LONDON: The most expensive construction location

• The UK’s public sector spending spree is slowing down, taking pressure off an overheated construction sector.
• Overall UK&I cities ranked highly; all sat within the top 25 in the world, except Belfast (28th)
• Although levels of inflation were moderate in the UK, specification enhancements related to building safety, sustainability and client expectation pushed prices up further than most other locations.
• Bristol entered the top 10 for the first time.

London has narrowly overtaken Geneva to top the rankings once again as the most expensive city in the world in which to build, according to the latest Arcadis 2024 International Construction Costs (ICC) report, released by the global design and engineering consultancy today.

According to the study of comparative construction costs across 100 global cities, enhanced specifications associated with safety and sustainability have been pushing prices upwards, causing London to overtake Geneva (2nd) in the rankings, closely followed by Zurich (3rd) and Munich (4th). Rising costs and double-digit price growth in Munich have propelled the Bavarian capital significantly up the rankings, this year surpassing major US cities like New York (5th) and San Francisco (6th) in terms of relative cost to build.

The 2024 Arcadis International Construction Costs Index covers 100 of the world’s large cities across six continents. The cost comparison was developed covering twenty different building types, including residential, commercial, and public sector developments, and is based on a survey of construction costs, a review of market conditions and the professional judgement of Arcadis’ global team of experts. The calculations are based in USD and indexed against the price range for each building type relative to Amsterdam.

2023 was a difficult year across the world, with high borrowing costs undercutting the positive impact of infrastructure investment in many countries. However, with markets stabilising and inflation beginning to ease, we are at a pivotal moment in the recovery of the global construction sector. Increasing demand for labor, materials, and power mean that productivity is now becoming an increasingly critical factor in investment decisions and project viability.

Arcadis notes in particular the rapid acceleration of investment into the advanced manufacturing and technology sector, including data centers, pharmaceutical facilities, gigafactories and wafer-fabs. The sheer scale and complexity of these end-date-critical projects inevitably results in more financial risk, meaning that clients need to evolve their design, procurement, and construction capabilities even as these multi-billion-dollar programs are being built.

On the whole, cities in the UK and Ireland (UK&I) ranked highly for construction costs. All sat within the top 25 most expensive construction locations in the world, except Belfast which ranked 28th. Although levels of inflation were moderate in the UK, specification enhancements related to building safety, sustainability and client expectation pushed prices up further than most other locations. Viability challenges have continued to affect projects, even as inflation has fallen.  New regulations focused on low carbon emissions and improved building safety also created uncertainty and added to project costs. Uncertainty could continue in 2024, given local, mayoral and national elections are due in the coming months.

Tight fiscal conditions will see increasing pressure on the public purse in 2024 and beyond, with real-terms cuts in government capital investment currently projected until 2029. Whilst optimism as measured by the construction PMI has improved, the legacy of a weak order book from 2023 will delay recovery until late 2024 before the positive sentiment is realised. The infrastructure sector looks set to offer the greatest future opportunity, particularly investment in networks including energy transition projects and a large-scale, £96 billion planned investment in the regulated water sector.  In both sectors, capacity constraints will contribute to higher inflation and may impact the ability to deliver all projects and programmes in the period.

Simon Rawlinson, Head of Research and Strategic Insight at Arcadis said:

“The UK’s reduced public sector spending has eased pressure on an overheated construction industry amid slow growth. With minimal GDP growth and high interest rates, the sector faces viability challenges due to regulatory and election uncertainties. As fiscal conditions tighten, private sector collaboration is crucial for investment and urban renewal. Despite challenges, infrastructure, particularly in energy transition and water projects, shows promise. The cancellation of later HS2 rail phases has led to transport spending disruptions and fund reallocation.”

Peter Hogg, UK Cities Director at Arcadis, added:

“London’s resurgence to the top spot in the ICC 100 index for 2024 reflects the capital’s resilience in the face of challenging conditions. Despite a 10% year-on-year decline in construction output and a significant 20% drop in housing, the Commercial sub-sector experienced a notable 24% rise, largely attributed to retrofit activity. However, the capital has faced declining orders for new work since 2022, exacerbated by high interest rates impacting scheme viability and regulatory changes causing design and planning delays and cost escalations.”

Source: Arcadis