The last year has seen considerable focus on high construction costs, with extreme fluctuations due to the aftereffects of the pandemic, the war in Ukraine and a shortage of qualified personnel. The level of construction costs has significant consequences for development and renovation projects, causing a possible financial loss on projects already underway with low margins or for landowners and planned projects that see their margins crumble if the cost increase cannot be compensated by an increase in revenue.
A value assessment of land and development projects consists of several elements, but is primarily based on the sales price of the completed building, minus construction costs and the profit/project risk, which takes into account such elements as regulatory risk, timing risk, market risk and cost risk. Everything else being equal, an increase in construction costs logically results in a lower project and land value.
The majority of appraisals are conducted using more or less in-depth analyses of different value parameters. Calculating a sales price of a completed building is usually a straightforward process, since a very good statistical base is often available for both commercial and residential properties. But when it comes to construction costs, this is more challenging and the variations greater, as there are several factors that play a role beyond the characteristics of the building to be built.
In analysing normal construction costs, the Norsk prisbok database and Holte’s estimating tool are usually used, given the extensive amount of work that has been put into collecting and presenting statistics for most building types, individual projects and renovation projects with different characteristics in both residential and commercial construction, as well as reference projects. This is generally a good starting point, but here too it is important to delve into the details of the different benchmark numbers by, for example, considering the foundation construction method, size of the common areas (which are often less expensive to build than exclusive residential or commercial areas), ceiling heights, technical facilities, and so on.
However, there are also various other elements that can affect construction costs in a development or renovation project. These include different types of conservation status of existing buildings, the land on which the building is to be built, demolition and redevelopment costs for existing buildings, technical elements below ground, noise issues, the need for retaining walls or other structural components, sequencing requirements and discharge requirements at the building site, which collectively can have a significant impact on the total construction costs beyond the characteristics and qualities that have been chosen. Carrying out a qualified assessment of these elements requires not only in-depth knowledge of technical and construction processes but also experience. Moreover, statistical databases are based on historical data, which can lead to inaccurate estimates at times when market prices change abruptly.
At Veridian Analyse, we have a technical construction department with extensive experience and expertise in technical construction. The team is currently managed by engineer Bjarki Reyr, who has over 20 years of experience from the construction, development and real estate sectors in implementation, project management, administration and consulting for property owners of varying sizes throughout Norway, but especially in the Oslo area. Through our projects, especially those involving construction loan monitoring, project and building management, we are in daily dialogue with contractors and property developers, which provides us with unique insight into current construction costs, from materials and labour to other detailed and relevant input factors.
As a result, our analyses of construction costs in development and renovation projects are considerably more detailed and accurate thanks to access to the right data and the experiences of the team.
Contact Bjarki Reyr or Thomas Dinh at Veridian Analyse AS for a no-obligation chat about our technical construction analysis services, whether you require an assessment of costs, estimates or budgets for your development project.
Thomas Dinh, Veridian Analyse
Veridian Analyse are specialists in consulting for commercial and development real estate. Our employees have backgrounds in finance and technical construction, allowing us to assist with complete property analyses, whether this involves assessing the property in its current state as-is, assessing the property’s development potential, or assessing the property based on special premises.