As China and India begin to join more established economies such as Hong Kong and Singapore as key markets, what implications does this have for construction, so often a trusted barometer of economic growth?

According to a recent piece of research by EC Harris, the cost of construction in Asian markets has risen more than in most Western ones over the past twelve months. Construction costs in major Western nations like the United States, Germany, France and Italy have shown almost no change since 2010 whilst in some of the more peripheral countries like Ireland, Spain and Greece there has been a marked decrease in the cost of building. For the same time period construction costs in several Asian markets including Hong Kong and Singapore have shown a clear pattern of cost increases. Since this time last year tender prices in Hong Kong have risen by 8-12 percent.

Several markets across the region including Hong Kong and Singapore have recently put in place cooling measures to help slow down property price inflation. However this is unlikely to prevent construction costs from rising on a near-term basis for several reasons:

1) Shortage of skilled labor: With growing demand in markets around the region, larger numbers of highly skilled construction workers are being incentivized to leave mature markets like Hong Kong in favor of other parts of the continent with better growth prospects. The construction industry has not attracted as many young people as in previous years, resulting in an aging workforce. As a result of these two factors, in places such as Hong Kong and Singapore, there is now a smaller pool of workers who are in a position to try and command higher wages.

2) Rising commodity prices: With commodities generally accounting for 10-20 percent of the cost of construction, this is an important factor to consider. As the price of steel, copper and other commodities moves closer to all-time highs and demand for commodities in the public and private markets increases, we expect contractors to pass on the increase rather than absorbing it as that would continue to erode their margins.

3) Increased demand: In 2010 work performed in the Hong Kong public sector increased by more than 50 percent. With similar appetite for growth across many other parts of Asia, this trend looks set to continue over the coming years and will mean that construction costs are likely to remain high.

4) Higher interest rates and faster inflation: These important macro-economic factors add to the list of reasons why construction costs continue to escalate more quickly in Asian markets. For example, in Hong Kong domestic inflation is currently running at 5.8 percent a year, which inevitably has an impact on labor costs as well.

As Asian economies have started to develop more quickly, there has been an increase in the level of local demand. For example, countries like China and India are no longer just producers and suppliers but are instead increasingly emerging as consumers of key goods, services and commodities.

Across Asia and particularly in Singapore and Hong Kong, the outlook for the workload in the private and public sectors is positive with significantly higher amounts of construction forecast than in the previous five years. There is a commitment to major infrastructure projects, and more development sites in the private sector are being commenced. As a result, we anticipate that construction prices will continue rising at similar levels in the next twelve months before levelling out in line with the construction workload.

The author is head of Cost and Commercial Management in Asia at EC Harris.