The global professional services firm’s International Construction Market Survey (ICMS) for 2023, looks at conditions across nine key UK city regions – London, Manchester, Edinburgh, Bristol, Leeds, Birmingham, Glasgow, Newcastle and Belfast.

London remains the most expensive UK city in which to build with an average cost of US$3,879 (£3,136) per m2. However, the capital has fallen down the global rankings and now lies outside of the report’s international top ten at 14th. This trend is reflected across the UK, with the next two most expensive UK markets, Manchester and Edinburgh, only ranked 30th and 32nd with average costs of US$3,097 (£2,504) and US$2,999 (£2,425) per m2 respectively.

UK markets have been overtaken by exceptional growth in secondary US cities such as Atlanta and Tampa, reflecting a strong US dollar and the impact of green subsidies in the States. Real estate activity in the US has been boosted by a series of policy initiatives designed to attract investment, including the Biden administration’s Inflation Reduction Act (IRA).

Conditions in the UK market nonetheless remain highly pressured, with average construction cost escalation of 9.4% over the nine markets during 2022. This rate of inflation is expected to cool to 3.6% in 2023 as pressure on supply chains ease and demand falls, with higher interest rates increasing the cost of borrowing to finance projects.

Cost inflation is being sustained by a persistent skills shortage which pushes up labour costs, with total construction employment in Q1 2023 contracting by 1.9% on the previous quarter. The UK is the fourth most expensive global region for construction labour, with average wages across the nine markets of US$45 (£36.50) per hour.

The UK market has also seen a ‘levelling up’ of inflation trends, with a relative slow-down in the capital matched by a growth in activity stretching capacity outside the capital. London’s 10% construction inflation in 2022 was matched in Newcastle, Manchester, and Bristol. Belfast outstripped London, with 11.0% inflation, and Leeds was not far behind on 9.5%.

The report points to pockets of strength and opportunity, with government spending, particularly on healthcare, education, and infrastructure, helping to secure the future pipeline of work and unlock opportunities for real estate development and growth. The report points to areas of improved productivity in response to the labour shortages, including through investment in centralised logistics and digitalisation.

Martin Sudweeks, UK managing director, cost management at Turner & Townsend, said: “Exceptional growth in US markets has seen a relative shift in the UK’s global ranking of the most expensive places to build. However, that shouldn’t be misinterpreted as a sign that the market has cooled. While the expectation is that the rate of cost inflation will ease in the next twelve months, the overall picture is one of high competition for labour and resources.

“Real estate clients need to be braced for high costs to be sustained for the foreseeable future, and plan accordingly. Staying close to the supply chain, monitoring vulnerabilities, and working on productivity will be essential to keep projects moving ahead.”