Tender price inflation forecast
A cooling market leading to stagnating prices
With the German economy stagnating and the potential of a slight regression, it is expected that prices will follow suit. Rising expectations from clients that prices should be sinking, coupled with a diminishing number of available projects, leads to the expectation of price regression. However, due to rising labour costs, political instability and further supply chain challenges, we anticipate that tender price inflation might ease over 2024.
There has been a sharp decline in the number of construction permits issued over the last year. However, the total construction costs of these permits have declined at a much lesser rate. This means that although the total estimated costs of these permits have regressed, the average estimated cost per permit has increased. This suggests that prices are not dropping as expected (see Figure 9).
Figure 9:
Building permits issued in Germany by year
Source: Statistisches Bundesamt (Destatis)
Source: Destatis
Despite the number of projects and permits reducing, there are still pockets of growth, especially for the current industrial and infrastructure outlook. Data centre projects continue to boom and do not appear to be slowing anytime soon. The EU’s ongoing commitment to having an alternative to fossil fuels is also shown by the large clean energy infrastructure projects that are currently running, being tendered and in the pipeline.
The steeply rising construction costs that have impacted the construction industry over the past couple of years, appear to finally be reaching a plateau. However, the long-awaited and expected flatlining (and potential regression) of prices has not yet been seen. 2023 saw an average approximate rise of 4.0 percent in prices, although over 60 percent of this climb was seen in Q1 results and approximately 80 percent in the first half of the year. 2023 Q3 and Q4 hovered just above stagnation numbers with an approximate 0.4 percent rise in tender price inflation for each quarter.
Source: Destatis
Source: Destatis
It is evident that the material prices seem to finally have stabilised, and small regressions are starting to be seen. These regressions are not large enough to offset the rising labour costs, hence construction prices continuing to rise, albeit only slightly. Coupling the material price with a cooling market, 2024 may finally see some relief from the sharply rising prices that have been seen since the beginning of 2021.
Contractor expectations do not seem to share this outlook, as our Q1 2024 market survey found, contractors still expect a small rise in construction prices for 2024. The truth may lie somewhere in between client’s expectation for regression and contractor’s forecast for slight growth – with stagnation seeming to be the most viable possibility.
Source: Destatis
While stagnation and possibly even deflation is a very real possibility for 2024, clients and contractors need to be proactive in tackling cost pressures on a project-by-project basis, tailoring their approach to consider factors such as region, sector, project size, procurement route and market.
What does this mean for our forecasts?
We have slightly revised our central scenario down from our last market intelligence report, dropping our inflation expectation for 2024 and 2025. Our central forecast estimates that construction tender price escalation will slightly increase, by one percent, in 2024 on average. We are forecasting the construction tender price escalation to slightly increase to two to three percent in 2025 and 2026, respectively, which is expected to continue to hold steady for the next couple of years.
Figure 14:
Tender price inflation in Germany: forecasted annual percentage changes
Source: Turner & Townsend data forecast
Our forecasts are representative for Germany as a whole and escalation may vary by project size, value, procurement route and region. Projects need to be assessed on an individual basis and may not always align to our central scenarios. For further assistance on cost assurance and inflation analysis in your area, please contact Turner & Townsend.
Although our central construction forecast does not suggest that construction deflation will occur for now, it is a very real prospect and prices could potentially fall, depending on the project pipeline and investment confidence, in 2024. Germany’s economic performance, and the construction industry’s resilience to a weakening of the current activity, will play a heavy part in pricing moving forwards.
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