Building costs a headache for developers

By William Kemble-Diaz and Dominic Whiting

LONDON/SINGAPORE (Reuters) - Soaring construction costs are squeezing the profits of property developers around the world but that could be good news for real estate investors if it helps to rein in the supply of new buildings as occupier demand wilts.

"There is not a lot of reason to add product and in the end that is what makes this cycle different to other cycles we have been through," Chuck Leitner, global head of Deutsche Bank's (DBKGn.DE: Quote, Profile, Research) alternative investments arm RREEF, said at the Reuters Global Real Estate Summit.

"For a pure developer it is not good news but for a real estate investor actually it probably is good news," he said.

Higher funding costs as banks buffer their lending margins and toughen their underwriting has added to the strain felt by developers, while a Chinese iron ore supply deal this week signals more steel price hikes to come, adding to raw material and labour prices that are already rising.

"There is no input into the development equation that is going to be lower in the next 12 months," said Mike Hussey, managing director of the London portfolio for Britain's biggest listed property company, Land Securities (LAND.L: Quote, Profile, Research).

In the Middle East, India and China, where the bulk of the world's construction is centred, developers have relied on steep increases in sale prices to keep their housing and commercial projects lucrative.

But with property markets now slowing, 50 percent rises in building costs across Asia in the last couple of years are starting to bite.

DUBAI