Cost Management Report, January-March 2020

The January 2020 issue has been published.
"Private construction investment decreased in 2020 (compared to last year)."
"Intensified price competition has led to a gradual decline in construction prices."

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The “Cost Management Report” (quarterly) provides an overview of domestic and international economic conditions and, drawing on a wealth of cost data derived from our track record as the leading architectural firm in market share, delivers timely, independent analyses of the construction market from a neutral perspective.

*This report is prepared by Nikken Sekkei Cost Management Group for the purpose of providing information only. The contents are as of the date of creation and do not guarantee completeness and are subject to change without notice.

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Private sector capital investment slows down, leading to a decrease in building floor area started.

The Japan Economic Research Center forecasts that real GDP growth for fiscal year 2020 will remain below the potential growth rate, indicating a continued period of low growth and a downward trend. The Business Conditions Index (DI) has deteriorated from +8 in the September survey to +4, and a further decline to 0 is expected in the coming months (Figure 1). Since private-sector capital investment is already at a high level, downward adjustment pressure is expected to be quite strong, and there is a possibility of a significant decline in FY2020 (Japan Economic Research Center). The floor area of new construction starts (private non-residential) has also been declining continuously in FY2018 and FY2019 (Figure 2). Although the government has approved economic measures as part of the FY19 supplementary budget, private construction investment is expected to decline gradually in 2020, and construction prices are projected to continue their gradual downward trend due to intensifying price competition.
*Business Conditions DI: An economic sentiment index published in the Bank of Japan’s Short-Term Economic Outlook Survey (Tankan), calculated by subtracting the percentage of companies that perceive economic conditions as “poor” from the percentage that perceive them as “good.”

Figure 1: Trends in the DI (diffusion index) for business conditions
Source: BOJ “TANKAN”
Figure 2: Percentage change in real private capital investment and building starts (private non-residential)
Sources: Cabinet Office “Preliminary Quarterly GDP Figures,” Japan Economic Research Center “Quarterly Economic Forecast,” Ministry of Land, Infrastructure, Transport and Tourism “Survey on Building Starts”
*The 2019 figure for the area in the Construction Starts Statistics was calculated by comparing the April–October period.

Construction orders for the first half of fiscal year 2019 got off to a slow start.

The achievement rate* for construction order targets in the first half of fiscal year 2019 (April–October) shows a slower start compared to the past four years (Figure 3). The achievement rates for major construction companies increased compared to the previous fiscal year—when they had held back orders in the first half in anticipation of large-scale orders in the January–March 2019 period—but for three companies (excluding Obayashi Corp.), the rates remain at a lower level than in fiscal years 2015–2017. For mid-sized construction firms as well, the achievement rate is at a lower level compared to the past four years, and there is a possibility that their appetite for new orders will increase to at least the same level as before starting in the second half of the fiscal year.
*Order Target Achievement Rate: The ratio of actual order volume to the target order volume set at the beginning of the period

From sole-source contracts to competitive bidding

Since 2014, the ratio of sole-source contracts for construction companies had increased and the ratio of competitive contracts had decreased due to robust construction investment. However, since 2016, the ratio of competitive contracts has been on an upward trend. In fiscal year 2018, it reached levels seen before 2014, and it is expected that the ratio of competitive contracts will continue to rise due to the decline in private construction investment (Figure 4). This will put downward pressure on construction prices, and we expect the gradual downward trend in construction prices to continue.

Figure 3: Achievement rate of construction order targets for the first half of the year
Source: Compiled from each company’s financial statements
Figure 4: Trends in the percentage of competitive bids for construction companies
Source: Compiled from each company’s financial statements
*Mid-sized general contractors: Maeda Corporation, Toda Corporation, Sumitomo Mitsui Construction, Kumagai Gumi, and Tokyu Construction (5 companies)

Tokyo metropolitan area: Both building and equipment prices are on a gradual downward trend.
Kansai region: The rise has paused. Tokai region: A gradual downward trend is underway.

What is the Nikken Sekkei Standard Construction Cost Index (NSBPI)?

Nikken Sekkei conducts its analysis using its own proprietary index, the "Nikken Sekkei Standard Construction Cost Index (NSBPI)," which shows the movement of construction prices.
The Nikken Sekkei Standard Construction Cost Index is an index calculated by using a standard rental office as a quantity model and reflecting the actual market price based on Nikken Sekkei's own research in a timely manner.
With 2002 set as 100, the first quarter is January-March, the second quarter is April-June, the third quarter is July-September, and the fourth quarter is October-December.

Trends in construction costs

Tokyo metropolitan area: Labor costs and equipment prices for some building finishing work and equipment installation work fell. Ductwork costs rose, but the impact was small, resulting in an overall decline.
Kansai Region: The upward trend seen until last quarter has paused. While equipment construction costs are trending downwards in some projects, overall they remain largely flat.
Tokai region: Although the rate of decline from the previous period narrowed (-0.5pt to -0.3pt compared to the previous period), the gradual downward trend continues in both building construction and equipment construction.

Figure 5: Trends in NSBPI (Nikken Sekkei Standard Construction Cost Index)
Figure 6 shows the percentage change in NSBPI (Nikken Sekkei Standard Building Cost Index) and the contribution of building and equipment.

A gradual decline in steel frame demand is driving down prices.

Demand for structural steel peaked in fiscal year 2017 and has been declining since fiscal year 2018. This decrease in demand has led to improvements in production conditions at fabricators where supply and demand were tight, as well as improvements in delivery times for steel materials such as BCP materials and high-strength bolts. If the decline in demand continues beyond 2020, we believe that downward pressure on structural steel material prices will intensify.

Equipment labor costs, equipment prices, and specialized construction costs are falling.

Equipment installation work (electrical, air conditioning, and sanitation) is seeing declines, mainly in labor costs and some equipment and specialized work. Among specialized work, fire extinguishing equipment, which had remained high until now, is showing a decrease.

Figure 7 Estimate of steel frame demand
Source: Ministry of Land, Infrastructure, Transport and Tourism, “Survey on Building Starts”
*Steel usage is calculated based on the floor area of new steel-frame (S) construction × 100 kg and the floor area of new steel-reinforced concrete (SRC) construction × 50 kg
*For the period from November 2019 to March 2020, estimates were based on the assumption that the floor area of new construction starts would be the same as in the same period of the previous year
Figure 8: Trends in NSBPI Index for Equipment (Tokyo Metropolitan Area)
Source: Nikken Sekkei