• Novinky
  • 6. dubna 2020
  • Praha (ČR)

ICC 2020: Where do we stand in the Czech republic

Praha (ČR) - Construction costs in the Czech republic in detail

CHALLENGES WE HAVE BEEN FACING

Right now, we are focusing our wider response on the ability of clients and their project teams to mitigate both the immediate and medium-term effects of the pandemic. Project-based industries like construction will be severely damaged unless collective steps are taken to manage supply-chain continuity and resilience. From protecting the health of the workforce to the effective management of force majeure claims to the safe mothballing and restarting of sites, we all must work together to preserve industry capacity for the very real challenges ahead.

2020 needed to be a breakthrough year for construction and carbon reduction. Now there is a very real risk that progress will stall. As we struggle to keep the industry afloat in the face of COVID-19, we must also ensure that we are ready to play our part in confronting the climate crisis.

Everyone who builds, owns, operates or refits an asset has a stake in the problem and a responsibility to address it. Just as with COVID-19, the cost of inaction is too risky. And just like we are reconsidering our priorities in light of this pandemic, we should be rethinking and broadening resilience both in the short and long term.

In this year’s report, Arcadis is dealing with twin challenges: addressing the short-term crisis of COVID-19 and the longer-term, but equally urgent, impacts of climate change.


COVID-19

Arcadis’ annual International Construction Costs Comparison is based on industry-leading market knowledge. In addition to providing a comparative index of global construction costs, this report also focuses on emerging trends associated with climate change, highlighting work being done in many markets to reduce the environmental impacts of construction.

Even with the enormous stimulus measures unveiled by many governments, bodies like the International Monetary Fund have warned about the risk of global recession in 2020, with the pace of recovery being determined by the speed at which the spread of the virus is stopped and the resilience of industries during these troublesome times.

This is because there are two main ways in which COVID-19 could affect construction activity. The first is a supply shock. This is the result of companies not being able to source materials and labor. The construction industry is less reliant on global supply chains than other industries, but some projects will be exposed to sourcing delays – potentially related to long lead-in items including curtain wall or plant. Projects could also be subject to shutdowns as a result of public health protocols being put in place, as well as decisions by people to avoid worksites for fear of contracting the virus.

 

If such disruptions occur, they will delay the delivery of assets and potentially create cashflow issues for the industry. An increase in insolvency cases and disputes is very likely to affect the industry. Delayed projects will eventually be completed, but a sharp drop in demand, caused by a recession, is a much greater risk. At the time of writing, this risk is increasing. Governments will have a key role in maintaining demand levels in the first stages of recovery, as the Chinese government did with its infrastructure stimulus program during the Great Recession, which began in 2007.

  

GLOBAL CONSTRUCTION SLOWING DOWN

Looking back to 2019, many construction markets had a disappointing year, after a strong 2018. While very few countries saw a fall in construction output, the growth rate across many construction markets was weak. In Europe, this was the result of a slowdown in housing markets as well as a broader decline in commercial investment.

Many markets in Asia were able to switch the focus of investment to infrastructure and affordable housing. This switch was harder to achieve in western markets, including Europe, where a long-promised increase in infrastructure investment has still not materialized.

Even before the COVID-19 threat emerged, economic conditions looked uncertain. Monetary policy, particularly interest rate cuts in the US and the resumption of quantitative easing in many markets, had stabilized what appeared to be a gathering global slowdown. This background weakness suggests that the recovery from the pandemic will require further stimulus on top of the emergency economic measures being put in place from March 2020 onwards.

One of the consequences of the 2019 slowdown and the coronavirus is that some of this economic stimulus will automatically come into play. In addition to the support from Central Banks and governments, investors fleeing to safety have driven bond yields and borrowing costs to new lows. Furthermore, in early March, oil prices were down over 50%, compared to peak prices seen in 2019. Copper prices have also fallen by over 10% since the beginning of the 2020. Lower commodity prices combined with lower financing costs will be positive for both public and private investors focused on the delivery of long-term programs rather than one-off assets.

For the global construction industry, this all means that 2020 is the year in which construction clients and their project teams need to try to see through the huge turbulence of current markets to focus on longer-term opportunities ahead.

Drivers behind movements in the index this year include a reappraisal of cost levels in some markets as well as the well-known relationships between costs, currency and inflation. Multiple factors influence a city’s position in the index. The main factor is the level of specification and quality, which can vary over time.

Productivity is also an important consideration. Continental Europe has a very productive construction sector, which benefits from a focus on high levels of mechanization and the use of simple, effective construction techniques.

Finally, currency fluctuation and annual inflation will always play a role in determining the relative position of cities. Given recent dramatic changes in the value of global currencies, clients are advised to review currency movement before applying the published factors. Currencies were set on 13 February 2020, before the broader implications of COVID-19 were evident.

 

TOWARDS SUSTAINABILITY - TACKLING CLIMATE CHANGE

With the global disruption of the COVID-19 pandemic, there is a real risk that the momentum towards climate action will be lost. Environmental awareness and the need for collective action must remain at the top of the agenda, alongside the recognition that time is running out.

It has long been recognized that buildings and infrastructure are the single, largest contributor of total global, energy-related CO2 emissions, responsible for nearly 40% in 2018. Despite great improvements in the energy efficiency of buildings around the world, the sheer increase in floorspace required to house growing urban populations means that building-related emissions are growing rather than shrinking.

Furthermore, the 11% of embodied carbon emissions related to construction activity including materials production are particularly difficult to eliminate, given the energy-intensive processes associated with manufacturing metals, cement and other critical materials.

In 2020, there are positive signs that the construction industry is responding. Regulations in Europe for example are on course to mandate near zero-energy buildings (nZEB) this year. However, wider decarbonization, particularly the elimination of embodied carbon is not yet being adopted widely.  
It will only be possible for the construction industry to play its part in meeting the Paris goals if firms continue to chart a course toward a carbon neutral future, even as they implement their post-pandemic resilience plans.

And there are of many compelling reasons for the industry to accelerate its path towards decarbonization as part of the recovery. 

The most important is the sustainability of the business model. If it is unlikely for a business to be allowed to be a big carbon emitter in 10 years’ time, then businesses that change, secure a sustainable future. This is the opportunity that the automotive industry is already pursuing.

The second issue is finance. Banks, pension funds and other institutions are increasingly concerned that their long-term investments and loans are at risk of accelerated obsolescence as a result of climate change. Projects that are near carbon-neutral will be increasingly more attractive to investors.

Public opinion and consumer sentiment are equally important. Many consumers are already showing a strong preference for low carbon businesses and products. In particular, younger generations are demanding that companies take steps to address climate change and other critical issues. They are the decision makers of tomorrow and they will reward businesses that have gone carbon neutral and avoid the ones that have not. 

Finally, the backstop provided by regulation is also changing rapidly. In June 2019, the UK became the first country to set a legally binding net-zero target for 2050. This step is already affecting UK infrastructure programs. Furthermore, the 196 countries that signed the Paris Climate Agreement should be updating their Nationally Determined Contributions (NDCs) during 2020. It is likely that more national construction industries will be brought within the scope of GHG emissions reductions. Tougher NDCs will be reflected in more ambitious regulations such as the zNEB requirement being adopted across Europe from 2020 onwards.

„COVID-19 may cause delay, but all of these trends are moving inexorably towards the establishment of a carbon neutral global economy.“

The main reason is that global construction output has never been higher. With each new building adding both embodied and operational carbon emissions, future projects will need to be even more carbon efficient. Even though building standards have improved a great deal and many high-performing projects are being delivered, there are simply not enough of the best projects to make a difference. Globally, the whole industry, from client and financier, through consultant team and contractor to resident or occupier needs to change fast. Like the European automotive industry that is having to transform its entire product range to EV by 2035-2040, the construction industry faces fundamental change.

Matters are more challenging in this sector because the construction industry has historically operated with a short-term focus. Asset performance typically improves when regulations or standards mandate action or where markets are providing a specific signal, such as the market premium that can be secured for high-rated BREEAM or LEED buildings. The temptation to stick to a short-term focus on survival will be strong post COVID-19. However, the industry must adopt a long-term perspective in order to achieve net-zero carbon.

To maximize the chances for a successful carbon challenge response, there needs to a move to broader metrics of financial, environment and social returns. It will require all parts of the industry to become more productive, delivering projects with greater levels of cost and program certainty. Investment will depend on all companies being more stable and profitable, to enable a longer-term view to prepare for the transition to the carbon neutral economy.

 Given that the structure and fabric of most buildings exceeds 50 years, specifying to older standards poses a significant risk of obsolescence to asset owners and operators. Similarly, owners increasingly need to think about how their asset will be repurposed to extend its life as well as how the asset can be dismantled at end-of life – minimizing emissions throughout the asset life cycle.

So far, the construction sector’s response to the climate crisis has been inadequate.  A further delay following the coronavirus could make things much worse.

First, they need to adopt smart ways to increase productivity and control costs to create the profits and headroom to invest in sustainability measures and solutions. Second, clients and their teams need to adopt a broader recognition of value, going beyond capital costs and financial returns 

Decision makers will need access to much more information about the carbon performance of their projects and what that can mean, in the long term, for the asset, business operations and their people. This will create further challenges for the industry, with respect to performance management and data reporting.

Third, construction companies need assurances that their investments in carbon reducing solutions are deliverable without additional risk and that they will yield the promised lifetime net-zero carbon results. In particular, early adopters need solutions in which they can invest with confidence. This will require further innovation in procurement to share risk and to incentivize collaboration.

 

CZECH REPUBLIC IN DETAIL

In 2019, the GDP growth in the Czech Republic was 2.5%. Interest rates were increased by 0.25%, in order to reduce inflation, which is currently 3.5%. The construction industry grew by 2.3%, the third consecutive year of growth. This is significantly lower than the industry’s 8.4% growth in 2018. The number of building permit requests was rising, with growth coming in particular from the affordable housing sector. The European Union is set to reduce funding to the country for infrastructure projects, a move that may further hamper longer-term growth prospects. Progress towards meeting EU sustainability standards has been continuous and started in 2013, from 2020 onwards, every new building construction permit must demonstrate compliance with near-zero energy building standards (which corresponds to Energy Performance Certificate rating B and sometimes C, while A rating in most cases corresponds to Passive house standard). BREEAM and LEED building certificate applications are also on the rise, among industrial and commercial asset owners.

After the financial crisis in 2009, construction has been gradually growing since 2012 and the growth has been even accelerating since 2015. The private sector more or less follows the rest of the economy, while the public sector has greater inertia. The private sector is also undoubtedly more influenced by the legislative changes in the construction industry and by the development lobby.

Construction costs generally consist of material costs, labour costs, machinery equipment, and its operation and overheads, and all these components have been steadily increasing for the past few years, some of them in abrupt steps. Growth in recent years has been driven mainly by the growth of wages and sustained growth in material costs, due to the global boom. Another factor is the limited capacity of construction companies and the occasionally limited capacity of construction materials production. Greater growth in construction costs in Central and Eastern Europe than in Western Europe was driven by greater growth of labour costs.


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