Developers face cost squeeze
Property developers face a double whammy this year of rising construction costs and falling revenue from the slowdown in property sales and drop in home prices.
'We're shocked after seeing the tender bids submitted by construction firms for our projects,' the head of the Hong Kong business unit at developer HKR International, Chan Chi-ming, said, citing an increase of almost 50 per cent on last year.
'The bids were around HK$3,000 per square foot for an average-quality project and we don't know how to redo our budget. Last year it cost around HK$2,000 to HK$2,100 per square foot - and we thought that was already quite expensive.'
Based on the tender bids HKR received, Chan said construction costs had now almost doubled from the HK$1,600 to HK$1,700 per square foot seen for medium-quality flats in 1997.
Measured by the tender price index published by surveying firm Davis Langdon & Seah, average construction costs for residential towers rose by 8 per cent in 2011 alone to HK$1,777 per square foot, excluding clubhouse.
Explaining the big difference between the costs Chan cites and the index figure, a former president of the quantity surveying division at the Institute of Surveyors, Antony Man Chi-chuen, said the latter was based on the average cost of building high-rise homes of all price ranges.
He blamed the big jump in tender bids received by HKR on the rising costs of labour and materials. About 200,000 construction workers have received pay rises of between 5.26 and 12.8 per cent since November.
'It is also driven by increases in materials prices,' Man said. 'The Hong Kong dollar is weakening against other currencies, pushing up import prices; and also since infrastructure projects are expected to increase, subcontractors are under no pressure to submit cheaper bids to win a project.
'Many developers were in a rush to have building plans approved by the Buildings Department last year to escape the government's new restrictions on inflated areas. Construction on those projects now needs to start by the fourth quarter of this year,' he said.
'At the same time infrastructure projects will continue to increase and, since we will see a lot of construction work up for tender at the year's end, this will lead to an increase in costs as there is a shortage of labour,' Man said. He expects construction costs to rise by a further 12 per cent this year.
The head of valuation and professional services at Knight Frank, Alnwick Chan Chi-hing, noted that construction costs typically accounted for 30 per cent of development costs, but in some cases could be higher.
HKR's Chan pointed to the example of a new flat at Tseung Kwan O built for about HK$3,000 per square foot which may sell for about HK$6,000 per square foot. That meant construction costs ate up half of revenue.
HKR managing director Victor Cha Mou-zing said the government should consider importing more workers to contain labour costs.
Knight Frank's Chan said the construction cost in reality was higher than the figures shown in the index.
'Homebuyers have higher expectations on the quality of flats,' he said. 'Developers cannot cut construction costs to save money. They will raise selling prices to cover the increase in construction costs. However, the question is whether they can realise higher prices under the uncertain market outlook.'
Developers with a good reputation for the quality of their buildings would be able to raise prices more easily, he said.
The amount by which former Institute of Surveyors president Antony Man expects construction costs to rise this year