Finance

How building material prices influence property value

Building material prices have remained more or less steady with minor fluctuations over the last six months. Dubai’s construction sector could push prices for construction materials and labor higher over the coming years. It is therefore very important to buy the right building materials at the right price.

aBuilding materials are one of the main direct cost components of any project and any fluctuation will affect the building cost of the projects. Building materials represent about 40-50 per cent of the overall construction of a project, depending on its nature, usage and size. While one has to source the best quality materials from the market, one has to also look at the best prices.

The value of GCC projects bounced back in 2013 from a four year slump reaching US$156.3 billion, up by roughly 31 per cent year-on-year, according to reports. Construction, primarily comprised of commercial, residential and mixed use buildings, accounting for 41.4 per cent of total projects, reached almost US$65 billion of awards in 2013.

The construction sector is the fifth largest sector in Dubai’s economy, recording a share of 8.4 per cent of total GDP in Q1 2014, up by 20.2 per cent quarter-on-quarter and 2.3 per cent year-on-year, according to a latest report by Dubai Chamber. We expect construction growth to have accelerated during the course of 2014 as new projects broke ground.

Total trade in construction materials reached Dh19.4 billion in Q1 2014, up by 5.4 per cent year-on-year, accounting for almost 6 per cent of Dubai’s non-oil trade. Dubai’s construction trade should be further boosted as Dubai’s foreign trade is expected to reach Dh4 trillion as we approach 2020 from Dh1.3 trillion in 2013.

The cost of Dubai’s major construction materials groups rose marginally to 97.2 points in Q2 2014, according to the Dubai Chamber of Commerce and Industry (DCCI). Dubai’s rapid construction growth could push prices for construction materials and labor higher over the next few years.

Dubai’s rapid construction growth could push prices for construction materials and labor higher over the coming years.

Of the 16 major construction materials groups, 6 groups showed price increases, 8 posted price decreases and the remaining 2 exhibited relative price stability.  The biggest price increase was noted for the group of marble and stones for a fourth consecutive quarter, up by 17.6 per cent year-on-year in Q2 2014, probably reflecting the overall expansion of Dubai’s luxury construction sub- sectors.

It is therefore, very important to buy the right building materials at the right price. The initial economic cost of building materials lies in the purchase price. This is what often governs decision making about what materials to use in construction.

When it comes to materials trading, a trader makes money both ways – while buying and during selling. Similarly, a contractor could gain financially by squeezing the supplier on pricing. If he could get them cheap from the building materials supplier, he could make extra money from the overall construction project.

That’s why contractors spend a lot of time and resources in sourcing quality building materials from larger players who could give them the best price.

Sometimes people take into consideration the energy savings or durability of the materials and see the value of paying a higher initial cost in return for a lower lifetime cost. For example, an asphalt shingle roof costs less than a metal roof to install, but the metal roof will last longer so the lifetime cost is less per year.

Risks when considering lifetime cost of a material is if the building is damaged by fire or wind, or if the material is not as durable as advertised. The cost of materials should be taken into consideration to bear the risk to buy combustive materials to enlarge the lifetime. It is said that ‘if it must be done, it must be done well’.c

In terms of logistics, it is also important that the materials are supplied well in time for the contractor to utilise them. If materials arrive late – while workers wait – contractors have to count additional costs for lost time. Therefore, the professionalism and integrity of the building materials supplier is very important in the overall construction supply chain management.

The big contractors have established supplier database and existing relationships with major building materials suppliers. In order to keep the cost under control, larger contractors usually source major items – such as cement and steel re-bars from the manufacturers directly at the factory price. This way, they cut the middlemen – such as the traders and the wholesalers. This way, they also guard their businesses from potential price fluctuation in the international markets.

Some are also involved in materials price hedging – fixing price at a certain level for a certain period to offset potential losses in case price increases. In any case, price fluctuation affects the
cost of construction.

To put it in a layman’s term – if building materials price increases by 10 per cent – it wipes out a contractor’s profit, who might be constructing a project with just 5 per cent profit margin. Building materials price appreciation during a project execution could be a contractor’s worst nightmare. He needs to safeguard himself against such inflationary pressures.

Sometimes contractors make provisions of revising the contract value based on the construction materials price fluctuations. However, in most cases, they take into account the building materials price increase in their bid or quote amount – to guard themselves from potential inflationary pressure.

The building materials prices over the last six months have remained more or less steady with very minor fluctuations. Due to reduced demand during the Ramadan and the festivities and summer holidays etc, the demand in general was less so there was indeed a little drop in prices of certain items. But increase in freight rates countered/offset this.

Due to very low global demand and excessive supplies, steel prices in China fell steeply. However, due to shortages in raw materials wood based items prices remained constant. As all holidays are over, traditionally, the next six months will be very active for the construction sector in the entire region.

All the buyers are back to their regular buying. This has already started putting lot of pressure on the prices and the expected increase in shipping cost, means that the prices in the coming days will increase considerably.

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