Construction Sector: Growth Remains Robust In 2012
BMI View: Construction activity continues to surprise on the upside. Real growth for the construction industry beat government estimates to reach 6.9% year-on-year in Q1 2012, driven by a surge in residential building activity. With residential activity expected to remain robust over the rest of 2012, we have revised up our forecasts, with real growth for the construction sector reaching 5.1% in 2012 (previously 3.8%). However, barring a global economic meltdown, we expect construction activity in Singapore to slow to a more sustainable level, with real growth forecast to reach 3.5% in 2013 (from a previous forecast of 3.2%).
Construction activity in Singapore has once again surprised on the upside. Latest data from the Ministry of Trade and Industry (MTI) showed that real growth for the construction industry was 6.9% year-on-year (y-o-y) in Q1 2012, higher than the advanced estimates of 6.2% y-o-y projected by the MTI in April 2012. Although growth momentum is estimated to have weakened in Q2 2012, the sector is projected to register a real growth of 5.1% y-o-y for the quarter according to the MTI.
|Surprise On The Upside|
|Singapore Quarterly Construction Industry Value Real Growth, % chg y-o-y|
This robust activity in the construction sector is in line with our views:
Residential Sector: We had expected residential building activity to continue to pick up aggressively in 2012. This has already taken place, with housing starts for private residential buildings growing by 21.4% in Q1 2012, according to the Singapore Urban Redevelopment Authority. Combined with a major boost in public housing activity - in February 2011, the Singapore government announced that it will spend SGD10bn (US$8.0bn) on affordable housing over the next 10 years - the residential building sub-sector should remain as a major growth driver for the broader construction sector in 2012.
|Singapore - Residential Housing Starts, By Sector|
Infrastructure Sector: In our May analysis of the Singapore construction sector, we stated that the transport infrastructure sector would see a boost in activity in 2012. This is because the urban railway projects awarded by the government in 2011 - namely the 21km Downtown Line Stage 3 and the Tuas West Extension project - have already started construction works. As we have only seen minimum progress in these projects in 2011, we expect their construction works to hit top gear in 2012.
Non-Residential Sector: Activity in the non-residential building construction sector is also expected to remain relatively robust in 2012. In our October 2011 analysis of Singapore's construction sector, we highlighted that the non-residential sector saw the signing of several large-scale commercial construction agreements in 2011. The largest agreement was a joint venture between Malaysian and Singaporean state-linked funds Khazanah Nasional and Temasek Holdings to design and develop six parcels of prime land with a gross development value of SGD11bn in downtown Singapore. These six parcels are already being developed as they had secured bank financing in February 2012.
That said, with residential and non-residential activity expected to remain robust over the rest of 2012, we have revised up our forecasts for the construction sector, with real growth for the sector reaching 5.1% in 2012 (previously 3.8%). Meanwhile, we are maintaining our infrastructure forecasts, with real growth reaching 7.3%.
|Improvement In 2012|
|Singapore Construction (and Subcomponents) Industry Value Data|
Back To Normal
Looking ahead, we expect construction activity in Singapore to return to a more sustainable level. We are forecasting real growth for the construction sector to reach 3.5% in 2013 (from a previous forecast of 3.2%). This decline is because we expect activity in the residential, non-residential and infrastructure sub-sectors to remain decent, but not to reach levels seen in previous years, where record-low interest rates and a fiscal stimulus plan boosted construction activity to unprecedented levels. Projections from the Singapore Building Construction Authority showed that the total value of construction contracts awarded in 2012 (excluding reclamation projects) is set to decline from the highs seen in recent years.
|Falling From Previous Highs|
We believe that there are several reasons for this return to a lower but sustainable level of construction activity.
Residential Sector: We believe that private residential building activity is mostly likely to decline in 2013. Although the Singapore government is boosting public housing and keeping interest rates low, it is also moving resolutely towards curbing speculation in its real estate market. Two key moves are the introduction of a 10% stamp duty on property purchases by foreigners and corporate entities, and the removal of the Financial Investor Scheme (FIS), which allows foreigners to buy Singapore properties to expedite their application for permanent residency. With housing prices still stubbornly highs, further measures by the government to cool prices cannot be discounted.This scenario means that housing prices are most likely to trend downwards over the coming years, and this could dampen the demand to carry out new private residential building projects. We believe this could be a key reason why private residential building activity picked up aggressively in recent months. Private developers are aiming to complete and sell their projects as soon as possible to take advantage of current housing prices.
|Driving Residential Activity|
|Singapore - HDB And Overall Property Price Indices|
Non-Residential Sector: We believe that non-residential building activity will remain decent in 2013 but will not reach the highs seen in previous years. Although commercial building activity should remain robust due to the signing of several large-scale commercial construction agreements in 2011 , industrial building activity, which is mainly financed by Singapore's export-oriented businesses, should remain weak due to poor global economic activity. Institutional buildings activity, which is typically financed by the government, should remain decent as the government plans to award contracts to expand the National University of Singapore and to develop two hospitals in Jurong East in 2012.
Infrastructure Sector: Infrastructure activity should also remain decent in 2013 as we believe that the Singapore government will continue to spend in the sector to boost the country's productivity. A new airport terminal is expected to start construction in 2013, while the tendering process to construct two US$600mn underground cable tunnels is already underway. Recent mechanical disruptions in Singapore's existing metro rail system has also prompted state-owned rail operator SMRT to invest SGD900mn (US$724mn) in upgrading the system between 2012 and 2019.
Therefore, activity for the infrastructure sector should continue to outperform the residential and non-residential building sector in 2013. We are forecasting real growth for infrastructure to reach 4.7% in 2013, compared with 2.8% for residential and non-residential buildings.
|Return To Normality|
|Singapore Infrastructure (and Subcomponents) Industry Value Data|
Risk To Outlook
A major risk to our outlook for the Singapore construction sector is the potential for global economic conditions to worsen. Deteriorating external demand conditions (particularly among its largest trading partners) are weighing on Singapore's export sector, a primary driver of the country's economic growth (See BMI's " Exports Remain On Target For Weak H212" - July 23 2012). Should Singapore's economic downturn prove severe enough, it could push the government to initiate a construction-led stimulus package similar to the one carried out during the 2008 and 2009 financial crisis.