South China Morning Post, 21 Oct 2008
By Yvonne Liu
The rising trend in tender prices for construction in Hong Kong has come to an end and prices are expected to show a decline of up to 10 per cent by the end of the first quarter of next year due to the global financial crisis, construction consultants say.
In its latest quarterly industry survey, Rider Levett Bucknall, a property and construction consulting firm, reported an increase of 7.74 per cent in tender prices in the second quarter. That took annualised price increases to 22.71 per cent at the end of the quarter.
The firm noted that the 12-month growth rate was even faster than the 19 per cent rise recorded in the previous period of sustained increases in tender prices in 1997.
The present rise in prices, it said, was due mainly to a rapid increase in material costs such as steel reinforcement bars, while the rise in construction cost in 1997 was driven mainly by strong demand for new projects in the property market.
The combined result of the strong periods of cost growth meant that profit margins for contractors had shown no major improvement in the past few years, despite the improvement in the property market.
Yu Hon-Kong, a director at Rider Levett Bucknall, said tender prices were expected to have peaked in the third quarter, showing further quarter-on-quarter gains of some 3 per cent. But in the final quarter now underway, growth in tender prices appeared to have come to an end.
"Since August, the material price of steel bars has fallen from over HK$10,000 per tonne to around HK$7,000 per tonne last week. And the downward trend is expected to continue," he said. "The labour market has also been less tight than before."
Sentiment in the construction industry had been dented by the global financial crisis. "Many sub-contractors are now more willing to negotiate lower prices and main contractors are offering discounts to clients even after the issue of tenders," Mr Yu said.
A spokesman for Chun Wo Development Holdings echoed this comment. "In order to stay competitive, building contractors are tending to lower their prices, trying to minimise waste and integrate construction processes to maintain profit margins," she said.
Mr Yu said tender prices for projects awarded at the end of last month had dropped by "a few per cent, but a change in government policy may help to support the construction sector going forward".
A decision after the financial crisis of 1997-1998 to put many projects on hold was reversed in last week's policy address and the government now plans to proceed with 10 major infrastructure projects in the coming years.
Philco Wong Nay-Keung, chief operating officer and executive director of Gammon Construction, said he did not expect tender prices to drop significantly.
"The government will spend more than HK$250 billion on the projects, which will help to offset the negative impact from the financial crisis," he said.