High building costs cut both ways

Source : Business Times - 21 Oct 2008

Construction costs affect not just the immediate sectors but also Singapore’s competitive edge in attracting foreign investments

DEVELOPERS are still hurting - not so much from the credit crunch, but from escalating construction costs with no reprieve in sight.

Only last month, Real Estate Developers’ Association president Simon Cheong was reflecting on the cautious short-term outlook of developers due to the high building costs.

The problem has been plaguing the industry for some time now. Earlier in the year, it was serious enough for the government to shelve some $3 billion of public-sector projects to ease cost pressures on the private sector.

So far, the headline news is on the construction and property sector. But is that too narrow a view?

Surely, other sectors have not been spared. Especially manufacturing, where billions of dollars in investments are committed to plants and buildings? Many of these, especially those in the chemical and biomedical industries, are strategic investments with significant spin-offs. Have escalating construction costs stalled or killed some of these key projects?

The question raised concerns not only the immediate loss in vital investments and jobs but also, more importantly, Singapore’s competitive edge in attracting foreign investments in the long run.

The government remains upbeat. Trade and Industry Minister Lim Hng Kiang reported to Parliament in August that investment commitments for the year were still strong, adding that Singapore pulled in $12.9 billion of fixed asset investments and $4.8 billion of total business spending in the first six months of 2008.

Yet, there is no denying that the government has taken steps to ease the crunch in building resources that would push up construction costs. Delaying some of the huge public-sector projects is one big step. The government has also relaxed foreign-worker rules and stepped up worker training.

The manufacturing sector must have also felt the pain of soaring construction costs.

The Building and Construction Authority’s Tender Price Index for industrial developments jumped 30 per cent between 2005 and 2007. The upward trend is tipped to continue - the index for the first three months of 2008 rose 11 per cent year-on-year.

On the ground, some projects were said to have increased 20-80 per cent. The construction costs of one chemical plant project reportedly surged 60 per cent - from about $200 million to $320 million - while another mega-project saw its costs ballooned by 40 per cent to US$750 million.

Worldwide phenomenon When asked what impact the increasing building costs will have on investments, the Economic Development Board said that it was ‘constantly helping companies address their concerns when they have decided to invest in Singapore’. It acknowledged that the costs of building materials have gone up, but said that this was a worldwide phenomenon - and not unique to Singapore.

‘As each company’s needs are quite different, we will work with each of them to help make sure the projects get implemented successfully,’ the EDB added.

Still, the surge in construction costs has hit Singapore particularly hard - and highlighted the fact that investors have to cough out more money to put up a plant here than in neighbouring countries such as Thailand.

An independent study by property and construction consultancy Rider Levett Bucknal in July showed Singapore’s overall tender price index jumped 18.7 per cent in the past nine months - the highest among 34 global locations.

Davis Langdon & Seah International, a specialist in construction projects, reported that the construction costs of industrial standard factories in Singapore rose 33 per cent from a year ago in the first quarter of this year - the second highest compared to regional locations like Beijing, Guangzhou, Shanghai, Seoul and Kuala Lumpur.

With an open economy, Singapore is more vulnerable than many others to imported inflation. Yet, one can’t help wondering if we ourselves have contributed to the problem. With so many mega-construction projects in the pipeline, that’s bound to put extra strain on our limited resources.

Are we biting off more than we can chew?

The EDB has done a great job in drawing more and more investments to Singapore. Because of our labour shortage, EDB has concentrated on attracting investment projects that are capital intensive - in which construction accounts for a big chunk of total costs.

Perhaps the EDB has to be even more selective now in picking investment projects. Or, at least, it should ensure there are sufficient resources to support the projects before bringing them in.

Otherwise, Singapore’s high construction costs could scare away investments and drive them to cheaper locations.