Industry Outlook 2019-2021: Construction Contractor

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Industry Outlook

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Industry Outlook 2019-2021: Construction Contractor

6 June 2019
  • In 2019-2021, the construction sector should see growth pick up at an accelerating rate. Through 2019, investors are expected to await greater clarity over the policies that the incoming government is likely to implement and as such, growth for the year will be at a low rate in the range of 3.5-5.0%. However, in 2020 and 2021, growth rates should strengthen and these are forecast to hit 5-7% and 7.5-9.5%, respectively, on greater government spending on large-scale projects and a private sector that will be buoyed by improving confidence and strengthening economic fundamentals. In the coming period, developments in the Eastern Economic Corridor, new train lines and, in the private sector, mixed-use real estate developments will be particularly prominent.
  • In neighboring countries, strengthening economies and continuing urbanization are also feeding greater demand for real estate developments and improvements to infrastructure, and with this, their own construction sectors are seeing ongoing growth. This then represents an opportunity for Thai construction companies to expand their customer base overseas.

 

Overview

During 2009-2018, construction investment has accounted for 8.4% of Thailand’s gross domestic product (GDP) so the sector’s health has important consequences for employment and linkages with related sectors, such as construction materials and real estate.


 

The sector is split domestically into construction for the public and private sectors, with investment in the two occurring at a ratio of around 57:43.

  • Public construction: The lion’s share of public projects is concerned with infrastructure, which runs to around 80% of the total value of public construction, with the remainder being accounted for by construction of government buildings and housing for civil servants, Large companies enjoy advantages in contracting for government work, especially for large infrastructure projects, due to their experience, expertise, financial efficiency, and ability to exploit specialist techniques and technologies. SMEs working in public construction tend to operate as sub-contractors.
  • Private construction: 56% of this sector is accounted for by construction of residential property, 10% by industrial property, 10% by commercial property, and the remaining 24% by other projects, such as hotels and hospitals (NESDC, 2018). Private construction tends to be affected by investors’ confidence, which is in turn dependent on a variety of factors including the economy, the political stability, the infrastructure investment, and government measures to stimulate investment. Larger operators which focus on private projects will typically tend to enjoy higher margin than those which contract for the government, while the latter will usually have a greater construction value than will private developments. Meanwhile, SMEs contractors usually undertake work on projects with a low total value and which are relatively simple and straightforward.



 
In addition to the domestic market, Thai construction companies, especially larger ones, are increasingly expanding their customer base into overseas’ markets, in particular to Cambodia, Laos PDR and Myanmar (CLM) due to these countries’ rapid economic expansion and the concomitant development of their national infrastructure and built environment including, for example, road networks, rail links and power stations. In addition, Thai operators also have the opportunity to work on the repair and renovation of housing because Thai construction workers have high-skills and so are trusted in these neighboring countries.
 



 
According to data supplied by the Department of Business Development, as of 2018, there were around 80,000 construction operators and contractors legally established as companies in Thailand. However, although only 55 of these are large operations, these control half of the value of the market (in terms of income). The majority of these large companies are listed on the stock exchange, and of these, the largest three are Italian-Thai Development, CH. Karnchang and Sino-Thai Engineering and Construction. This trio enjoys a combined 24% market share overall but a 63% share of the market when considered in terms of just those companies that are listed on the stock exchange (source: Bloomberg, 2018).
 

 
Assessment of the construction sector will need to take into account:
 
1. Market factors. The possibility of realizing revenues depends largely on the state of the economy, political conditions, progress on public- and private-sector investments, and the regulations governing investment in particular countries, which may either support or hinder the sector.

2. Cost factors:Of particular importance are changes in the costs of construction materials and of labor, although at present, Thai construction companies face labor shortages, both in terms of quantity and quality, with skills at a level beneath that required by the market. As such, costs do not match productivity and this has had consequences for profitability. The cost-structure of construction companies is split approximately 60%, 20% and 20% between construction materials (construction steel, concrete, cement and other materials), labor and other costs respectively[1].
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Situation

In 2018, the construction sector had a value of THB 1,264.4 bn, while for the year, growth ran to 4.3% YoY, an improvement on the 0.9% contraction seen in 2017. This turn around was due to greater progress on new projects, while those that were ongoing were pushed through to completion. In terms of particular market segments, growth in public-sector construction (which accounts for 56% of the total value of Thai construction) was at a lower level than that of the private sector, which has seen its value grow at a faster pace over the last four years as work on projects for residential accommodation have sped up (residential accommodation represents 56% of the value of private-sector construction). In addition, 2018 was also the first year in which the two halves of the market worked together on large-scale public-private partnerships (PPPs). Under these arrangements, the private sector is responsible for financing construction work, as is the case for the MRT Pink Line (Min Buri-Bang Khae) and Yellow Line (Lat Phrao-Samrong). Details of the recent development of public and private sector construction are given below.


 

  • Following a 2% fall the year before, in 2018, public-sector construction grew by 3.2% to THB 707.3 bn. This expansion was driven by a faster pace of work on the roll-out of new infrastructure, which accounts for around 80% of all public-sector construction. Large-scale infrastructure projects currently underway include the Bang Pa In-Nakhon Ratchasima motorway and the MRT Orange Line (Cultural Center-Min Buri), which are now respectively 49.3% and 24.6% complete, compared to 24.1% and 4.7% at the end of 2017 (Table 5). At the same time, though, spending on small-scale projects, which are largely for road repairs, has slowed; in 2018, government investment budget on construction shrank by -6.5% (Figure 5). Other public-sector construction work includes residential accommodation and offices for government organizations and these saw a decline of -1.5% and a little growth of only 0.9% respectively, (NESDC, 2018) as a result of the passing of the 2017 Government Procurement and Supplies Management Act, which had the unforeseen consequence of delaying government disbursements.


 
  • Compared to the public sector, the private sector saw somewhat better growth of 5.8% YoY in 2018, which lifted the total value of private sector construction to THB 557.1 bn (Figure 6). Positive factors supporting increased investment included property developers’ greater confidence in investing in new projects. This is especially the case for the new developments that are going up alongside Bangkok’s expanding public transport network as the links between central Bangkok and the more distant parts of the Bangkok Metropolitan Region are extended. Thus, the residential accommodation market (56% of the total private sector construction market) grew by 5.3% in 2018, compared to 2017’s lower growth of 1.4%. The private sector was also helped by a strong increase in the level of investment in low-rise accommodation in 2018, as is reflected in the rise in applications for construction permits for low-rise buildings that were made in 2017 (typically, developers submit applications 6-12 months before making any serious investments in construction work, Figure 7). As regards construction of property other than residential (29% of the value of private sector building work), this expanded by 2.9% in line with work in the Eastern Economic Corridor (EEC), although within this category, some types of construction reported good rates of growth. As with residential properties, applications for construction permits indicate that by total footprint, construction of industrial properties and hotels is expanding significantly (Figures 8-9). Commercial property (e.g. department stores) fared less well and the volume of work on these shrank during the second half of 2018 compared to the same period in 2017, when growth rates were relatively high. Other types of construction include large-scale PPP projects, the terms of which specify that the private sector is responsible for funding building work, and the number of the has increased. These include the MRT Pink Line (Min Buri-Khae Rai) and Yellow Line (Lat Phrao-Samrong), for which the value of construction has increased by 14.6%. It is expected that more PPP projects will be undertaken in the coming period.





 
The price of building materials rose by 2.6% in 2018, compared to 2017’s rise of 1.9%. Prices were lifted by a combination of the higher cost of inputs and greater demand on an expanding construction sector. Construction steel (23% of the total market for building materials) saw the sharpest increase in price, this rising by 7.6%, while for cement and concrete products, prices rose at the lower rates of 2.6% and 2.1% (these contribute a further 29% to the construction materials market).
 

However, labor costs were largely unchanged in the year because although the national minimum wage was raised in 2018 by 5% to an average of THB 315.97 per day (the actual rate is set on a province-by-province basis according to the economic situation within individual provinces), skilled labor already receives wages above this level and so the impacts of the increase were limited. In addition, because of falling numbers of Thai workers within the sector, much of Thailand’s manual labor force is composed of migrant workers from neighboring countries, while large operators have also tended to be less affected by labor shortages as they have increasingly been substituting technology for manual labor.
 

Outlook

Krungsri Research forecasts that total growth in the construction sector will run to 3.5-5.0%, 5-7% and 7.5-9.5% YoY in each of the years 2019, 2020 and 2021 (Figure 11) on a combination of increased spending on large-scale projects by the government and rising investor confidence among real estate developers.


 

  • Following the establishment of a new government, public sector construction is expected to expand.

In 2019, government spending on construction is forecast to grow by 3-5%. These weak rates of growth are explained by the fact that through the second half of the year, it will likely remain unclear what the new government’s policy will be towards current and future construction projects. However, in 2020 and 2021, the expectation is that growth rates will accelerate to 5-7% and then to 8-10% on better progress on a number of new large-scale infrastructure projects, especially on: (i) projects within the Bangkok Metropolitan Region, such as the MRT Purple Line (Tao Pun-Rat Burana); (ii) projects in the EEC, including the high-speed rail link between the region’s three airports, the development of U-Tapao airport, and phase 3 of the upgrade of Laem Chabang Port; and (iii) projects in major provinces (including Chiang Mai, Khon Kaen, Nakhon Ratchasima, Phuket and Phitsanulok) including the development of light railway systems and airport expansions. In addition, there are also plans for a greater number of medium- and small-sized projects, for which allocations are made in the annual budget. These are mostly for expansions and upgrades to the national road network, which will be carried out under the management of the Department of Highways and the Department of Rural Roads.

Over the next 3 years, a large number of government construction projects that have received cabinet approval and that are at a stage where progress can move forward will now do so, with investments being made in construction, operations and repairs. Those projects that can be expected to be first in line will include those for which (i) a contractor is being chosen, (ii) competitive bidding is being prepared, or (iii) the cabinet has given its approval and that have according to the assessment of the Environment Board passed their environmental and health impact assessments.

In the coming period, it is expected that a greater number of PPP projects will be undertaken, with these taking the form of both government- and private sector-funded construction. Determining exactly what type of PPP agreement is signed depends on stated government policy and negotiations over the anticipated income from forecast passenger numbers but it is likely that most PPP projects will take the form of PPP Net Cost (rather than PPP Gross Cost) agreements because these grant the private sector the right to collect income and help the government to reduce the project’s operating costs.



 

  • Private sector construction will tend to grow in step with general economic conditions, although operators will also benefit from the crowding-in effects triggered by government spending. ​

The forecast for private sector construction is for growth of 4-5% in 2019, a slight fall relative to 2018 (Figure 11). This slowing of activity is in line with a softening of the economy, the decision by operators to await further progress on government-backed infrastructure before moving forward with investments, the tightening of conditions on issuing house loans set by lenders, and changes to the law governing mortgages that came into effect in April 2019 and that will likely have the consequence of limiting growth in the housing market. However, the market is expected to expand by 5-7% and 7-9% in 2020 and 2021, with higher rates of growth being supported by several factors. (i) Greater progress with upgrades to communications networks will tend to pull in private sector investment through the crowding-in effect, for example in the case of residential accommodation that is being built as mass transit systems expand (e.g. in Ratchada-Lat Phrao, Phaholyothin and Ramkhamhaeng). (ii) Progress on the EEC development is helping to support a raised level of construction of commercial buildings, industrial estates and hotels. (iii) The private sector is increasing its investments in new types of developments, especially in mixed-use projects (such as One Bangkok and The Grand Rama 9), which are expected to see ongoing growth in the coming years (Figure 13 and Table 7).
 




 

Turnover for construction companies in the next 3 years is expected to grow further, in particular for those which concentrate on government’s projects as they should see a growing backlog of work. In 2019, income from these operators is expected to increase only slightly as large-scale projects are awaiting for the establishment of the new government in the second half of year; but it is expected to show accelerative growth during 2020-2021 due to concurrent construction in several large and small projects. For operators focusing on the private sector, in 2019, turnover is likely to decline owing to an economic slowdown, stagnant infrastructure projects, stricter regulations of mortgage loans which may affect new developers’ decision on new projects; and then would grow in line with demand for investment in real estate influenced by the state of the economy and progress with government infrastructure projects.




 

As regards turnover, large players will have the opportunity to work on more sizeable projects connected to both government-backed infrastructure work and developments undertaken by the private sector, in addition to construction projects overseas, particularly in the CLMV nations where investment in infrastructure is ongoing. However, in 2019, income growth for these operators may be limited by delays in making disbursements for government construction work caused by the election in the first half of the year. Despite this, though, in 2020 and 2021, growth will tend to pick up again as the shape of the new political landscape becomes clearer and, with this, government investment in large projects rebounds. For their part, mid- and small-sized players will benefit from: (i) the possibility of subcontracting for large players that have a significant backlog of projects, although profit margins for this work may be low; and (ii) contracting directly on real estate projects, which are seeing solid rates of growth. However, some SMEs in the construction sector may face financial limitations, which then hinders their ability to carry large stocks of construction materials and also forces them to rely on labor in preference to machinery, which in turn leads to higher operating cost and places a cap on performance growth.

In addition to growing opportunities in the domestic market, over the next 3 years, the markets in the CLMV nations (Cambodia, Laos PDR, Myanmar and Vietnam) will also tend to expand in line with their recent growth; between 2012 and 2017, the value of the construction sector’s contribution to GDP increased sharply in these countries, with the rise being most pronounced in Cambodia, where the construction sector grew by an average of 25% per year, followed by Myanmar (19%), Laos PDR (12%) and Vietnam (10%) (Figure 16). These rapid levels of growth thus presents Thai players with the opportunity to expand their customer base, particularly so given the fact that there is a significant overlap between the areas where Thai players already have expertise and the plans for construction work that the public and private sectors in the CLMV nations have for the next several years. This is summarized in Table 8 (a full analysis can be found at Construction in the CLMV region: Opportunities for Thai contractors).





 

The principal factors that are likely to have an impact on business costs over the next 3 years are the price of construction materials (60% of total costs) and of labor (a further 20% of costs).​

  • Prices for construction materials should remain stable in 2019 and then gradually rise in 2020-2021 on strengthening demand. Prices for cement products are expected to increase by 1-2% per year on greater demand from both the public and private sectors, which will move ahead with a large number of projects simultaneously. Construction steel will see its price move in the opposite direction, falling by -1.5% to -3.5% in 2019 and 2020 on an expected weakening of world markets that will depress the price of imports and with this, those for construction steel on the domestic market will likewise fall. However, in 2021, prices should lift again, rising by 2-4% as demand strengthens for steel for use in the ongoing construction of Bangkok’s mass transit system, as well as in the twin-track rail network and the high-speed railway. In addition, the government also has a policy of supporting the use of domestically sourced construction steel and to reduce its reliance on imports, and this too will tend to feed into higher prices
  • Labor issues are most likely to affect players in the construction sector in the form of labor shortages, which will have a disproportionately strong impact on SMEs. This is because (i) SMEs are still more reliant on labor than are large players since replacing labor with new technologies carries a heavy price tag, and (ii) Thai workers are typically disinclined to work in construction so migrant workers play an important role in the sector, but regulations governing the hiring of foreign workers may become more stringent in the future. As for the cost of labor, this is not expected to significantly affect overall business costs because skilled workers already earn incomes above the minimum wage.

 


Krungsri Research view:

In 2019, income for building contractors working in both the private and public sectors is not expected to grow dramatically as investments will likely only be made in the second half of the year, following the establishment of the new government. However, in 2020 and 2021, income for both these groups should improve.

  • Income for large construction and civil engineering operations will improve in step with growth in government expenditure on infrastructure, which is expected to strengthen in 2020 and 2021. For large and mid-sized players, income will grow steadily for those who are able to undertake major construction projects on behalf of the public sector (e.g. in mass transit developments) and of the private sector (e.g. for the development of projects in airports that are funded by privately-owned airlines). For small operators, incomes should improve on greater opportunities for subcontracting on large projects run by large and mid-sized players that pass on work to smaller companies.
  • Income for contractors working on residential and general construction projects, and for those working on high-rise and large-scale developments will tend to grow, though not at particularly high rates. This will be especially the case in 2019, when a slowing economy will have negative impacts on operators, but in 2020 and 2021, investor confidence should strengthen as government investment in infrastructure returns to growth. In terms of players’ size, large and medium-sized operations should see their income grow at good rates, especially for those who focus on mixed use real estate developments, for which a backlog of work is steadily accumulating, while contractors that take on work overseas, and in particular in the CLMV nations, will also be able to expand their earnings from work on infrastructure projects, residential accommodation developments, commercial properties, and industrial premises, all of which are seeing continuing growth.
             For small players, business conditions will likely worsen as the market for small-scale construction projects has not yet recovered, while at the same time, players in this group also often face problems with cost control and this may lead to a decline in their profitability.

 
[1] Calculated from the costs of large operators and from the Office of the National Economic and Social Development Council (NESDC) input-output tables, 2010
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