Construction: Building Blocks For Growth
by Carmen Lee
Head of Research, OCBC Investment Research

Singapore’s construction sector is booming again after years of languishing at below S$12b contract level. Since 2004, the total contract awarded grew at annual rate of 25% and hit a new record high of S$24.5b in 2007.

For this year, the Building and Construction Authority (BCA) is projecting some S$23-27b worth of contracts to be awarded. Of this, the bulk will still come from the private sector at around 62%, but the pace of public sector jobs is likely to pick up due to numerous infrastructural projects in the country.

The slew of residential projects launched in the past 12-18 months and the re-development of residential sites have also added to the pool of available jobs. However, prices of raw materials have spiked up and could impact margins, especially if the developers or contractors are unable to pass on the additional costs. With order books at unprecedented levels, this should help to mitigate rising construction costs. Overall, the outlook for the sector is still positive for the next 2-3 years.

Construction sector is back in the limelight. The local construction sector is back at the peak after being in the doldrums for the past few years. The last peak was in 1997 when a total of S$24.4b contracts were awarded. Since then, construction activities have slipped to a low of S$10b in 2003 when SARS hit the region. Last year, with the brisk activities in the construction sector, total contracts awarded hit a new record high of S$24.5b. For this year, the Building and Construction Authority (BCA) is projecting some S$23-27b worth of contracts to be awarded.

Growth came from the private sector. The bulk of the expansion came from the private sector, which saw growth rate of 42% (versus the overall growth rates of 25%) for 2004-2007 and only 1% for the public sector. This means that the private sector has been fuelling the growth in the past few years. Of the construction demand of S$24.5b in 2007, the private sector accounted for 77%, while the public sector accounted for only 23%. In 2008, the bulk of the contracts will still come from the private sector (estimated at around 62%), but the pace of public sector jobs will pick up due to numerous infrastructural projects in the country.

Property sector is also dishing out jobs. With the revival of interest in residential properties in 2006/07, and the slew of en-bloc transactions, the development and re-development of residential sites in Singapore have also added to the pool of available jobs for contractors and developers. The re-making of Singapore is also fuelling the development of expressways, MRT lines, the Singapore River and the Orchard Road shopping belt.

Margin compression. Prices of raw materials have spiked up and could have a drastic impact on contractors, especially if these companies are unable to pass on the costs. This could hurt margins which have recently recovered from low single-digit to more than 15% presently. However, order books are currently at unprecedented levels and should mitigate against rising construction costs. Overall, the outlook for the sector is still positive for the next 2-3 years.

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