Why Financial Hubs Are The Costliest Cities For Construction

A construction cost report by Amsterdam-based global consulting company Arcadis showed New York, London and Hong Kong were the world's most-expensive cities for construction in the year 2015. The three cities saw "cost premiums of up to 60 per cent compared with many European cities". Now, what is common among the three cities?

The answer is that they are financial hubs that drive economic activity of their respective countries; it's obvious construction costs in these cities would be higher. Ever wondered why is that so, apart from the fact that real estate in these cities is high in demand, and that prices grow on a limited supply?

Sample this.

For developers, it is obvious that the construction cost they incur in developing property in Mumbai will be much higher than other cities of the country. For a start, land in the financial capital of India is far more expensive than other cities. Mumbai's geographical position does not allow it to grow beyond a point, making land even more scarce and expensive. However, even if major financial centres across the world do not have that restriction, there is only so much developable land.

Apart from the reasons obvious to the eye, what else jacks up construction costs in financial centres?

Large-scale projects

Financial hubs run for upgraded infrastructure. And, upgrading infrastructure is far more a difficult task than building a new one. Bring the Metro network in Mumbai, for instance, will be much more difficult than doing so in a smaller city. Making adjustments, as a matter of fact, in the existing infrastructure costs heavy.

The labour shortages

Financial districts depend on adjoining areas to fill up their labour demand. However, large-scale projects lead to labour shortage, further increasing construction costs. Referring to the construction industry of Hong Kong, the Arcadis report says: "High levels of public sector investment into the Metro system and the high-speed rail have created something of a labour shortage. Not only are these labour shortages pushing costs higher but they are also resulting in project delays." 

International investors

A healthy competition between global and local players is a must for cities to grow. However, the presence of international players and a cut-throat competition among developers leads to an increase in construction costs. 

All big and famous

While undertaking large-scale projects, a developer would want to employ only the best of the tools available in the market. For instance, authorities will only employ a renowned company to carry out airport development in large cities. This will lead to an obvious increase in construction costs. "There are inherent risks associated with using smaller firms, such as limited experience on mega projects and potential bankruptcy challenges,” says the report. 

Defying risk

Lately, project delays and other risks involving the real estate sector have led to developers investing into insurance. In New York, the report says, "rising insurance costs for builders have doubled in the last five years, reaching up to 10 per cent of the total construction value”. Same is true worldwide.