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Rising building costs to increase tenants’ rents?

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RISING building costs are likely to lead to further price increases for tenants, according to a report following last week’s news that many Islanders had already faced soaring rents over the past two years.

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New figures showed that average private rents increased by 7% last year, having already risen by 9% in 2018. And in a further blow to Islanders hoping to find their own accommodation, a report produced by commercial property agents D2 Real Estate has indicated that rising building costs – caused by labour shortages, rising material prices and the ‘overheated’ construction sector – could make matters worse for tenants and would-be homeowners.

The Channel Islands Annual Office Market review says that the past four years have seen ‘huge change’ in the Jersey property market as a number of large new office buildings have been completed, particularly in the Esplanade area, freeing up more than 200,000 square feet for conversion to residential use.

But it adds that building costs are increasing and could drive rents higher, with the development of large construction projects, like the future hospital, likely to ‘exacerbate the situation’.

‘[What is] becoming increasingly apparent is that building cost inflation is having an impact on rental levels,’ the report says.

‘There is constant pressure on developers for rents to keep pace with the inexorable rise of building cost inflation, testing a project’s viability.

‘There are also several major infrastructure projects on the horizon, such as the new hospital, that may exacerbate the situation.’

The most recent Business Tendency Survey produced by Statistics Jersey indicated that a large majority of construction firms had reported increases to their input costs, while a sizeable majority also reported tighter profit margins.

Stephen Regal, managing director of Regal Construction, said that the trend was down to increased material costs, as well as too much work going on in the sector with not enough labour available.

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‘Material costs are escalating at a significant rate – greater than that of inflation. I believe that this is a complex issue, part national and part industrial. We, the UK, are using more construction products,’ he said.

‘Raw material costs, particularly petrochemical products, are rising and other issues, such as utilities costs, have an impact upon production costs. All these issues arise and form the perfect storm of an overheated economy concerning the construction sector.’

He added: ‘As a result of the impact of government decisions trying to limit population growth here in Jersey, there is a dearth of skilled workers available, leading to inevitable wage-inflationary pressure.

‘Construction costs are rising more rapidly than is good for the economy. This effect is likely to become more apparent, particularly upon the larger infrastructure projects presently reaching fruition.’

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Nick Trower, head of agency at D2RE, also said that there were a number of factors driving up building costs in Jersey.

‘It is down to a mix of supply and demand issues, the pound being weak, the cost to transport materials to the Island and a shortage of labour,’ he said.

Dominique Caunce, communications manager for Andium Homes, said that the government-owned social housing provider would work to reduce build costs while ensuring ‘compliance with our requirements’ and ‘being to demonstrate value for money’.

‘Our rentals are assessed against market rates and reduced in line with the government policy,’ she said.

Meanwhile, Marc Burton, vice-chairman of the Jersey Construction Council, acknowledged that prices were rising in the building sector but said firms were trying to innovate to meet client needs.

‘The council is not aware of the detail that sits behind these figures but it does acknowledge that there are inflationary increases caused by global, national and local market forces,’ he said.

‘The industry is working hard with a range of stakeholders to enhance the access to careers in construction and therefore develop local talent, while looking at new innovative and modern methods of construction to meet our industries and clients future needs.’

Ian Heath

By Ian Heath
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