..Despite London Pushed Out Of Most Expensive Cities For Construction

• Persistent skills shortages maintain high construction costs across UK cities, although rate of inflation set to lessen through 2023

• With an average build cost of US$3,879 per m2, London falls out of top ten most expensive cities, following exceptional rise in US markets

• UK seeing a ‘levelling up' of inflation trends as Newcastle, Manchester, Bristol and Belfast match or exceed the 10 percent rate in London

Turner & Townsend has warned of sustained pressure on UK real estate construction for the next twelve months, as the industry faces a combination of pressures from ongoing inflation, an acute skills shortage, and high interest rates.

The global professional services firm's International Construction Market Survey (ICMS) for 2023, looks conditions across nine key UK city regions – London, Manchester, Edinburgh, Bristol, Leeds, Birmingham, Glasgow, Newcastle and Belfast.

London remains the most expensive UK city in which to build with an average cost of US$3,879 (£3,136) per m2. However, the capital has fallen down the global rankings and now lies outside of the report's international top ten at 14^th. This trend is reflected across the UK, with the next two most expensive UK markets, Manchester and Edinburgh, only ranked 30^th and 32^nd with average costs of US$3,097 (£2,504) and US$2,999 (£2,425) per m2 respectively.

UK markets have been overtaken by exceptional growth in secondary US cities such as Atlanta and Tampa, reflecting a strong US dollar and the impact of green subsidies in the States. Real estate activity in the US has been boosted by a series of policy initiatives designed to attract investment, including the Biden administration's Inflation Reduction Act (IRA).

Conditions in the UK market nonetheless remain highly pressured, with average construction cost escalation of 9.4 per cent over the nine markets during 2022. This rate of inflation is expected to cool to 3.6 percent in 2023 as pressure on supply chains ease and demand falls, with higher interest rates increasing the cost of borrowing to finance projects.

Cost inflation is being sustained by a persistent skills shortage which pushes up labour costs, with total construction employment in Q1 2023 contracting by 1.9 percent on the previous quarter. The UK is the fourth most expensive global region for construction labour, with average wages across the nine markets of US$45 (£36.50) per hour.

The UK market has also seen a ‘levelling up' of inflation trends, with a relative slow-down in the capital matched by a growth in activity stretching capacity outside the capital. London's 10 percent construction inflation in 2022 was matched in Newcastle, Manchester, and Bristol. Belfast outstripped London, with 11.0 percent inflation, and Leeds was not far behind on 9.5 percent.

The report points to pockets of strength and opportunity, with government spending, particularly on healthcare, education, and infrastructure, helping to secure the future pipeline of work and unlock opportunities for real estate development and growth. The report points to areas of improved productivity in response to the labour shortages, including through investment in centralised logistics and digitalisation.

Martin Sudweeks, UK Managing Director, Cost Management at Turner & Townsend, said:

"Exceptional growth in US markets has seen a relative shift in the UK's global ranking of the most expensive places to build. However, that shouldn't be misinterpreted as a sign that the market has cooled. While the expectation is that the rate of cost inflation will ease in the next twelve months, the overall picture is one of high competition for labour and resources.

"Real estate clients need to be braced for high costs to be sustained for the foreseeable future, and plan accordingly. Staying close to the supply chain, monitoring vulnerabilities, and working on productivity will be essential to keep projects moving ahead."