Construction in for long winter as cooling measures dash hopes

En bloc boost cut short; SMEs in particular also vulnerable to new headwinds

Jul 27, 2018


JUST when a silver lining appears to be on the horizon for Singapore's construction industry, the latest round of property cooling measures has put paid to the sector's recovery.

Earlier in the year, builders - many of them small and medium-sized enterprises (SMEs) - had forecast that after enduring years of decline, the worst will be over by the end of 2018.

Kenneth Loo, president of the Singapore Contractors Association Ltd (SCAL), told The Business Times: "Before the measures, we could see some light at the end of the tunnel - the sector was just about to turn around. Now, we don't know what is going to happen."

According to data compiled by Edmund Tie & Company, the number of en bloc sales since 2017 stands at 64 so far. Its head of research and consultancy Ong Choon Fah estimates that this will translate to 21,135 units to be built.

In comparison, there were three en bloc transactions in 2016, translating to 1,907 units to be built. Construction typically takes place about 1 to 1.5 years after the sale, but timelines vary.

Most economists agree that the record number of en bloc projects in the past 1.5 years would give the construction sector a lift, but they are mixed about how long the momentum can be sustained.

OCBC economist Selena Ling said: "Initially, we were expecting construction to bottom out this year. But the latest round of measures could postpone that recovery story."

ANZ economist Khoon Goh was more optimistic: "Given the amount of en bloc transactions that have been completed so far, this will still result in a pick-up in residential construction activity and the associated flow-on effects through the value chain."

To him, the cooling measures will "dampen" the extent of the pick-up but not delay it.

On the other end of the spectrum, Nomura economist Brian Tan believes the nascent construction recovery will "likely prove short-lived".

In fact, he believes there could be another round of property tightening measures, possibly as soon as October. This is because the latest round of measures might not be "effective" and private residential property prices would rise by 10 per cent this year, he said.

Observers say some firms have been struggling to stay above water in the past few years due to the soft property market and are ill-prepared to deal with more headwinds. These include the impact of the US-China trade conflict, interest rate hikes, and global growth slipping a notch.

In recent advance estimates of Singapore's Q2 economic growth, the construction sector continued to contract for the eighth straight quarter. It shrunk by 4.4 per cent year-on-year, easing from the previous quarter's 5.2 per cent decline.

Kurt Wee, president of the Association of Small and Medium Enterprises (ASME), said: "A lot of construction companies weren't doing well even before the cooling measures. Some of them have consolidated, some have shrunk to become smaller contractors."

SCAL's Mr Loo pointed out that weak tender prices will continue to be an issue.

"Cashflow will be tight because the impact of low-priced jobs will be felt in the market for a long time," he said. "When you have low prices, your margins are lower and it will impact your capability to meet financial obligations."

While the en bloc transactions and government projects announced last year will go some way to prop up the languishing construction sector, Mr Loo said improvement won't be seen till 2019 at least - a sentiment shared by other market watchers.

Even so, he said it is "anybody's guess" whether it is enough to support a solid turnaround.

While the property cooling measures impact the economy most directly through the construction sector, which makes up about 5 per cent of the economy, it is not the only one that would feel the hit.

It also affects financial services through banks' mortgage books, as well as those in the ancillary value chain such as property agents, property consultants, landscapers and lawyers.

Economists estimate that property-related businesses make up about 10 per cent of Singapore's economy. As of March 2017, about one in five persons in the employed workforce is directly involved in real estate, and its ancillary or the construction industry.

Aside from the impact on specific industries, developments in the property market can also spill over to consumer sentiment.

ANZ's Mr Goh explained: "There is a fairly decent correlation between the property market and the economy. But this does not mean that property drives the economy. Most of the time, it's the other way round - a strong economy results in a strong property market."

While en bloc windfalls are often said to spur consumer spending, he pointed out that the strong en bloc activity since last year has not had a material effect on the economy beyond higher property sales and prices, and a lift in sentiment towards the property market.

Ms Ling concurred: "Consumer spending may be affected to a certain extent. But if you look at the people who benefit from en bloc sales, they will go out and buy property. They don't necessarily go out on a spending spree."

As such, the latest round of property cooling measures are not likely to affect or curtail consumer sentiment, said economists.

Observers maintain that, for now, it will mostly be the SME players in the construction sector that are in for a long winter.

To survive the spell, Mr Loo urged contractors to be careful with their bids in order to ensure sustainability.

He warned: "At the end of the day, if the market turns around and you cannot sustain your operations, there's no point."