Construction in Thailand bounces back

Following two challenging years, during which the country has experienced slower overall economic growth and reduced spending on large government contracts, the construction industry came roaring back to life in 2015 with the strongest growth rates on record. The resurgent construction sector expanded by a whopping 15.8% in 2015, making up for lost time in a big way after political and economic uncertainty restricted growth to 0.1% in 2013 followed by a contraction of 3.7% in 2014, according to statistics from the Office of the National Economic and Social Development Board (NESDB). Spearheaded by an impressive 23.9% expansion in the fourth quarter of 2015 over the same period in the previous year, the industry contributed an all-time high of BT379.29bn ($11.4bn) to Thailand’s economy in 2015 – or 2.8% of GDP – up from BT339.61bn ($10.2bn) the previous year and substantially greater than the BT226.6bn ($6.8bn) tallied just a decade ago in 2005.

Solid Base

This record-setting performance is the result of a number of factors that are providing a fertile environment for growth: low base effects from 2014, greater confidence in near-term government stability and the loosening of government purse strings. This last factor is expected to continue to have a major impact in 2016 and beyond as Thai policymakers ramp up expenditure on mega-projects in infrastructure involving the construction of roads, railways, mass transit, sea ports, airports and the like in order to jump-start the economy, which has been stagnating under high household debt, weak exports and sluggish consumption. The renewed momentum on these crucial public works projects was the primary driver within the industry as it gained momentum throughout 2015, although private sector building remained sluggish as a result of slower economic expansion. In the first half of 2015, public construction rose by 34.2%, compared to 2.3% improvement for the private sector, according to NESDB figures.

By another measure, however, building activity has yet to fully recover from its high-water mark in 2012: issuance of building permits. The total area covered by new permits continued to decline through 2015. Such areas in municipal zones tailed off by 6.9% to 24.1m sq meters in 2013 before falling another 2.8% to 23.4m sq metres in 2014 and then plunging another 11.4% to 20.7m sq meters in 2015, according to Bank of Thailand (BOT) figures. Residential projects continue to account for the lion’s share of private sector building projects, with 13.58m sq metres of construction area permitted in 2015, or 66% of the total.

Recent Slide

The housing subsector has been hit hard in recent years, however, as a growing amount of stock, along with slower economic growth, has caused many developers to delay launches and new builds while they concentrate instead on clearing inventory. The result has been a three-year slide in permitted housing construction area, which declined by 4.1%, 0.3% and 16.5% in 2013, 2014 and 2015, respectively, according to the BOT.

Construction of industrial projects has been more varied over the years as a result of the smaller sample size within the subsector consisting of fewer but very large projects. A total of 3.38m sq metres of industrial construction areas were permitted in 2015 – or 16% of the total – down 7.8% on 2014 but still greater than the 3m sq meters of area registered in 2013, according to the BOT. Lastly, the construction of commercial property rebounded to 3.75m sq meters of construction area in 2015 after consecutive declines of 28.4% and 17.8% during the previous two years.

Although economic diversification, increased trade and a thriving tourism industry are all driving growth outside the capital city, Bangkok remains the preeminent market for construction within Thailand, accounting for 60% of all permitted construction activity in 2015. According to BOT figures, a total of 12.4m sq metres of permitted construction space within the Bangkok metropolitan area was on the books in 2015, down from 13.8m sq metres in 2013 but still far more than any other region. Construction area in the Central Region, excluding Bangkok, totalled 2.27m sq metres (up 7.2% on 2014) while all other regions combined accounted for 5.07m sq metres of permitted area (down 22.3% on the year).

Big Digs

After two years of relative calm, big ticket infrastructure projects that are the bread and butter of larger construction firms appear to be set for a revival, with the government announcing a slew of high-priced, high-profile builds. The most significant indicator of the state’s new commitment to moving these stalled projects was the unveiling in March 2015 of a new infrastructure development plan encompassing 59 major infrastructure projects, including 20 so-called mega-projects, worth nearly BT1.8trn ($54.2bn) through to 2022. Construction is expected to gain momentum in 2016 and will cover a wide range of development, including public works on railways, roads, air transport and ports throughout Thailand, along with investments in the ICT sector.

Financing will come from various sources, including the government budget, borrowing and public-private partnerships (PPPs). Peerapol Thavornsuphacharoen, the Ministry of Transport’s deputy permanent secretary, told local daily Bangkok Post that contracts for the 20 mega-projects were expected to be finalised by September 2016. Meanwhile, local daily The Nation reported in September 2015 that early projects within the investment plan had been fast-tracked, including three Metropolitan Rapid Transit (MRT) lines planned in Bangkok and two waste-to-energy power plants to be built in the Nonthaburi and Nakhon Ratchasima provinces. The five investments will require a financial outlay of approximately BT200.4bn ($6.03bn) and are expected to be developed as PPPs under the new Private Investment in State Undertakings Act.

According to a September 2015 report from national broadcaster Thai PBS, the MRT projects include Bangkok’s MRT Pink Line elevated train, connecting Kaerai and Min Buri at an estimated cost of BT56.7bn ($1.7bn); the MRT Yellow Line elevated train, connecting Lat Phrao and Samrong at a cost of BT54.7bn ($1.6bn); and a BT82.4bn ($2.5bn) extension of the existing Blue Line from Bang Sue to Kanchanapisek. The preferred bidder for this last project will also be responsible for the operation and maintenance of the new extension. Contracts for the Nonthaburi and Nakhon Ratchasima waste-to-energy PPP projects are estimated to be worth BT4.14bn ($124.6m) and BT2.25bn ($67.7m), respectively.

The sharper focus on infrastructure has been welcomed by the sector, which has been impacted by the slower pace of planned projects, according to Khushroo Wadia, managing director of construction firm Christiani & Nielsen. “While the Thai construction sector is cyclical in nature, we have experienced a slowdown in mega infrastructure projects in the past few years,” he told OBG. “This has resulted in increased competition, which has driven prices down.”

Deeper Pockets

A significant departure from the short-term budget cycles over the past two years, the massive new investment plan will not only surpass recent budgetary spending, but is shaping up to be one of the more significant public works endeavours in the country’s history. In all, the infrastructure development plan features six double-track railway projects requiring a combined investment of BT129.8bn ($3.9bn), four high-speed railway projects (BT1.08trn, $32.5bn), five MRT projects (BT408.3bn, $12.3bn), three motorways (BT160.5bn, $4.8bn) and two port projects (BT4.7bn, $141.5m), according to construction developer CH Karnchang. “The year 2016 and 2017 will be the year of public infrastructure construction, the highest in history,” Arkhom Termpittayapaisith, the minister of transport, told Reuters in November 2015.

Among these are a number of long-planned and much-needed transportation links that are expected to boost the capacity and efficiency of cross-border movements of goods and people. As the potential for international trade with neighbouring countries such as Myanmar, Cambodia and Laos continues to grow with greater integration of the ASEAN Economic Community and beyond, the facilitation of transport and logistics activity is emerging as a key priority.

Realising Plans

One such project falling under this category is the proposed BT468bn ($14.1bn) Sino-Thai rail project, which will cover a total of 873 km between the city of Nong Khai on the Thai-Laos border and Bangkok, according to a Reuters report. From Laos, the railroad will then extend northwards towards the border with China. By increasing connectivity between Thailand and China, the rail link is likely to be a boon for Thai trade and tourism as China is easily the greatest contributor to the Thai tourism industry, as well as its leading trade partner.

Expected to be completed over the course of three and a half years, the China-Thailand railway will be built in a series of four sections, according to the government’s roadmap for the project. Construction of the first 133-km section, running from Bangkok to Kaeng Khoi, was kicked off in December 2015. The second section runs from Kaeng Khoi to Map Ta Phut, with a length of 246.5 km, followed by the third section from Kaeng Khoi to Nakhon Ratchasima (138.5 km), with the fourth and longest linkage from Nakhon Ratchasima to Nong Khai covering 355 km. Under the terms of the engineering, procurement and construction (EPC) contract governing the project, China is responsible for construction surveying and design, while Thailand is in charge of affirming the construction plan, construction costs, cost-effectiveness and suitability of the rail line, as well as selecting Thai contractors for basic construction.

Better Ties

Thailand is also planning a high-speed railway connecting the capital with Chiang Mai in the north, which is being developed with Japanese partners. If developed according to schedule, the 715-km Bangkok-Chiang Mai line is scheduled to open in 2019. As of February 2016, the two countries were continuing to explore the feasibility of the project, with a progress report expected by June 2016, according to a February 2016 Bangkok Post report.

Air transport infrastructure is also slated for a major upgrade in the phase-two expansion of Bangkok’s Suvarnabhumi Airport, which is expected to boost passenger-handling capacity from 45m to 60m per annum in a bid to bolster the country’s network of regional air hubs. Construction is expected to begin in late 2016 or early 2017, with works to take six years to complete at an estimated cost of BT62.5bn ($1.9bn), according to the national airport operator, Airports of Thailand. The operator will manage the two-stage upgrade, which includes major additions such as the construction of a new passenger terminal, which will be able to handle 20m passengers a year, and a third runway, which will initially measure 2900 metres in length but will later be extended to 3700 metres.

Inputs

In addition to providing impetus for growth in the construction industry, higher government spending on infrastructure is also likely to galvanise private investment, leading to greater overall demand in the construction materials segment. As of early 2016, this increased demand has so far failed to translate into higher prices, however, due to a soft domestic residential market and the fall in energy costs and raw materials prices, along with a decrease in steel price as global supply remains high. Thailand’s construction materials price index averaged 115.8 in the first two months of 2016 (using 2005 as the base year), continuing the downward trend started in late 2014, when the index averaged 126.7 over the year, before falling off to 120.2 in 2015, according to figures from the Bureau of Trade and Economic Indices. Local cement prices reflected the overall trend, with the cement price index declining from 123.1 in January 2014 to 118.6 in the same month of 2015 and finally to 112.2 in January 2016. Some related sub-industries have continued to look up. “The paint industry typically experiences similar pace of growth as GDP growth,” Michael Shum, managing director of Jotun Thailand, told OBG, “so with current GDP growth projections standing at around 3.5% in 2016, combined with the continued growth of the construction and real estate sectors, the industry will enjoy healthy growth.”

The cement price index’s fall reflects flat domestic sales in 2014, when domestic demand contracted by 1%, followed by a stagnant market in 2015 that saw no growth again as purchases hovered at around 40m tonnes per annum, according to the Siam Cement Group (SCG). In spite of this protracted period of stagnation, signs of a turnaround began manifesting themselves in the final quarter of 2015, when demand within the market increased by 2%. This was driven entirely by renewed government spending in 2015, which achieved double-digit year-on-year growth in each quarter of the year, resulting in a cumulative 11% growth for the segment in 2015. This proved to be just enough to offset persistent declines in demand in the commercial segment, of 2%, and the residential segment, which was down another 5% in 2015 after a 1% slip the previous year. “Despite the increase in government spending over the first nine months of 2015, the market remains soft, especially in the residential sector,” Kan Trakulhoon, chairman of the management advisory committee and former president of SCG, told OBG. “However, the cement market will recover in 2016, driven largely by government budget disbursements for large-scale projects in particular.”

Primary Players

Although there were more than 33,000 Thai, foreign and joint venture companies included in the National Statistical Office’s most recent survey of the construction industry in 2014, only a handful of companies provide services for large-scale EPC contracts in the country. Outside these select few heavyweights, the vast majority of these outfits were instead engaged in the construction of buildings, accounting for 53.4% of all companies in the industry. This was followed by road and railway building businesses at 18.9% of the total, while the remainder of the segments remained more fragmented, with no other area breaking into double digits. Roughly two-thirds of these firms operate on a relatively small scale as well, with 66.5% of operations employing just five people or less and another 19.6% of companies employing between six and 10 workers. By contrast, only the large builders of infrastructure works such as roads, power plants, railways and other major civil engineering projects retained large workforces of more than 20 employees.

Three of the largest of these EPC players are Italian-Thai Development (ITD), CH Karnchang and SinoThai Engineering and Construction (STEC), each of which focuses heavily on developing multimillion-dollar infrastructure projects. While the delay in issuing contracts for major government works in 2013 and 2014 has been trying for these companies, the ramp-up of PPPs under the government infrastructure plans in 2015 is likely to lead to new gains.

One of Thailand’s leading construction companies, ITD undertakes a diverse portfolio of activities, including mass-transit systems, airports, buildings, dams and tunnels, highways, bridges, expressways, power plants, ports, jetties and dredging. After a slow 2014, work picked up for the company as its revenue stream increased from BT48.08bn ($1.4bn) in 2014 to BT51.3bn ($1.5bn) in 2015, according to its 2015 annual report. This growth was driven in large part by the signing of numerous new contracts for government projects, including a BT15.3bn ($460.5m) deal to build a part of Bangkok Skytrain’s Green Line to the city’s northern suburbs. Other smaller government contracts inked in 2015 included the construction of highways, residential buildings, irrigation works and wastewater management.

Thailand’s second-biggest construction outfit, CH Karnchang, engages in projects primarily for government agencies, state enterprises and private entities either as a main contractor or subcontractor, or via a joint venture or consortium. Established in 1972, the company now maintains operations across various countries in the ASEAN region, but operates primarily in Thailand and Laos. In the first half of 2015 it inked a number of major deals with the government, worth a combined BT3.62bn ($109bn). These include two contracts, worth BT1.17bn ($35.2m) and BT1.38bn ($41.5m), for the construction of a medical centre and utilities for Mae Fah Luang University, along with another BT1.07bn ($32.2m) deal to build manholes and underground electrical-duct banks for the Bangkok Mass Transit System Light Green line extension (Bearing-Samut Prakan).

This order book was bolstered by a handful of signings in the second half of the year, led by a BT15.33bn ($461.4m) contract for the Khon Kaen section of the State Railway of Thailand’s double-track railroad at the Chira junction in December 2015. Other second-half-2015 contracts signed included a BT1.52bn ($45.8m) contract to work on the MRT Purple line, as well as two separate deals for work on the MRT Blue line worth BT1.27bn ($38.2m) and BT1.56bn ($47m). Driven by the launch of these new projects, CH Karnchang’s revenues rose to BT38.03bn ($1.1bn) in 2015 compared to BT35.44bn ($1.07bn) in the previous year, according to the firm’s 2015 annual report.

Other Key Players

Similar to the other major contractors in the Thai construction segment, STEC also focuses on a diversified array of projects ranging from state-sponsored railroads and airports to privately run power plants and residential buildings. Not to be left out of the government’s infrastructure spending spree, STEC benefitted from a number of new contracts in 2015, having won bids to build part of the MRT Dark Green Line (BT4bn, $120.4m), the Budget Bureau building (BT1.51bn, $45.5m), the Nongbon Drainage Tunnel (BT2.3bn, $69.2m) and other projects worth B1.24bn ($37.3m). Within the construction materials sector, SGC remains the dominant player and also holds the title of the country’s largest industrial conglomerate. Partly owned by the Thai royal family, the company boasts a heavily diversified stable of business units, including chemicals, paper, cement, building materials and distribution. As such, SGC remains one the largest building materials providers in the country and the single largest producer of cement in Thailand. The firm has also been rapidly increasing its already significant international presence through its ongoing expansion in Southeast Asia that has resulted in its holding stakes in more than 100 businesses across the region.

Lower oil prices had a significant impact on SGC’s bottom line in 2015, hurting the company’s chemical production unit and driving down annual revenues by about 10% compared to the previous year, with total sales at BT439.6bn ($13.2bn), according to the firm’s annual report. The cement and building materials business segment accounted for 38% of the group’s revenue in 2015, despite a down year for the sector that saw sales trail off from BT185.4bn ($5.6bn) in 2014 to BT179bn ($5.4bn). Of the 2015 sales, 60% were derived from the Thai market compared to 40% from the international market, including both exports and foreign-based production facilities.

Two other companies operating within the sector to make the Stock Exchange of Thailand’s Top 50 valuation list for 2015 were also primarily providers of materials. Theses are cement manufacturer TPI Polene, which is also involved in the manufacturing petrochemical products, and Tipco Asphalt, which produces and distributes asphalt products for road construction, maintenance and paving industries.

Outlook

The record-setting, double-digit growth of the construction sector in 2015 will not be repeated in 2016, but the industry can look forward to more stable growth in the short term, given the steadier economic and political environment in Thailand compared to the previous two years. Continued economic expansion, the country’s rising demand for housing and, most importantly, renewed government investment levels in public infrastructure are projected to be the main drivers of growth. In addition, the government’s tax incentives intended to attract investment from foreign companies in agriculture, renewable and alternative energies, IT and tourism should also augment construction works.

However, risks associated with the industry’s positive outlook are still in place. Global economic factors, coupled with an ongoing lack of skilled labour, will likely slow potential industry growth. Near-term political stability, considering that the current military-led government will remain in power until 2017, also bodes well for large-scale state transport infrastructure development plans, such as the Thailand-China railway, which gained renewed momentum in 2015. This projected growth should lead to a rejuvenated construction materials segment in both the domestic and export markets, with major cement and steel producers projecting increased demand in 2016.

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The Report: Thailand 2016

Construction & Real Estate chapter from The Report: Thailand 2016