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9 Oct 2007

Real Estate and Construction

Construction Outlook: Revival Expected If Politics Become Stable (Current Issue No.1997)

The construction industry in Thailand has been sluggish this year. In 1H07, investments into construction grew only 2.2 percent over-year, slowing from 4.8 percent growth in 2006. During 1H07, private construction – a key indicator of real estate-related investment – shrank 1 percent for two successive quarters, the first contractions in seven years since 2000. This slump is thought to have been due to demand plagued by numerous negative factors such as sagging consumer confidence and a slowdown in business expansion.
KASIKORN RESEARCH CENTER (KResearch) expects that during the second half of this year the construction industry will experience improvement over what was seen in the first half. Still, numerous risks at home and abroad need a close watch. Among the negative factors externally are steep oil prices in the world market, ill effects of the US sub-prime mortgage crisis on the US economy and foreign exchange volatility. Domestically, the political situation will be the key factor affecting consumer confidence. It is projected that in the last half of 2007, growth in the state sector's construction projects will fall or remain at a similar level as in the first half because not many new projects have been implemented. However, construction of the private sector will likely improve slightly, which would boost overall construction to grow 2.4-4.4 percent in 2H07, which would be better than the 2.2 percent of growth in 1H07.
With respect to the broad picture of construction business in 2008, KASIKORN RESEARCH CENTER (KResearch) projects that it may recover somewhat given the condition of a new elected government being substantially stable and can drive the economy by accommodative monetary and fiscal policy. In addition, they must push state investment projects toward advance, which would be a stimulus for the economy and improve confidence within the private sector. However, KResearch remains concerned about the recovery of the real estate sector because the Thai economy is still mired by important risks, i.e., domestic politics and the impact of the hampered US economy, which will affect Thailand's foreign exchange rate and export sector. At the same time, the prices of oil and raw materials in the global market could also rise further.
Broadly speaking, it is projected that in 2008, private construction will improve and grow 4.0-8.0 percent, higher than the 2007 growth projection that it would grow only 0.3-1.0 percent. State sector construction will also likely progress in key investment projects, which would boost growth to 6.3-9.7 percent over our forecast of 4.4-5.7 percent in 2007. This improved trend would result in overall construction growing around 5.1-8.8 percent, improving over the projected growth of only 2.3-3.3 percent in 2007.
As for the trend in construction material prices, they may rise at a similar pace or higher than in 2007, when the construction material price index is projected to rise around 4 percent. This is due to the forecast demand for construction materials, coupled with the trend of volatility in consumer goods prices in the global market. Although the global economy is decelerating, demand for metals in China and India continues to grow profoundly along with investments in infrastructure. In addition, the depreciation of the US Dollar might stimulate foreign funds to speculate on commodity futures.

The level of domestic construction tending toward growth would seem to be beneficial to Thai construction contractors. However, entrepreneurs should seek foreign markets because of many infrastructure mega-project investments in Asian developing countries at present. Also, the Middle East and African construction markets are expanding. This will not only be an opportunity for the service sector, but also for Thai contractors to make important progress in upgrading their potential and strengthening Thai construction business by building on their international operations and preparing for other opportunities and challenges accompanying the liberalization of the service sector, including construction.

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