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Thursday, July 3, 2008

Builders face 20pc rise in costs

MALAYSIAN builders face a record 20 per cent increase in costs this year, which may prompt some of them to scrap projects, the nation’s largest surveyor said.

Average building costs rose 11 per cent in the first six months, with steel making up bulk of the increase, Loo Ming Chee, director of Davis Langdon & Seah (M) Sdn Bhd, said in an interview in Kuala Lumpur yesterday. Costs rose 12 per cent last year.

The increase is “unprecedented,” Loo said. “I’ve never seen anything like it in my 20 to 25 years of experience.”

Malaysian Prime Minister Datuk Seri Abdullah Ahmad Badawi in the past two months scrapped price controls on steel and cement and raised gasoline and power prices as record crude oil costs forced the government to cut subsidies. Tenders submitted this year show contractors expect steel prices to jump by as much as 50 per cent to RM4,800 (US$1,470) a ton from RM3,200, Loo said.

The government last month shelved at least US$1.1 billion in public works projects as soaring commodity prices forced it to spend more on food security.

UEM Group, the main contractor of a second bridge to the Malaysian island of Penang, said its costs may climb to more than RM5 billion (US$1.5 billion) from an estimated RM3.36 billion on higher raw material prices, Business Times reported today, citing the UEM managing director Ahmad Pardas Senin.

Slowing Growth

Malaysia’s central bank Governor Tan Sri Dr Zeti Akhtar Aziz said on June 29 soaring food and energy prices may hurt household spending and damp economic growth, slowing expansion in 2008 to below its March forecast.

The economy may grow between 4.5 per cent and 5 per cent this year, she said, citing “preliminary” estimates. The central bank in March forecast expansion of 5 per cent to 6 per cent.

The measures put many building contractors with no cost escalation clauses in their tender contracts in a bind, forcing them to pull out from projects, he said.

“Contractors are not taking the risk anymore” and would rather forfeit their 5 per cent performance bond in their contracts, said Loo. “Everyone has to face the reality” of higher costs.

Developers will also have little room to pass on the higher costs to consumers because rising food cost and inflationary pressures are eroding their incomes, Lee said.

Developers are “facing an economy with tightening disposable income and the possibility of an economic slump,” Davis Langdon said in its July quarterly newsletter. The “sector is now stuck in a proverbial no-man’s land.”

By Bloomberg

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