Hong Kong property

Hong Kong’s high construction costs could keep rising on surge in government projects

PUBLISHED : Tuesday, 11 July, 2017, 6:30pm
UPDATED : Tuesday, 11 July, 2017, 7:58pm

Hong Kong’s notoriously high construction costs are expected to climb even higher, perhaps giving the city a new No 1 ranking over the next few years: the world’s most expensive place to get anything built.

But much depends on government projects and what chief executive Carrie Lam Cheng Yuet-ngor’s planned future infrastructure spending is likely to include.

High property prices are already a well-known fact of life in Hong Kong, but high construction costs can hit everyone, from government agencies and property buyers to proprietors doing renovations on a restaurant.

Hong Kong made headlines a few months ago when a report from Arcadis, a design and engineering firm, listed the city as Asia’s most expensive in terms of construction costs, and second only to New York globally.

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Anderson Chan, director at Rider Levet and Bucknall (RLB), a construction management consultancy, sees those costs continuing to rise in the next few years, vaulting Hong Kong to the number one spot globally.

Figures from Arcadis’ 2017 report indicate that the total construction cost of a high rise residential building in Hong Kong is on average about HK$26,000 per square metre of construction floor area, compared with HK$11,000 per square metre in Singapore.

One thing all sides agree on is the effect of the Hong Kong government’s infrastructure spending cycle on costs.

Overall construction costs closely track major spending splurges on infrastructure by the government. In 2007-8, the Hong Kong government committed itself to 10 major infrastructure projects, including the controversial Hong Kong-Zhuhai-Macau bridge, the Sha Tin-Central Link, Express Rail Link, the West Kowloon Development, among others. These were initiated just as construction costs in Hong Kong had seen a decline in the previous decade.

From 2005 to 2010, average total private and public construction expenditure in Hong Kong was HK$140 billion. In the subsequent five year period to 2015, the average was HK$187 billion, with most of the increase coming from government capital works expenditure, according to figures from the Construction Industry Council.

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Looking at tender price indices, Rider Levett Bucknall recorded a 62 per cent rise in tender prices submitted by construction companies from 2009-2016. Tender prices are those submitted by a contractor but not the actual price on completion.

Arcadis’ own tender price index tracked a near doubling of building costs from 2007 to 2016. At the same time, costs for materials have fluctuated, leaving only labour costs rising substantially in this time frame.

Most of these mega projects are now nearing completion, and as a result analysts expect to see a pause in rising construction costs over the next year or two.

Francis Au, head of Hong Kong and Macau for Arcadis, reckons 2017 should see overall costs fall by 2 per cent, while RLB’s Chan predicts that price gains over the next two years will be between zero and 2 per cent.

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Therefore, the prospect of costs rapidly rising again depends on whether the government launches another round of huge construction projects.

The Hong Kong government pays for infrastructure projects with its capital works fund, which receives money from land sales revenue.

In recent months, land sales have been seeing record highs as both mainland Chinese and local Hong Kong developers bid aggressively for prized plots, which in turns generates more money for continued infrastructure projects.

Chan says that as the current lull ends and contracts start coming online again, construction costs could continue to rise by 5 per cent per year. He also believes it is the capital works reserve fund that would be fueling these rises.

[Public and private construction projects] tap resources from the same market
John Kwong, head of the Project Cost Management Office

David Chan, executive director of Socam, the construction subsidiary of Shui On Group, says one reason for Singapore’s lower construction costs is “more regulated output than in Hong Kong”, adding that big swings in demand make Hong Kong’s industry “unhealthy”.

John Kwong, head of the government’s new Project Cost Management Office (PCMO), agrees that there is a link between government expenditure and rising costs. “[Public and private construction projects] tap resources from the same market,” he says.

That market is characterised by an ageing workforce and limited labour flexibility. Forty two per cent of Hong Kong’s total construction workforce of about 430,000 is aged 50 or over, according to Thomas Tse, chief executive of the Hong Kong Construction Association. Further, most frontline workers get paid on a daily basis and are unable to switch between jobs.

The politically sensitive issue of immigration is also part of the debate, with some in the industry saying more imported workers could relieve price pressure, as it has done in Singapore.

However, in the absence of progress on the immigration issue, developer Henderson Land and construction firm Gammon have both invested in automation and robotics to cut costs.

Fernando Cheung, a Labour Party Legco member, disagrees with the need for more imported workers, believing the real problem lies with multiple layers of subcontractors, which creates overlapping management and administration.

Gammon chief executive Thomas Ho estimates that of the 20,000 workers on Gammon construction sites, only 3,500 are Gammon employees, with the rest being contract workers. A Hong Kong Trade Development Council report on the industry said most of the city’s construction companies handle less than HK$10 million worth of work annually. Total expenditure on construction in Hong Kong was HK$237.5 billion for the 2015-2016 year, according to CIC.

Kwong of the PCMO also points to the deficiency in project management skills in the government – the last major training session for civil servants in construction project management was in 1993. He estimates that relatively poor project management skills could be adding 10 per cent or more to the cost of government projects.

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Although Kwong agrees that the number of subcontractors contributes to higher costs, he says sustained government spending will encourage large contractors to consolidate. The layers of subcontractors came about as large contractors shed full time employees to mitigate the financial risks of swings in the industry, he adds.

For legislator Cheung, a government push to approve more projects will once again place a huge strain on the workforce. Construction has already begun on the HK$141 billion airport expansion plan, while HK$200 billion has been set aside for building new hospitals.

Should the government start spending at even higher levels, the general public can expect the cost of building anything, from home renovations to a new office block, to climb even higher.