Recovery of Singapore construction industry 0 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
The construction industry in Singapore has been in the doldrums since the bursting of the property bubble after the 1997 Asian financial crisis. Over the last few years, many construction firms have gone belly-up or into deep financial trouble, including many listed ones (L&M, Chew Eu Hock, Econ etc). Today the industry is seen as a sunset industry, where contribution to GDP has been consistently declining year after year.

Yet as with all things, recovery rises from the deepest pessimism. And I am not just
talking about stock market prices of construction companies, but the fundamentals of the construction industry itself.

On the supply side, one can say that the decline over the last few years has purged the industry of its excesses: the weaker companies that have poor balance sheets, high operational costs, questionable product quality and insufficient operational scale. In effect, consolidation of the industry has occurred, with existing players now more able to control costs better, avoid overbidding (a myopic practice of the past) and having potential to grow profit margins in the future.

On the demand side, there are three areas where there is strong promise. Firstly, retail and commercial construction and upgrading. This is going to be supported by rising tourism in Singapore. One increasing focus of the Singapore government has been to increase domestic consumption expenditure, given that investment expenditure might plateau; a sympton of transition from developing to developed economy. And to attract foreign consumption (ie. tourism), major revamping of key areas like Orchard Road and construction of new ones eg. the BFC (Business and Financial Centre), the casinos (oops the Integrated Resorts) and mega retail malls like Vivocity. Secondly, construction of niche industrial properties. To quote from a DBS Vickers report recently, for industrial properties, there has been a trend of "more developments being built for a specific end-user’s needs rather than strata-titled units. This is evident among logistics service providers and the hi-tech sector where the end-user has specific business requirements." Thirdly, exporting construction expertise overseas. There is strong demand for fixed asset investment in growing economies such as India and China especially in the current benign economic climate, as well as oil-rich regions like the Middle East which are reaping massive windfalls from oil these two years and are now looking to diversify away from oil. Local construction companies can look to Japanese construction companies as an example and go global (look at how fast Japanese construction companies were in responding to reconstruction of Aceh after the tsunami).

Residential housing is apparently in a long-term decline and we have heard stories of HDB having an oversupply of flats which are now lying empty. Meanwhile there seems to be high take-up rates for high-end condominiums in plum areas such as Orchard Road. Besides suggesting rising income discrepancy, it also means the demand picture for residential housing in Singapore is intact.

It is difficult to pick the bottom of any industry but one only has to look towards the marine industry to see how a "sunset" industry has transformed itself into an acclaimed sunrise industry (especially in offshore rigs) in just a few years.