Project Pipeline Gives Cause For 2013 Optimism
BMI View: Construction activity in Hong Kong remained robust in Q212 as the government's plan to boost housing supply and to improve the city's transport links moves into full swing. We expect the construction sector to grow relatively robustly for the rest of 2012, and have revised up our 2012 construction real growth forecasts to 9.0% (previously 7.1%) due to the strong Q212 performance. For 2013, we are cautiously optimistic towards the sector as the large pipeline of projects and the launch of another round of quantitative easing in the US should provide a solid base to support construction activity.
Hong Kong's construction sector continues to growing robustly in the second quarter of 2012. Although the Hong Kong Census and Statistics Department has yet to release Q212 data on construction activity, data released on construction investment indicated that investment in the sector remained as robust as from Q112. Expenditure on building and construction grew by 12.4% year-on-year (y-o-y) in real terms in Q212, compared with the increase of 12.6% in the Q112.
This positive performance is reflected in the data released on the gross value of construction works performed by main contractors in Hong Kong. The value of construction works grew by 37.6% y-o-y in Q212, faster than the 30.0% seen in Q112. Activity in the buildings sector remained at a decade high, with the value of construction works in the subsector growing by 27.4% y-o-y in Q212. Meanwhile, infrastructure activity continues to growth in strength in Hong Kong. Construction works for the infrastructure sector surged by 57.4% y-o-y in Q212, compared with 39.5% y-o-y in Q112.
|Growing In Strength|
|Hong Kong - Gross Value Of Construction Works Performed By Main Contractors At Construction Sites Analysed By Broad End-Use Group, HKmn, At Constant (2000) Market Prices)|
Government Plans In Full-Swing
We believe this Q212 performance shows that the government's plan to boost Hong Kong's housing supply and to improve the city's transport links are moving in full swing. In the 2012/13 budget speech, financial secretary John Tsang announced that 47 residential sites will be placed on the land auction list under the government's 2012-2013 Land Sale Program, as well as four commercial-business sites and two hotel sites. A sizeable portion of the land has already been awarded - the value of real estate transactions in Hong Kong peaked in March 2012 - and this has translated to construction activity.
|Hong Kong - No. of Property Transactions (LHS) and Value of Transactions (RHS), HKDbn|
Meanwhile, several large-scale transport infrastructure projects in Hong Kong, such as the US$7bn Guangzhou-Shenzhen-Hong Kong Express Rail Link, have started construction. Based on data from our Key Projects Database, we estimate that around US$20bn worth of transport infrastructure projects are already under construction in Hong Kong.
These projects are mainly aimed at enhancing Hong Kong's access to the mainland and are critical to the city's economic outlook. China is expected to be the main driver for Hong Kong's economy and is already Hong Kong's largest trading partner and main source of tourists (60% of all tourist arrivals). This economic relationship continues to deepen despite the economic slowdown in China. For example, tourist arrivals in Hong Kong grew by 15.3% in the first seven months of 2012, and this is mainly driven by a 22.6% increase in tourists from China.
|Growing Strong Despite Chinese Slowdown|
|Hong Kong Monthly Visitor Arrivals Data|
Therefore, the Hong Kong construction sector appears to be on track to grow robustly for the rest of 2012 and this strong Q212 performance has prompted us to revise up our full-year construction forecasts, with real growth for the construction to reach 9.0% in 2012 from a previous forecast of 7.1%.
|Supported By Strong Backlog|
|Hong Kong Construction (And Sub-components) Industry Data|
Cautiously Optimistic On 2013
Beyond 2013, we are cautiously optimistic towards Hong Kong's construction sector and have revised up our construction forecasts for 2013, with real growth expected to reach 4.9%, as compared to our previous forecasts of 3.9%. Although the severe slowdown in China's economy is a dampener on the demand for building and infrastructure facilities, the large pipeline of construction projects being released by the government should provide a solid base to support activity. Over the past quarter, we saw several large-scale construction projects in Hong Kong take pertinent steps towards implementation.
In July 2012, South Korea's Samsung Construction & Trading, as part of a consortium with Hong Kong-based builder Hsin Chong, won a US$350mn contract to build the 2.2km subway section of the Shatin to Central Link. In the same month, UK engineering company Atkins secured a lead engineering design contract on the 12km Hong Kong Link Road project worth GBP750mn (US$936mn).
In August 2012, Hong Kong conglomerate Cheung Kong won the land tender to build a new residential and commercial complex above the Tsuen Wan West station in Hong Kong. The company won with a bid of HKD9.6bn (US$1.24bn) - the largest land deal in Hong Kong for more than a year - and will invest an additional HKD20bn (US$2.6bn) in the project.
Besides a large project backlog, the third round of quantitative easing by the US Federal Reserve could increase the demand for speculative investments in Hong Kong such as real estate. This could in turn, drive property developers to increase their building activity to meet demand. Hong Kong's currency is pegged to the US dollar, thus its monetary policy is tied to the US policy. This means that borrowing costs in Hong Kong will remain very low over the medium term. Combined with increased liquidity from the US, monetary conditions in Hong Kong would be ideal to finance property purchases. Although the Hong Kong central bank has taken steps to tighten mortgage lending - it has limited the maximum term on all new mortgages to 30 years - it remains to be seen if it is sufficient to curb the demand for real estate.