third to eighth position in Arcadis' 2021 International Construction Cost Index. It was the highest ranked Asian city, a couple of spots above Macau in 10th but a long way behind Geneva, Switzerland, which topped the table of 100 cities.

Hong Kong was second globally in the index in 2017 and took third place from 2018 to 2020.

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"The reduction of construction costs in Hong Kong reflects the improvement of efficiency in the construction industry by the adoption of innovative ways of working, and the reduction in [the] volume of works in the market," said Francis Au, growth director for Greater China at Arcadis.

Costs dropped by 3 per cent to 4 per cent year on year in the first quarter of 2021, according to the index, to an average of HK$4,200 to HK$5,000 per square foot. They are likely to remain stable in 2021, Au said, supported by rising material costs.

Development is a medium-term investment which usually takes four to five years to reach completion. Costs have come down by 13 per cent in the last five years, according to Au, and this is likely to be reflected to some extent in today's residential property prices.

"For Hong Kong, the construction cost represents 20 to 30 per cent of the selling price so a change of 5 per cent will theoretically have a 1 per cent to 2 per cent impact on the selling price," he said.

Hong Kong's construction industry slowed down drastically in 2020, and output continued to decline this year, as the economy faced the "interminable effects" of Covid-19, according to Arcadis. The pipeline of new work remains subdued because of both lower demand and the extended periods required to obtain permission to start work.

Overall, construction activity fell by 4.5 per cent during 2020, with the full impact of the contraction being cushioned by a 13 per cent increase in the value of public sector contracts, according to Arcadis. The lag from private investors is likely to create, at least temporarily, a deflationary landscape for construction in Hong Kong in 2021, it added.

"We believe most developers will plan for 10 to 15 per cent profit [margin] on gross development value," said Au. "If the profit is less than 10 per cent for a development, which usually takes four to five years, they may consider investing in something else."

The original cost of a plot of land accounts for the lion's share of a property's price.

In Kai Tak for example, land contributes 60 to 65 per cent of a flat's eventual price, while the construction cost including professional fees accounts for 20 to 22 per cent, according to Alex Leung, senior director at CHFT Advisory And Appraisal. Interest makes up 8 to 10 per cent and marketing costs might contribute around 6 per cent.

The land market started to recover from a correction when a plot at the site of Hong Kong's former international airport in December sold at tender for a price that was above the upper range of market expectations, said Leung. The recovery signal was further enhanced by the sales of two land parcels on The Peak in December and February.

Exchange rates were another factor in Hong Kong's drop in the Arcadis index, according to Au.

As local currencies of all the cities were converted to US dollars for comparison in the rankings, those using the American currency or pegged to it, such as New York City, San Francisco and Hong Kong, have a lower ranking this year, Au said. On top of that, the adoption of more stringent low carbon building standards in European cities had increased construction costs there, boosting their positions in the table.

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