Why Southeast Asia? The region is home to one of the most underappreciated global construction markets—a quiet giant. With an urban population of over 300 million people, Southeast Asia has recently surpassed the North American market. And with a construction market volume of well over USD 250 billion, Southeast Asia has become one of the most attractive target markets for the A/E/C industry world-wide.
While China’s growth has begun to taper, Southeast Asia’s impressive growth has been driven by an expanding and continuously up-skilling labour force. To continue growing, the region needs substantial investment in infrastructure that supports trade, industry, digitisation and urbanisation.
The region’s construction market is growing: In 2013, the ten largest developers (as determined by the aggregate value of their annual construction projects) in the six main ASEAN countries (Singapore, Malaysia, Indonesia, Philippines, Thailand, Vietnam) plus Hong Kong accumulated a total building volume of USD 16 billion. Five years later, the value had increased to almost USD 24 billion.
It is a fallacy to believe that Southeast Asia is a homogenous block of economies neatly fitting together under the ASEAN umbrella. While the city states of Singapore and Hong Kong are well and truly first-world markets, Vietnam and Indonesia, for instance, are still in many ways in their developmental stage. It is nonetheless a compelling undertaking to look at the Southeast Asian construction market through a number of prisms, to highlight similarities and differences. Taken together, this exercise paints a picture of a region that, from a construction perspective, is alive and exciting.
Regional Pulse Check
In early 2018, Southeast Asia’s main countries find themselves at various points of the economic cycle of their respective construction markets.
Sectors: What’s Hot and What’s Not
Looking a bit more closely at each country, different sectoral patterns emerge.
Construction in Singapore has gone through a contractionary period in the last couple of years, caused largely by a slowdown of the property market and a drop in private sector construction. Key sectors that seem to be pointing in a more positive direction are infrastructure, transportation, healthcare and (public) housing. Demand for retail, in contrast, is low.
Malaysia’s economy has, for a number of years, been plagued by rising inflation, a depreciation of its currency and tepid demand for its oil and other commodity exports. The government has been increasingly busy counteracting this trend with significant investments in infrastructure and a large-scale affordable housing program.
For the last 15+ years, Indonesia has benefitted from political stability and a fast-growing urban population, driving domestic demand. The construction sector is expected to thrive with a good pipeline of infrastructure projects, including electricity works, transportation projects and water/sewerage plants.
The Philippines economy has enjoyed robust growth the last couple of years, and the construction sector has been a major contributor. While the residential sector will continue to account for a third of the market, much of the future growth in the construction market will come from government sponsored infrastructure projects.
Construction in Thailand has seen a recent uplift after sluggish growth over the last four years. Government funded infrastructure and transportation projects as well as commercial and residential projects all contribute to renewed demand.
Vietnam’s construction industry is enjoying renewed strong demand after a period of very slow growth. The country’s strong pipeline includes public infrastructure projects (sea ports, transport and power), affordable housing, as well as education and healthcare projects.
Hong Kong has always had a special role to play as the gateway to China, and so is predominately impacted by the cooling off of the mainland economy. The government is investing in infrastructure and the healthcare sector to offset some of the sluggishness of the market.
Growth Drivers and Detractors
Keynesian (demand-side) economic policy is alive and well in virtually all Southeast Asian nations. When global markets are jittery or private demand is weak, governments in Southeast Asia tend to crank their public spending pump. This comes all the more naturally to countries that habitually draft 5-year plans. A good example is the 11th Malaysia Plan, which runs from 2016 to 2020 and includes the development of water treatment plants, power plants, a high-speed rail project connecting Kuala Lumpur and Singapore, and a refinery and petrochemical integrated development in Johor. As a socialist country, Vietnam regularly draws up 5-year Socio-Economic Development Plans. The latest plan guides the country through to 2021 and mandates investments in transport infrastructure, energy, utilities and affordable housing. It prescribes that the dwelling space per capita for the country’s growing population is to increase from 16.7m2 (2015) to 25.0m2 (2020), resulting in the government’s commitment to build one million houses by 2020. The development plan in the Philippines coincides with the 6-year term of the country’s president. In his 10-Point Socioeconomic Agenda, President Duterte has committed the country to public spending on infrastructure projects in the order of USD 160 billion—dwarfing the investments of his predecessors.
While the government is clearly the key driver of construction demand across Southeast Asia, in 2017, a few new detractors entered the scene. Geopolitical concerns (South China Sea, North Korea) are being raised in most of the region’s countries.Due to Southeast Asia’s dependence on free global trade, the exit of the U.S. from the Trans-Pacific Partnership is not good news. There is a widespread perception that China will fill the leadership void created by the Trump administration. China’s One Belt One Road Initiative, which seeks to connect more than half the world’s population through maritime links and surface roads, is viewed as a welcome opportunity for the region’s construction sector, which is seeking to expand further abroad.
Productivity Challenges and Opportunities
The global construction sector is manifestly one of the world’s most inefficient sectors. A recent watershed study by McKinsey Global Institute has established that by implementing seven distinct bundles of best practices, the global construction sector could improve its productivity by up to 50 percent, delivering a stunning USD 1.6 trillion profit windfall to the industry.
Several—but not all—of Southeast Asia’s countries can be credited for having made serious efforts to increase their construction efficiency. Of the seven countries reviewed here, Singapore is clearly the region’s poster child for efficiency advocacy. Several of McKinsey’s efficiency drivers get serious consideration: The government introduced “Industry Transformation Maps” designed to bring efficacy, innovation and global competitiveness to a variety of industry sectors, including A/E/C. Additionally, for a number of years, the government has been tightening its mandate that developers submit their projects using BIM (building information modelling) technology, delivering a fully integrated model of the building with the aim of minimising errors, reducing change orders and avoiding waste. The government is also pushing the industry to rethink design and engineering processes by adopting mass manufacturing practices: construction firms can receive tax relief on capital expenditures incurred in the construction of Integrated Construction and Prefabrication Hubs. The government is also adapting legislation to make room for greater efficiency by introducing a Land Intensification Allowance Scheme and amending the building code to allow cross-laminated timber for high-rise structures.
Hong Kong and Malaysia have introduced similar programs to enhance efficiency in the building sector, such as Malaysia’s efforts to encourage off-site manufacturing through its Industrialised Building Systems (IBS). The other Southeast Asian countries are, however, clearly lagging behind these more innovative construction players.
What’s Keeping A/E/C Leaders Awake at Night?
Some of the more obvious concerns and challenges that weigh heavily on decision makers’ minds are shared across the region. The foremost of these concerns are global political uncertainty and possible changes to global trade. Labour productivity challenges and the shortage of skilled labour are also topics that are shared among decision makers across the region. Other concerns are more country-specific, such as the impacts of an aging population and restrictions on foreign labour (Singapore), political uncertainty (Malaysia and Thailand), funding challenges (Indonesia and Vietnam), land acquisition challenges (Indonesia), as well as underdeveloped financial services and domestic security concerns (Philippines).
Market Outlook—The Trend Is Your Friend
Southeast Asia will be a construction market to be reckoned with in the years to come. According to Global Construction 2030 (a global study of the construction and engineering industry published by Global Construction Perspectives and Oxford Economics), predicts that Southeast Asia’s construction market will exceed USD 1.0 trillion by 2030. This prediction is underpinned by global geopolitical trends that see the BRIC region making way for ICASA (India, China, Africa, Southeast Asia) to be the world’s new economic epicentre. The region’s growth will be driven by labour-intensive light industries moving across the South China Sea to Asia’s emerging markets, wherein wages are increasingly more competitive than in China.
Based on our deep understanding of and involvement in the region’s construction markets, this is our country-specific outlook:
Singapore: cautiously positive
Malaysia: robustly positive
Thailand: robustly positive
Hong Kong: cautiously positive
Philippines: robustly positive
Dr. Matthias Krups is founder and CEO of BCI Media Group—the leading construction information service in the Asia-Pacific region with comprehensive on-the-ground market presence in Southeast Asia, Australia and New Zealand. For more information, visit www.bcimediagroup.com.