Pillar of strength in a wilting economy

Source : Business Times - 5 Jan 2009

Cost and pricing advantages and public spending set to put construction industry in a good spot

The construction sector looks to be the only pillar of growth in the Singapore economy this year, especially if there are significant increases in public infrastructure spending.

Latest official flash estimates reveal that the sector continued to grow in Q4 2008, albeit at a slower 13.3 per cent.

While this is down from 18.6 per cent in the previous quarter, a recent survey of financial analysts conducted by the Monetary Authority of Singapore revealed that the general sentiment was that construction activity is expected to expand relatively strongly in 2009 - although at just around half the pace in 2008 - of about 7.5 per cent.

‘The construction sector will lead GDP growth in the next two years, but it only accounts for about 5-7 per cent of 2009/2010 GDP,’ said CIMB-GK analyst Song Seng Wun.

Still, Mr Song reckons the sector could grow by about 15 per cent year-on-year over the next two years, which is about as optimistic as one can get about any sector.

It is also notable that forecast growth is nowhere near trough levels in Q3 ‘99 and Q1 ‘03, which fell to minus 11.9 per cent and minus 14.9 per cent year- on-year respectively.

The executive chairman of contractor Lian Beng Group, Ong Pang Aik, is sanguine about this year’s prospects. He expects to see an increase in the number of public sector projects starting in the first half of 2009.

As chance would have it, Mr Ong believes the likely fall in construction costs will also accelerate the pace of new projects and possibly even fatten profit margins of contracts inked earlier.

‘We had to bear the cost of materials going up before. So when they come down, we will also make a bigger profit,’ he added.

United Engineers’ group managing director and CEO Jackson Yap is also optimistic about the year ahead.

‘Thanks to the relatively long project cycles - as most construction projects will take about two to three years to complete - construction contracts secured during the industry boom over part of this and last year will keep many construction companies busy for at least the next two years,’ he said.

According to property and construction consultancy Rider Levett Bucknall (RLB), steel export prices started to fall in the second half of 2008 with the average supply price of steel reinforcement now down by about 30 per cent from about $1,500 per tonne to $1,100.

RLB managing partner Winston Hauw said that based on current demand and cost trends, the tender price escalation is anticipated to decline, averaging in the order of minus 10 per cent to minus 15 per cent year-on-year for 2009.

But while traded prices for base metals are currently much lower compared to the first half of 2008, Mr Hauw says that prices of mechanical and electrical (M&E) services for building developments have not as yet moderated.

‘The limited pool of specialist subcontractors in the local market is for now pre-occupied with the large existing workload,’ he added.

RLB also noted that notwithstanding the general decline in many base construction materials, the average supply prices for cement and granite aggregates have actually increased as at November 2008, although he believes the impact of this on building tender prices is insignificant.

Mr Hauw said: ‘We see the forthcoming year as a period of consolidation for the construction sector, with the management of costs and cash flows as key priorities, while positively looking ahead to opportunities, both locally and regionally.’

How low construction costs fall could be influenced by monetary policy too.

National University of Singapore economist Tilak Abeysinghe said that a weaker Singapore dollar will increase the import cost of building materials and will have a negative effect on residential property construction.

‘Unlike the export sector where you get an offset of the import cost from increased export revenue, the construction sector has to bear the import cost resulting from the weaker dollar,’ he said.

Tempering expectations some more, construction consultancy Hill International’s senior vice-president and managing director (Asia-Pacific) John Brells foresees developers deferring more projects. ‘Such delays consequently would give rise to more construction-related disputes,’ he said.

The bright spot again is infrastructure and public sector construction. In his discussions with contractors, Mr Brells said some who have not previously bid on government works are now looking to do so with more ‘looking at areas of construction outside their normal comfort zone’.

Job prospects in the sector could also be hit.

Construction information services provider BCI Asia estimates the value of projects under construction will contract by 20-30 per cent and its managing director Thor Kerr said: ‘Unemployment will rise quickly as the construction volume declines.’

He added that construction companies should survive provided their existing contracts have appropriate fee structures and payment schedules, and that ‘contractors do not quote below market price in order to maintain sales volume’.

To this, Lian Beng’s Mr Ong says that ‘undercutting’ is unlikely, because of the volatility of construction material prices.

On the jobs front, Mr Ong said that the sector is still reeling from poaching of staff over the past year. ‘Salaries have been frozen but we will not cut because the staff will leave,’ he said.