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21 Oct 2005

Real Estate and Construction

Construction Industry in H2/2005 and 2006

Construction industry has exhibited steady growth, buoyed mainly by the booming real estate business and the government's gearing up for investment in infrastructure-related projects. However, investment in the private sector's construction this year has seen a slowdown in line with sluggish real estate industry. Fortunately, investment in projects of various public agencies, in particular, mega-projects may be a main thrust of growth for the construction industry.

Over the second half of this year (H2/2005), Kasikorn Research Center (KRC) forecasts that investment in construction by the private sector may grow around 7.3 percent at constant prices, down from the growth of 9.4 percent seen during the first half (H1/2005). The slowdown would be in line with slowing real estate industry where demand for residential units has been on the ebb. Meanwhile, investment in the construction projects of the government may exhibit growth of 16 percent, slightly higher than 14.1 percent over H1/2005, thanks to acceleration in budget disbursement among public agencies. As a result, investment in construction throughout this year may post growth of some 12 percent, modestly lower than the growth of 13 percent recorded in 2004. Total investment value in construction is projected to reach some THB705 billion against THB600.036 billion in 2004.

Looking ahead into next year, the slowdown in the housing sector is likely to persist against the backdrop of upward interest rate trend. On the plus side, the sector may be supported by easing inflation and better economic growth in 2006 that will result in improved business confidence toward investment. KRC forecasts that the private sector's construction next year will grow around 8 percent, close to the level of this year. On the government front, if public investment projects are implemented as planned, investment in the government sector's construction may grow more than 20 percent compared to 15.7 percent projected for this year. Therefore, investment in construction on the whole is set to top some THB850 billion, a year-on-year rise of 15 percent in 2006.

KRC expects that the investment projects of state sector should stimulate the total construction investment to grow more than 10 percent until 2007 and will slightly decelerate in 2008 before contracting in 2009; a year that the investment value of state sector may drop in the final part of mega-projects and many parts of civil construction work of the electrical trains will be completed and then all the work will be focused on the electric train system. KRC estimates that between 2007-2009, the construction of state sector may have an average value of around THB550,000 million per annum, which will boost the country's total construction investment to an average value of around THB1,000,000 million per year, or growing at an average fixed price of around 4 percent per year.

The growth of construction business will induce linking results to other related businesses, which make the demand for construction materials grow in the same direction. However, the prices of construction materials and construction cost still tend to rise, even previously construction and real estate entrepreneurs gained benefits from the stable prices of construction materials in general. In the first 9 months of 2005, the average price index of construction materials increased only 0.7 percent due to weaker prices of steel products and cement. However, entrepreneurs would get impact from the hike of other costs as the average producer price index in the first 9 months of this year showing an increase by 9 percent and the trend that construction material prices might rise in the remaining of the year due to the pressure of possible higher energy cost. For the prices of major construction materials such as cement, though they tend to drop according to decelerating real estate market outside the construction season, the prices can possibly increase according to the rising demand when the state's mega-projects proceed in full speed. At the same time, financial cost of the business tends to rise according to higher interest rates. In conclusion, though construction business will get advantage from a possible higher volume of construction projects, there is a pressure on higher cost. Therefore, in next years, cost management is an important variation to the performance of construction business.

Real Estate and Construction