The process of developing real estate continues to be dynamic and complicated, involving elements such as market demand, land availability, financing, construction, management, and design. Two key elements that might impact both the profitability and viability of projects are inflation and construction expenses. Inflation is, by definition, the general upward trend in prices of goods and services over time. Contrarily, construction costs relate to the costs associated with starting and finishing a project. For developers, investors, and consumers in the Singapore real estate market, both inflation and building costs have significant effects.
In this article, we’ll examine how construction prices and inflation have affected Singapore’s real estate development industry. So, let’s get right into it.
Inflation in Singapore
Inflation is the general increase in the prices of goods and services over time. It erodes the purchasing power of money and affects the cost of living and doing business. Inflation can be measured by various indicators, such as the consumer price index (CPI), which tracks the changes in the prices of a basket of goods and services consumed by households, and the core inflation rate, which excludes the volatile components of accommodation and private transport costs.
According to the Monetary Authority of Singapore (MAS), Singapore’s annual inflation rate rose to 5.7% in April 2023, slightly up from March’s 11-month low and market estimates of 5.5%. This was mainly driven by higher inflation for transport, recreation & culture, and health care. The core inflation rate was unchanged at 5%, remaining at its lowest since July 2022.
The MAS projected that all-items inflation for 2023 will come in at 5.5% to 6.5%, compared with 6.1% in 2022. Over the same period, core inflation is expected to average 3.5% to 4.5%, compared with 4.1% in 2022. The MAS attributed the high inflation to several factors, such as:
- The increase in the goods and services tax (GST) from 7% to 9% came into effect in January 2023, which added about 1 percentage point to both headline and core inflation.
- The global supply chain disruptions caused by the Covid-19 pandemic led to higher costs of imported goods and raw materials.
- The strong demand for private transport due to social distancing measures and travel restrictions pushed up car prices and COE premiums.
- The low base effects from the previous year, when inflation was subdued due to the circuit breaker measures and weak economic activity.
Construction Costs in Singapore
Construction costs are the expenses incurred in building or renovating a property, such as materials, labor, equipment, design, supervision, taxes, and fees. Construction costs can vary depending on various factors, such as location, size, quality, complexity, design specifications, market conditions, and regulatory requirements.
According to the Building and Construction Authority (BCA), construction demand in Singapore is expected to be stable in 2023, with contracts worth $27 billion to $32 billion likely to be awarded. This is similar to contract sizes recorded in 2022 and 2021. The public sector is expected to contribute about 60% of the total construction demand this year, with projects such as BTO flats, MRT lines, and water treatment plants in the pipeline. The private sector is anticipated to reach $11 billion to $13 billion, comparable with 2022, with projects such as new condominiums and high-specification industrial buildings.
However, construction costs in Singapore are also facing upward pressure from various sources, such as:
- The record-high commodity prices in the global market, especially for steel, copper, cement, and timber. These commodities are essential inputs for construction activities and account for a significant share of construction costs.
- The labor shortage due to the Covid-19 border restrictions and foreign worker levies. This has resulted in higher wages and lower productivity for construction workers.
- The higher environmental standards and green building requirements are imposed by the government. These entail additional costs for adopting sustainable materials and technologies.
- The rising inflation rate that affects the general cost of living and doing business.
The BCA estimated that progress payments for work being done are projected to hit $30 billion to $33 billion this year, on par with the preliminary estimate of about $30.2 billion for 2022. This is due to a steady level of construction demand and some backlog of remaining workloads impacted by the Covid-19 pandemic.
Implications for Real Estate Development
The rising inflation and construction costs have significant implications for real estate development in Singapore. Some of the possible effects are:
- Higher development costs and lower profit margins for developers. Developers may have to incur higher expenses for acquiring land, materials, labor, and financing, which may erode their profitability and cash flow. They may also face higher risks of cost overruns and delays due to supply chain disruptions and labor shortages.
- Higher property prices and lower affordability for buyers. Developers may pass on some of the higher costs to buyers by raising property prices, which may affect the demand and affordability of properties. Buyers may also face higher mortgage payments and interest rates due to inflation.
- Higher rental rates and lower occupancy for landlords. Landlords may increase rental rates to cover their higher costs and maintain their returns, which may affect the attractiveness and occupancy of their properties. Tenants may seek cheaper or smaller alternatives or negotiate for lower rents or shorter leases.
- Higher quality and sustainability standards for properties. Developers may have to comply with stricter environmental and green building regulations, which may improve the quality and sustainability of their properties. They may also adopt more innovative and efficient methods of construction, such as prefabrication, modularization, and digitalization, to reduce costs and enhance productivity.
Coping with Inflation and Construction Costs in Real Estate Development
To overcome the challenges posed by inflation and construction costs, real estate developers in Singapore can:
- Reduce risk by diversifying your portfolio by making investments in a variety of real estate kinds, regions, and marketplaces.
- Adopt green building practices. To increase efficiency and lower running costs, utilize renewable energy sources, energy-efficient appliances, water-saving gadgets, waste management systems, and green construction materials. Participate in government incentives.
- Making use of technology Improve productivity, minimize errors, and cuts expenses by utilizing solutions like blockchain, AI, drones, sensors, and BIM. Utilize digital platforms to gain new clients and funding.
- Seek government assistance. Make use of government programs, guidelines, and subsidies for real estate projects that promote urban growth, innovation, and sustainability.
Two significant factors that influence Singaporean real estate development are inflation and construction prices. They have an effect on residential, commercial, and industrial real estate development in both positive and bad ways. To overcome these obstacles, real estate developers must employ a variety of tactics, including diversifying their holdings, implementing green construction techniques, utilizing technology, and requesting government assistance. By doing this, businesses may increase the viability, profitability, and competitiveness of their projects in the ever-changing real estate market.