A rapid restart: Paused projects and new developments are coming on-line quickly

The construction sector is booming as Myanmar’s opening to the world has brought in foreign investment and sparked an economic renaissance. With the country’s limited domestic capacity and wide range of construction needs, there are plentiful opportunities for foreign investors, international construction firms, and sellers of construction equipment and materials. “Myanmar is currently at ground zero. The construction sector will be very busy for the foreseeable future as the country looks to build its infrastructure capacity,” U Zaw Tun Aung, the managing director of Southern Metal Industry Company, told OBG. The strongest demand has been for high-end projects in Yangon, formerly known as Rangoon, to host an influx of expatriates and business visitors and serve the growing domestic elite. Construction of infrastructure and industrial buildings is also ramping up, with three major airport projects being tendered, at least three large industrial zones being prepared, and vast swathes of the country being explored for oil and gas. Myanmar is being hailed by some as the next Vietnam, which kicked off a multi-decade construction boom when it opened up to the world in the 1990s. With much of the urban housing stock in poor shape and cities expected to as much as double their populations over the next two decades, demand for middle-class urban apartments will be a powerful driver of growth.

All In The Families

Myanmar’s construction sector is dominated by the large, family owned, diversified conglomerates that emerged after the former military regime turned away from socialism in the late 1980s. These groups had close and complex relationships with military leaders, who used their control of land, permissions and public finances to foster a loyal business elite. Foreign investors in real estate were required to have local joint venture partners, which in most cases were major construction firms. A construction boom in the mid-1990s, fed by foreign investment and curtailed by the onset of the 1997 Asian financial crisis, and another in the early 2000s, driven by an inflationary domestic lending spree, were vital formative periods for the sector. By the mid-2000s an established group of well-connected firms regularly participated in government-led projects, most importantly in the building of the new capital, Naypyidaw. A peculiar tradition developed in which the conglomerates that controlled construction firms would be called on to self-finance public buildings or infrastructure in return for favours like access to mining contracts or automobile import licences. These so-called crony relationships and the role of construction companies in financing projects led the US and EU during the 2000s to put most of the big construction firms and their owners and top executives under stricter sanctions than applied to other people and companies in Myanmar. Although the US lifted most sanctions in July 2012 and the EU dropped all sanctions by April 2013, US sanctions on particular companies and individuals were left in force. As of August 2013, six of Myanmar’s largest construction companies – Htoo Group, Zaykabar, Yuzana, Asia World, Max Myanmar and Dagon International – remained under US sanctions.

Demand For Quality Space

After the building of Naypyidaw began in 2002, most of the construction industry’s resources were directed there for the remainder of the decade. That left Yangon poorly prepared to handle the boom in demand for international-standard space that has been under way since 2010. There is especially strong demand for class-A office and retail space, serviced apartments, high-end family homes, international schools, and four- and five-star hotels – in other words, for everything required to host business visitors and accommodate foreign businesses and expatriates moving into Yangon.

“After the change of government, the new emphasis is on Yangon,” said U Ohn Khaing, the deputy chief engineer of High Tech Concrete Technology (HTCT), a unit of Shwe Taung, a major developer-builder. “The demand for space is too great, which is why everyone now is focusing on high rises and expanding the city.”

The strong demand for higher-quality and taller buildings is putting pressure on the construction industry to improve its standards and capabilities (see analysis). Currently, most higher-end projects involve foreign engineering, architecture and design firms from Singapore, Thailand, Malaysia or Japan, with the engineering firm handling complicated work and overseeing one or more domestic construction companies. U Win Khaing, president of the Myanmar Engineering Society, told OBG that as a rule all projects of more than eight storeys are directed by foreign firms. “We are behind neighbouring countries with regards to high-rise projects, but as time progresses this gap will close and we will advance from conventional building methods,” U Han Thein Lwin, managing director of HTCT, told OBG.

Domestic construction firms or their parent groups are often partners in development projects and not merely contractors. Myanmar law only allows foreign investment in real estate through joint ventures with domestic partners, or through build-operate-transfer (BOT) lease contracts with the government. All major construction firms have land banks, which they are usually reluctant to sell and prefer to convert into stakes in high-end developments. For example, Asia World is a partner in projects built by the Shangri-La group.

Hands Off

The biggest recent legal change for the construction industry was a reform to the Foreign Investment Law in 2012 that allows foreign investors in real estate to operate without domestic joint venture partners through BOT lease agreements with the government. The BOT model is being used to attract higher-profile foreign investors for major projects. For the construction industry, it means that on larger projects foreign construction firms are increasingly likely to recruit local firms on a contract rather than partner basis. Another important legal reform in the pipeline was a new Condominium Law that was expected to be adopted in early 2014. The new law will give foreigners, who cannot directly own land, the right to own apartments in condominiums, which will make it easier to finance high-end condominium construction.

Yangon’s largest recent project, a $440m mixed-use complex of high rises in the prime Inya Lake area, is using the BOT model. Hoang Anh Gia Lai Group, a large Vietnamese developer-builder with experience in other South-east Asian countries, secured a 70-year lease for a 6.5-ha site in December 2012 after an international tender. HAGL set up its own construction firm in Yangon and is using a combination of its own imported specialists and local hires. Ground was broken in June 2013.

The government’s next big move will be to tender out a huge, 162-ha site in the Mayangon district of northern Yangon. The Yangon City Development Committee (YCDC) announced in June 2013 that it was preparing international tenders for hotels, malls and housing projects on the site, to be tendered in 2014. The shortage of quality space is such that there is also plenty room for small-scale, niche projects, such as the increasingly popular conversions of urban villas for office use.

Big Infrastructure Projects

Foreign and domestic construction firms will also be kept busy trying to address the country’s severe infrastructure deficit. Firstly, two airport projects were tendered to international consortia in 2013. The government tendered projects to renovate and expand the Yangon and Mandalay airports. The Mandalay tender was won by a consortium of Japan’s Mitsibushi teamed with local construction firm Serge Pun & Associates, while the Yangon tender was won by a consortium including China Harbour Engineering. The largest project is a planned new primary national airport, Hanthawaddy International Airport, to be built 80 km north-east of Yangon. Negotiations with a consortium including Singapore’s Changi Airport Planners, Yongnam Holdings and Japan’s JGC Corp to build and operate the new airport are ongoing. The consortium was originally named in August 2013 as the back-up candidate to take on the project.

Myanmar’s huge hydropower potential will be another major driver of demand for construction work and materials. More than 80 dams have been proposed, ranging from small local projects to the giant proposed TaSang dam on the Than Lwin or Salween rivers, which would be the tallest in South-east Asia. If major projects move forward, investment over the next decade could come to tens of billions of dollars. However, recent dam building has been limited due to popular opposition, poor relations between central authorities and local people, and difficulties obtaining financing.

Chinese state-owned player Sinohydro has headed the building of larger recent projects, including the 790-MW Yeywa dam completed in 2010 and the 600-MW Shweli 1 dam completed in 2008. Among local firms, Shwe Taung has been very active as builder of the 52-MW Baluchaung 3 dam, slated for completion in late 2013, and as supplier of concrete to projects.

“The investments required for the larger dams are very great. We need foreign investors,” said U Ohn Khaing. Meanwhile, a dramatic surge in oil and gas exploration activity is likely to result in a need for more pipelines. For example, China National Petroleum Corporation was expected to complete a $4.3bn pair of oil and gas pipelines leading from offshore north-west Myanmar to the Chinese border in autumn 2013.

Roads & Bridges

Myanmar’s highways and bridges are in dire need of investment. Most are too narrow, poorly paved and lack banks in the turns, and many bridges need to be replaced, renovated, or built where there are none. Work has progressed slowly, but is likely to gather pace due to a recent spike in the number of cars on the road following the liberalisation of automobile imports. Since 1996 the development of most highways has been financed by domestic construction firms through BOT contracts that come with tolling rights, which are increasingly lucrative, especially along the highway from Yangon to Naypyidaw and Mandalay.

According to a February 2013 Ministry of Construction report, 6114 km of roads – 17% of intercity roads – were already under BOT leases. The government has received funds to address some acute traffic bottlenecks from development banks and other governments, and it told local media that it is in talks with an unnamed South Korean firm to build a bridge connecting central Yangon with the southern Dala district.

Housing For A Growing City

Myanmar, and especially Yangon, has a severe shortage of quality urban housing. U Win Khaing of the Myanmar Engineering Society told OBG that demand for new urban housing is around 200,000 units per annum, but in recent years only about 20,000 units have been built. The urban housing stock is dominated by low-quality, low-rise apartment blocks that look older than they are. Most were built after the shift away from socialism in 1988, but due to poor materials and workmanship they are deteriorating. Many were built by smaller developers that would obtain land by approaching owners of older detached homes in central areas with offers to allocate to them a share of a new building’s apartments.

The building of Naypyidaw since 2002 took some of the pressure for housing off Yangon by moving tens of thousands of civil servants to the new capital. Nonetheless, demand in Yangon has grown so strongly since 2010 that many observers are describing the rise of apartment prices as a “bubble”. However, there is relatively little mortgage credit involved.

In April 2013, Dragages Singapore, a unit of French construction firm Bouygues Construction, announced it had won a $100m contract from Myanmar’s Serge Pun & Associates to build the second phase of Star City Thanlyin, a large condominium development on the south-eastern outskirts of Yangon. The project includes 5000 apartments to be completed by 2016.

The government is also accelerating the building of low-cost housing projects in Yangon, often using cross-subsidies to recruit domestic builders. In January 2013 the Ministry of Construction’s Department of Human Settlement and Housing Development awarded permits to two major domestic developer-builders, Shwe Taung and IGE Company, to develop two sites in Dagon Seikkan. The developments are planned to include a combined total of more than 17,000 apartments in 48 towers on 89 ha of land, and the apartments are expected to be sold for around $20,500 per unit.

Daw Hlaing Maw Oo, deputy chief architect at the Ministry of Construction, told OBG the government was studying prefabrication technology as used in Hong Kong that could lower construction costs for social housing. Government planners see a future in which Yangon will double in size from just over 5m in 2013. The YCDC, with assistance from the Japan International Cooperation Agency, unveiled a draft urban plan in May 2013 that foresees Yangon roughly doubling its current population to 10m people by 2040. The plan involves developing new outer districts of Yangon with residential developments and industrial parks. Myanmar’s annual population growth rate of 0.8%, as per the World Bank, is relatively modest for a developing country and by itself would increase population by 24% by 2040. But officials foresee a wave of migration into the cities as the country industrialises, similar to what has occurred in recent decades in China and Indonesia.

Building For Industry

Behind the vision of rapid urbanisation is a plan to develop manufacturing industries by attracting foreign investors. The government is planning three special economic zones connected to major ports, at Yangon’s Thilawa district, at Dawei to the east and at Kyauk Phyu in the north-west. All have hit delays, with the Thilawa project most likely to progress soon thanks to strong backing from Japanese firms. For example, Japan’s Suzuki has announced plans to build an automobile factory there. There are also factories and plants popping up around Myanmar, with much of the early investment since the lifting of sanctions going into production of consumer goods for the domestic market. For example, Coca-Cola opened two bottling plants in 2013 while pledging $200m of investment over five years, and Unilever opened a food-processing plant while pledging €500m ($666m) of investment over 10 years. British American Tobacco announced a planned $50m plant, and Pepsi and Japanese soft-drink maker Pokka were reportedly eyeing investments.

Cement Is Hot

There is no surer sign of the strength of Myanmar’s construction sector than the rush by domestic and foreign investors to boost local production of cement and concrete. Two of South-east Asia’s largest cement manufacturers announced plans in mid-2013 to build cement plants in Myanmar: Thailand’s Siam Cement is planning a $420m plant with a capacity of some 1.7m tonnes per annum (tpa), while Semen Indonesia intends to develop a $200m, 1m-tpa plant.

That followed a pair of deals announced in late 2012 in which domestic developer-builders Max Myanmar and A1 Group signed agreements with engineering firms from Thailand and Singapore to build or upgrade cement plants. Thailand’s LV Technology inked a deal to boost capacity of Max Myanmar’s two cement plants from about 0.2m tpa to 1.5m tpa, while Singapore’s TEE Resources said it would form a joint venture with A1’s subsidiary Ayeyarwaddy Cement and spend $ 200m300m on a new cement plant. Together with a 0. 4mtpa cement plant being built by Shwe Taung, the new projects will more than double Myanmar’s cement production capacity. Red and concrete bricks and aggregate are also produced domestically, as is granite, but the majority of materials and practically all machinery are imported. Many of the major builders are also importers and distributors.

Outlook

Myanmar’s construction industry will continue to enjoy rapid expansion and be an important driver of economic growth for many years to come. Rising demand for buildings and infrastructure is still outpacing increases in supply. Indeed, demand growth is likely to accelerate in coming years, especially if oil and gas exploration pays off and obstacles to development of hydropower are overcome.

The unreliability of the public energy grid and the relatively high cost of private energy supplies are holding back much investment in manufacturing, which in turn slows the pace of urbanisation. Builders complain that a considerable unused or underutilised state-owned land in Yangon is only slowly being made available for development. Besides empty spaces around the city, there are many dilapidated colonial buildings on prime property in city centre Yangon that could be refurbished.

Legal reforms are expected to boost investor confidence. As U Thein Han, technical consulting engineer at A1 Group, told OBG, “The pace of development is slow. Everybody is eyeing investment, but many wait. Some wait for new laws, some wait because of high land prices, but the government is not reducing prices.”

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The Report: Myanmar 2014

Construction & Real Estate chapter from The Report: Myanmar 2014

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