Construction Growth in Hong Kong Driven by Public Sector Workloads

Analysis, Slider 22 May 2014
Construction Growth in Hong Kong Driven by Public Sector Workloads

Construction Output Picks Up Moderately in Singapore

According to a Q1 2014 RICS Construction Market Monitor report construction activity continued to increase during the quarter, but at a slower pace than in Q4 last year. The public sector workloads rise while activity in the private sector eases somewhat. In Singapore, sentiment is positive in most sectors but private housing is the exception.

The headline workloads(Note 1) net balance moderated to +12 from +22 in Hong Kong. A divide between the public and private sectors looks evident in Q1 with the former seeing strong rises in activity while the later has seen workloads decline or stabilize in some sub-sectors. The sectors which experienced the strongest rises in workloads were public housing, public non-housing and infrastructure, with readings of +67, +40, and +33 respectively. In contrast, private housing and industrial categories posted falling workloads, with the net balance(Note 2) coming in at -22 and -20 respectively, while private commercial workloads were broadly unchanged.

Meanwhile, expectations for the coming year remain quite positive. Although readings are not as buoyant as in the preceding quarter, workloads, employment, and profit margins are still expected to continue to rise. The workloads are expected to increase by around 5% over the coming 12 months, while the average projected gains in employment and profit margins are approximately 3% and 1% respectively.

92% of respondents report that a shortage of skilled labour was the biggest factor inhibiting a greater pick-up in construction output The survey shows that skill shortages are visible across all occupations, namely quantity surveyors, other construction professionals, bricklayers, plasterers, plumbers, carpenters, and electricians.

Moreover, the inaugural RICS Singapore Construction Market Survey results show positive momentum across most areas of the industry. The total workloads edged up over the first quarter, with the headline net balance at +25.

In terms of sector breakdown, public sector workloads fared relatively well, with public housing and public non-housing recording net balances of +38 and +25 respectively. By way of contrast, private housing was the only sector to see a fall in workloads. That said, a dip in private housing construction activity may not be particularly surprising, given the several rounds of government measures to contain house price inflation.

For the next 12 months, the average anticipated increase in construction output and employment over the year ahead is estimated to be in the range of 5 to 7.5%. Meanwhile, profit margins are expected to rise between 2.5 and 5%, on average. Labour shortages are being cited as the most significant factor hampering growth in the sector, with 90% of respondents highlighting the issue.

RICS Senior Economist Andy Wu, said: “In major Asia (excluding Japan) markets, particularly mainland China and Hong Kong, ongoing softness in the commercial and residential markets, coupled with the uncertainty surrounding the strength of global economic recovery, a slowdown in China’s growth, and tighter credit conditions, has prompted an increasing number of construction companies to reconsider or postpone their investment plans and major projects, with the result that construction activity has not been robust for the past several quarters. As Asia is unlikely to avoid an economic slowdown this year, the impact will be directly felt in construction for some time to come.

In Hong Kong, some of the factors including China’s slowing economy, the expectations of rising interest rates in developed countries and the continuation of cooling measures by the government, certainly have played a role in holding back some building activity. Particularly, the residential sector is showing a subdued outlook over the next year or two. Meanwhile, commercial construction activity is slowing quite significantly. In the coming quarters, we believe the sectors which will likely hold up some promise, are public housing, public non-housing, and infrastructure.

It’s worth highlighting that, like Hong Kong, Singapore saw a slump in building activity for the private housing sector in Q1. Nevertheless, we believe the Singapore government will likely continue to push ahead with major and mega infrastructure projects and the public housing sector will continue to develop as the government invests.

In China, the economic conditions still look unfavourable. It’s a continuation of a downward trend seen in recent years. The economy is currently growing below trend and we believe there are some construction areas of intense weakness. Increasingly, we are seeing deterioration in sentiment translating into reduced demand for construction. Indeed, the data within the commercial and residential sectors show that firms and developers are less confident putting money into new construction projects. Furthermore, as the private housing and commercial sectors are rapidly approaching a turning point, builders’ profit margins might start to dwindle soon if, as many expect, price appreciation for new homes and commercial properties continues to lose more momentum.”

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