Industry Outlook 2024-2026: Construction Contractor

Executive Summary

Construction contractors can look forward to an improving business environment from 2024-2026, with growth driven by an expected 3.0-4.0% annual expansion in construction spending. This will be led by 3.5-4.0% growth in government spending on construction, guided largely by the Action Plan on Thailand Logistics Development 2023-2027. The focus will therefore be on megaprojects, most notably those connected to the development of the Eastern Economic Corridor (EEC). Private construction on both residential and commercial developments will also improve with 3.0-3.5% growth due to a better economic environment, strengthening consumer spending power, and greater progress on government infrastructure projects. However, challenges will remain, notably in the form of the rising cost of labor and materials. In addition, higher fuel costs have kept transport overheads elevated, while over the longer term, the need to address climate change and the race to net zero will force contractors to invest more heavily in the technology needed to reduce consumption and to cut waste.

Krungsri Research view

Over 2024-2026 contractors that are focused more on servicing the public sector can likely look forward to ongoing growth. Companies more heavily involved in private-sector developments will also see conditions gradually improve over the next few years, though at a slower rate.

• Large construction contractors will enjoy an expansion in revenue as the government picks up the pace of work on infrastructure investment, benefiting contractors from their ability to bid on contracts and manage projects effectively. This will help them to work on ongoing public-sector projects (e.g., the expansion of mass transit systems, and the development of the double-track railway and motorway networks), megaprojects that connect to the EEC, and projects involving other infrastructure and public utilities. These companies will also work on the growing backlog of private-sector developments, including residential, high-rise, and large-scale projects.

• SMEs will likely see income remain flat in 2024 before beginning to grow again in 2025-2026 from an improving economic outlook and firmer consumer spending power.  Mid-sized enterprises will also benefit from a wider range of opportunities to subcontract for large players. However, they will be negatively impacted by higher operating costs and ongoing labor shortages, which will drag on turnover and potentially generate cashflow difficulties for some companies.

Overview

Over the years 2014 to 2023, the construction industry averaged an 8.0% share of gross domestic product (Figure 1), most of which was attributable to activity in the domestic market. The industry can be divided into the two major segments of public and private construction, for which 2023 spending was split in the ratio 57:43 (Figure 2). Over the years of the COVID-19 pandemic (2020-2022), investment in construction by the private sector declined compared to the level in 2019, and this dragged on overall growth in the industry. However, this was somewhat counterbalanced by an expansion in spending by the government (Table 1), especially by the acceleration in spending on infrastructure that the authorities undertook to maintain overall economic growth and to pull in additional overseas investment, though despite this, many projects are now behind schedule.

• Public construction: The major share of public construction is accounted for by the build-out of infrastructure. This ran to around 81% of the segment’s total value in 2023, with the remainder going to the building of offices for government agencies (17%) and housing for state employees (2%). Large companies typically enjoy advantages when contracting for government work, especially for infrastructure megaprojects, due to their experience, knowledge and expertise, financial security, and ability to develop and exploit specialist techniques and technologies. SMEs thus tend to sub-contract for larger corporations when working on publicly-funded projects.

• Private construction: Private construction work is mostly on residential accommodation, which most recently contributed 52% of all income to the segment. The remainder is split between industrial and commercial buildings, a category that includes facilities such as shopping centers, hotels and hospitals. Private sector construction tends to be affected by investor confidence, the overall state of the economy, the degree of political stability in the country, the extent of infrastructure spending, and any government measures that are in place to stimulate investment.

    Thai construction companies, especially large corporations, have also been expanding their customer base into overseas markets, in particular the neighboring countries of Cambodia, Lao PDR, and Myanmar. Players are attracted by the high level of investment in infrastructure and utilities in these countries, for example, in road networks, rail links and power stations, as well as for the construction, repair and renovation of housing and other structures.

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At present, there are some 108,000 construction companies registered in Thailand (source: Department of Business Development, 2022) but of these, only 709 (or 0.7% of total construction contractors) qualify as large-scale operations. Nevertheless, by income, large players account for 55% of the market, and just the three largest players listed on the stock exchange, which are Italian Thai Development, Sino-Thai Engineering and Construction, and Ch. Karnchang, hold a 17% share of the income of all large construction companies and a 67% share of the income of the 12 largest construction companies^2/ traded on the Thai stock market (Figure 3, data as of 2022).

Factors affecting the overall movement of the construction industry will need to consider both the market and business costs, as per the following:

1) The market: The possibility of generating income depends largely on the state of the economy, the political environment, plans for and progress with public and private investment, and the regulations governing investment in particular countries, which may either support or hinder the industry.

2) Costs: This refers principally to changes in the costs of construction materials and of labor, and the effects of this on profits. Currently, Thai players are struggling with a shortage of labor in terms of both quantity and skill. Consequently, most labor productivity has been lower than wages. For construction companies, costs are split approximately 60%, 20% and 20% between construction materials (construction steel, concrete, cement and other materials), labor and other costs respectively^3/ (Figure 4).  

• Responses by construction contractors to changing market conditions

  • Large operators rely on their superior negotiating position relative to manufacturers and distributors of construction materials to manage the cost of inputs. These also typically try to maintain and expand their income and profits by moving into new markets, for example by managing mass transit systems, while investment tends to be directed to high-tech machinery that reduces risks arising from labor shortages, cuts construction time, and improves the quality of finished work. This includes BIM (building information modeling) software and the use of pre-fabricated building components.

  • SMEs are mostly family-run businesses that have limited access to capital and so these generally negotiate with suppliers from a much weaker position. Many works as subcontractors for large players, especially on public megaprojects, although some are also looking for additional sources of income from renovation and repair work.

Situation

Business conditions remained stable over 2023 relative to the same period a year earlier. Thus, total spending on construction grew 0.4% to THB 1,373.7 billion in 2023 against an increased of 0.5% to THB 1,368.6 billion in 2022 (Figure 5). The industry was supported by the growth in work in private construction, where demand for industrial and commercial units accelerated. Meanwhile, public construction investment value declined on a delay in disbursement on some infrastructure projects with no work initiated on new megaprojects during the transitional period of forming a new government.

• In 2023, spending on construction by the public sector fell -2.2% to THB 784.3 billion (Figure 6) in line with a contraction in some large-scale infrastructure projects.

  • Spending on infrastructure projects (81% of all spending on public construction) dropped by -3.6% to a total of THB 633.4 billion in the period, with projects delayed at all stages from the making of disbursements to work schedules, especially for a -22.0% drop in 4Q2023 (compared to 10.3% expansion in 4Q2022). The projects that recorded expansion in the construction investment value included ongoing project development, especially works on metro systems such as: (i) the MRT Pink Line (Khae Rai-Minburi, 98.9% complete); (ii) the MRT Pink Line (Sirat-Muang Thong Thani extension, 44.6% complete, as of January 2024); and (iii) the MRT Purple Line (Tao Pun-Rat Burana (Kanchanaphisek Road), 24.6% complete, as of December 2023). In addition, ongoing work in the EEC included: (i) phase 3 of the development of Map Ta Phut Port (73.0% complete, as of December 2023); and (ii) phase 3 of the development of Laem Chabang Port, where some land reclamation work was completed on 1 October 2023, with the remainder scheduled for completion in June 2024, and the entire project due to be finished in June 2026.

  • Other public construction projects included the construction of offices, for which budget allocations increased 3.2% to THB 132.5 billion. This was a turnaround from -3.8% drop in 2022, when spending contracted -5.0% YoY due to the cashflow problems and labor shortages that COVID-19 had inflicted on many SMEs. On the other hand, while spending on the construction of accommodation for state employees climbed 12.6% to THB 18.4 billion, the fall in the cost of building materials from the highs of 2021 and 2022 meant that 2023 growth in expenditure was down from 2022’s jump of 18.1% (Figure 9 and Figure 10).

• In 2023, investment in private construction totaled THB 589.4 billion, up 3.9% on stronger activity in the industrial and commercial segments (Figure 7).

  • In the period, residential housing attracted investments worth THB 306.5 billion, or 52% of all spending on private-sector construction. Investment in the segment was thus up 3.1% YoY on the improved outlook for the economy and recovery in the tourism sector, but this was still a decline from 9M22’s rise of 5.6%. This relative slowdown was in line with the -5.8% YoY nationwide contraction in the number of new units completed and registered in 9M23, though in the Bangkok Metropolitan Region and the four major provinces of Chiang Mai, Chonburi, Khon Kaen and Phuket, the decline was at the faster rate of  -7.4% YoY (Figure 8). This slowdown was caused by: (i) the impact of inflation and the rising cost of living on overall consumer spending power; (ii) the recent cycle of rate hikes and increased caution among lenders over the release of new credit; and (iii) ongoing labor shortages that impacted progress on some developments, especially those undertaken by SMEs.

  • Non-housing construction covers work on properties for use by the commercial, services, transport and industrial sectors, and over 2023, spending on these rose 4.9% to THB 282.9 billion. This was caused in particular by recovery in investment that then supported an increase in spending on industrial and office properties on industrial estates, most notably in the EEC.

• The construction materials price index edged up just 0.1% in 2023, down sharply from 2022’s growth of 5.8%. The overall increase was held back by the -3.6% drop in prices for steel and steel products (23% of all expenditure on construction materials) (Figure 9). Prices for rebar and c-channel were affected by the long-running crisis troubling the Chinese real estate sector, which forced steel manufacturers to step up exports, especially to the ASEAN zone (Figure 10). At the same time, prices for cement (13% of construction costs) climbed 1.9% on stronger consumption by both the private and public sectors, which in combination with more expensive sand and concrete products and other inputs then boosted prices for concrete products by 1.4%.

  
  

• The twelve largest publicly listed construction companies by revenue reported an average 7.3% YoY increase in turnover over 9M23, but average net profit margins were up just 0.5% due to the continuing high cost of construction materials and transport (Figure 11). This was, though, an improvement on the -1.8% contraction in profits seen in 9M22, when labor shortages and the COVID-19 pandemic delayed work on projects.

Outlook​

The ongoing growth in construction spending will support a positive outlook for the industry over the period from 2024 to 2026. In the public sector, growth will come from an increase in government disbursements for work on large-scale projects, especially those in the EEC and those that aim to improve the national road and rail transport systems. In addition, spending on both commercial and residential property tends to grow, and so overall investment is forecast to rise by 3.0-4.0% annually over the next 3 years (Figure 12), although growth will be restrained by high interest rates and the elevated cost of energy, transport, and construction materials.

• Public construction investment should expand by 3.5-4.0% annually over the next three years as work accelerates on megaprojects, especially the 77 projects valued at THB 337.8 billion that are covered by the Action Plan on Thailand Logistics Development 2023-2027. However, delays in the approval of the 2024 budget, which is not expected to be finalized until May 2024 (Manager, January 11, 2024), may then further slow progress through the year, before accelerating in 2025 onwards.

  • Work on EEC megaprojects covered by the 2023-2027 action plan on EEC infrastructure and utilities should pick up from 2025 once the new government finishes making the requisite budget allocations. However, to date, work on most EEC projects has fallen behind schedule, particularly the high-speed rail link connecting Suvarnabhumi, Don Muang, and U-Tapao airports. Work on this is unlikely to make significant progress in 2024 since the original contracts for work have now expired and so new contracts must be negotiated. At present, work is most advanced on phase 3 of the development of Map Ta Phut Port. As of December 2023, this was 73% complete and work is expected to be finished on schedule in 2027.

  • Major projects outside the EEC are generally being undertaken to improve the country’s transportation and logistics systems and to develop trade linkages with neighboring countries. These include work on the high-speed railway and phases 1 and 2 of the dual-track line, improvements to the national highway system, and the development of regional airports to improve integration across the transportation network (Table 4). Work on a total of 31 projects with a value of THB 390bn is due to commence in 2024, followed by another 57 projects worth THB 260bn in 2025 (Krungthep Turakij, January 31, 2024).

• Private construction investment is forecast to strengthen by 3.0-3.5% annually over 2024-2026, helped by the following.

  • Over 2024-2026, the number of new residential units launched annually is forecast to rise by 3.0-4.0% per year in the Bangkok Metropolitan Region (BMR), or to around 96,000 units per year (Figure 13), and by 4.0-5.0% annually in the 6 major provinces4/. The market will be lifted by ongoing work on the expansion of transport networks, notably the extensions to the metro system and to motorways that will make travel between suburban and central parts of the BMR more convenient. This will then encourage developers to work on more condominium projects in downtown areas and along the new lines, although this will largely benefit major players. However, headwinds will also slow growth and delay work on some projects, including: (i) the high level of household debt, which is slowing growth in spending power and encouraging lenders to be more cautious about releasing new credit; (ii) the continuing oversupply of property in some areas; and (iii) rising costs, especially those related to construction materials, which is then pushing up house prices (LWS, which provides consulting services on real estate R&D, estimates that in 2024, average residential property prices will rise by 5-10% across the country, December 2023). Given this, some companies may have to adjust their business plans, and this will then impact turnover and profits, though smaller operations will be particularly exposed to this.

  • Work on factories and industrial estates will benefit from an acceleration in spending on public infrastructure projects, especially those in the EEC. Players in the industrial estates segment have plans to respond to expansion in the government’s targeted S-curve industries by investing in the development of new projects.

  • Commercial developments are split between: (i) retail space, which Krungsri Research sees growing by 3.7% annually in line with developers’ responses to the rebound in the tourism sector and in private-sector consumption (Figure 14); and (ii) office buildings, the supply of which Krungsri Research expects to expand by 2.6% annually in the BMR, or by around 0.8 million sq.m.

• Over 2024 to 2026, the cost of construction materials will likely increase slightly on (i) Stronger demand from the construction industry; (ii) higher global prices for scrap and billet that will push up import prices for goods used in the construction sector, although a flood of cheap imports from China will keep domestic prices for finished and semi-finished steel products below their 2023 level; and (iii) extended geopolitical risks arising from the Russia-Ukraine war and the Israel-Hamas fighting, which tends to be prolonged, that will keep energy costs elevated (Figure 15).

• Overseas construction markets represent an additional possibility for Thai players, in particular in the CLM countries, though opportunities will tend to be restricted to large players, since only these have the requisite financial strength, technological know-how, and local business connections. These will thus potentially be well placed to take advantage of growths in overseas markets, where economic expansion and continuing urbanization have supported rising investment in infrastructure and an enlargement of the market for work on industrial, office, and residential buildings. However, some risks prevail because of: (i) regulations on employment that may not match international standards, and the uncertain interpretation of contracts; (ii) possible political uncertainty in some countries; and (iii) competition with other overseas contractors as well as those from the host country. To reduce exposure to these risks and to secure a steady supply of new work, Thai companies will need to partner with local players embedded in construction supply chains, such as local property developers, construction contractors, and recruitment agencies.

• Growth will come under pressure from the following factors.

  • Labor shortages have affected the industry since the outbreak of COVID-19. Construction companies now must compete with manufacturing and service industries for access to labor, especially for migrant workers. Data from the Office of the National Economic and Social Development Council and the Ministry of Labor show that in 2022, the construction industry needed 1.32 million workers but according to data on social security payments, it was only able to secure the employment of 1.16 million individuals (Table 5). This problem may then delay work on some projects and undercut turnover, especially for SMEs.

  • The stock of unsold units remains high (Figure 16), and with new supply continuing to come to market, new private investment in residential accommodation may be limited.

• The need to make progress towards net zero commitments will be a challenge for the industry, since construction activities are the source of a significant quantity of carbon emissions that are still growing (Figure 17). In response, global interest in green building^5/ has grown as part of the wider adoption of ESG (environmental, social, and governance) goals. Precedence Research estimates that the value of the global market for green building will grow by around 9.5% annually over 2023-2028 (Figure 18). Likewise, the contribution of environmentally friendly construction to the overall market will increase steadily worldwide (Figure 19). 

  Large players will be in a better position than SMEs to adopt environmentally friendly building practices, since they have the financial and technological resources necessary to make cuts to consumption and waste generation, to improve their operating efficiency, and to reduce their dependency on labor by investing in construction drones. An October 2020 report by Allied Market Research showed that in 2019, the market for these was worth USD 4.8 billion, with this due to rise to USD 11.97 billion by 2027, thus growing by 15.4% annually (CAGR) over the period. Other technologies that are likely to attract increased investment in the coming period include 3D-printing and building information modeling systems.

1/ The K value is an index that is used to evaluate the scale of changes in construction costs between the day on which tenders are submitted and the period when a stage of work is completed, and then to calculate the corresponding additions or reductions to payments to contractors. The K value thus works to lessen the impacts of increases in the cost of building materials on contractors’ payments
(source: Office of Policy and Strategic Trade, Ministry of Commerce).
2/ These are 1) Christiani & Nielsen, 2) Power Line Engineering, 3) Seafco, 4) Pre-Built, 5) Syntec Construction, 6) Unique Engineering and Construction, 7) Nawarat Patanakarn, 8) Ch. Karnchang, 9) Sino-Thai Engineering and Construction, 10) Italian-Thai Development, 11) Thai Polycons, and 12) TRC Construction.
3/ Calculated from large operators’ costs and from Office of the National Economic and Social Development Council (NESDC) 2015 input-output tables.
4/ These are 1) Chiang Mai, 2) Chonburi, 3) Rayong, 4) Nakhon Ratchasima, 5) Khon Kaen, and 6) Phuket.
5/ Green buildings are structures that deploy energy and water saving systems, that produce less waste and pollution, and that generate fewer carbon emissions.