An extraordinary construction boom is transforming the skyline of the national capital, Manila, as well as other provincial cities. What were once rundown neighbourhoods have become chic, and abandoned former US military bases have been transformed into new business districts, catering mainly to the fast-growing outsourcing sector. Work on highways, toll roads, ports and power plants is evident right across the archipelago.
SOLID PERFORMANCE: A healthy rate of economic growth – with GDP rising at 6.8% in 2012 – a stable political environment, moderate inflation (at 2.9% in 2012) and improved investment grades have resulted in a spurt of activity in the construction industry.
The Philippines therefore enjoys conditions that are ideal for construction activity which could continue into 2014 and beyond. The service sector grew by 7.4% in the second quarter of 2013, in which construction remained the largest contributor. From expansion of 18.4% in the last quarter of 2012 to 32.5% in the first quarter of 2013, the construction industry has posted four consecutive quarters of double-digit growth on the back of robust performances from the public as well as private sectors. While the latter drives construction activity in the housing segment, the former is responsible for large-scale infrastructure projects.
According to the National Statistical Coordination Board, the construction industry accounted for 6.6% of GDP in the first quarter of 2013, up from 5.3% in the same period of 2012. Its overall $14.2bn market size is expected to rise by nearly 20% to $17bn in 2013. Moreover, the sector is a significant provider of jobs; some 2.2m people are employed here, and according to labour statistics the industry is estimated to have generated over 103,300 new jobs in 2012 alone. The total output of the construction sector increased markedly in 2012, posting growth 14.4% higher than 2011, which is more than its average annual rise in the last several years. The sector surged in the last quarter of 2012 to a high of 18.4%, making construction a big contributor to the Philippine economy. This growth was caused by the upsurge in government spending on infrastructure, and sustained private construction activity.
DEMAND DRIVERS: Construction projects are expected to continue to come on-line over the next several years as the Philippines’ growing economy supports demand for infrastructure, according to a recent BCI Asia report. The construction market research firm described 2013 as the “birth of new construction” for the Philippines, stating, “This is primarily the result of government measures to push the growth of the economy by increasing government expenditure, the growing electricity demand and the upcoming election.” Moreover, civil construction works on roads, bridges and facilities for utilities were driving the majority of the momentum for new construction projects in 2013.
TYPHOON: In November 2013 the Philippines suffered one of its worst natural disasters in living memory when Haiyan, a category-5 typhoon made landfall on the eastern island of Lyte flattening buildings and damaging public infrastructure on a massive scale. Typhoon Haiyan is estimated to have killed at least 10,000 people and caused large-scale damage to property. Estimates put the cost of the disaster at some $14bn. The devastation is likely to result in significant construction contracts in 2014 as rebuilding begins. The most urgent repairs are likely to be the reconstruction of Tacloban City’s main airport, seaports, cargo terminals, power lines, hospitals and mobile network stations necessary to provide relief to the millions of displaced citizens.
NEW PROJECTS: Public spending on airports, bridges, roads, railways, ports and ferry services, potable water and irrigation projects are contributing to increased construction activity. According to the Philippine Development Plan 2011-16, the government intends to increase infrastructure spending to almost 5% of GDP by 2016 when the term of President Benigno Aquino III ends. The estimated demand for infrastructure for the 2011 to 2016 period stands at nearly $70bn. Of this projected demand figure, the government has already earmarked P299.4bn ($7.2bn) for infrastructure projects in 2013 – up by nearly 15% from similar spends in 2012. As of the first quarter of 2013, total infrastructure expenditure stood at P58bn ($1.4bn), almost doubling in growth over the same period last year.
Market research reports show infrastructure has become a significant source of work for construction companies, making up between 29.6% and 37% of the value of the sector in 2012, according to various reports. Furthermore, the segment is expected to show the strongest growth rate over the coming five years, at 4.1% through 2018, compared to 1.9% for residential construction, which was the largest segment in 2012 at just over half (53.4%) of the sector’s value.
ROAD TO PROSPERITY: Goldman Sachs estimates that the Philippines is likely to enhance its per capita GDP by nearly 50% during the 10-year period to 2020, largely thanks to the continued focus on infrastructure improvements. Based on the World Economic Forum’s “Global Competitiveness Report 2012”, it has projected infrastructure demand during this period at $110bn. The current rapid urbanisation and construction trends are likely to add to rising demand for water, energy, roads, airports and other transportation developments.
The need for such capacity increases would in turn facilitate investment flows into the construction sector. A key demand driver for the construction industry in the private sector is the expansion of housing, business and retail space – especially in and around Metro Manila. The Philippines Constructors’ Association recorded 24,400 private projects in the first quarter of 2013, of which 71.7% were residential buildings, 12.4% were non-residential constructions (mainly commercial buildings), and the remaining 15.8% were additions, alterations and repairs of existing structures. Calabarzon recorded the largest number of construction projects with a share of 26.3% of the total, followed by National Capital Region and Region III (Central Luzon) with 13.6% and 10.2%, respectively.
INVESTMENT POTENTIAL: An emerging investment destination has been the North Luzon urban beltway, which has seen businesses relocate to the peripheral zones of Metro Manila, particularly around Central Luzon. The North Luzon Expressway connects Metro Manila with the provinces. It is also linked to the Subic-Clark-Tarlac Expressway, which in turn connects the region with the Subic Bay Port and the Clark International Airport, where construction activity in large infrastructure projects has begun to take shape. Central Luzon posted the highest gross regional domestic product growth at nearly 12% in 2011, surpassing even the National Capital Region and Calabarzon’s growth figures of 7.5% and 5.6%, respectively.
Such developments, coupled with the nation’s rising investment potential, have attracted overseas firms to set up manufacturing facilities in the region. Improved infrastructure is also supporting tourism and hospitality developments. One major construction project is the Philippine Amusement and Gaming Corporation ( PAGCOR) Entertainment City, a 120-ha hotel and casino complex that is situated along a reclaimed area in the Manila Bay, part of Paranaque City and Pasay City. The site is being touted as a new central business district and construction activity on the complex has been partly responsible for lifting the growth in the sector. Indeed, work on several public-private partnership (PPP) infrastructure projects continue apace, such as the Ninoy Aquino International Airport Expressway project.
BUILDING MATERIALS: Despite hectic activity in the construction sector, the wholesale price index (WPI) of basic construction materials actually declined. WPI eased at 1.8% during the first quarter of 2013 compared to last year, and further decelerated to 0.8% between April and May. Inflation rates for key construction materials such as concrete products, hardware, plywood, galvanised iron sheet, structural sheet, glass products, doors, jambs, steel casement, plumbing fixtures, painting works and PVC pipes have remained lower than the overall headline inflation rate of 3.2%. The WPI of machinery and equipment rental remained at last year’s rate; this slow price movement of construction materials has helped investment confidence.
CEMENT: According to Ernesto Ordoñez, president of the Cement Manufacturers Association (CeMap), demand for cement rose 18% in 2012, where he anticipates it to stay for the next two years. While prospects for the cement industry are expected to remain positive, the growth rate is unlikely to surpass 2012 levels, however. Expansion for the cement sector is largely expected to remain in the range of 9-10%. “Given the rapid growth in construction investment, the outlook for the cement industry is positive, and most players are engaged in expansion plans to meet growing demand for cement, aggregates and concrete,” Don Lee, president of Lafarge Holdings (Philippines), told OBG.
Increased spending from the public as well as private sectors in the construction industry is expected to sustain growth going forward – leading many cement companies, such as Lafarge Republic, to embark upon works in 2013 that will see 1m tonnes added to milling capacity. The company reported sales revenues of P19.9bn ($480m) in 2012, up 15% over 2011 and P6bn ($145m) in the first quarter of 2013. Another leading firm, Southeast Asia Cement Holdings (Seacem) reported its year-end profits in 2012 at $92m – more than eight times its 2011 result. Current demand for cement in the Philippines is at just over 18m tonnes. Economic conditions look set to further facilitate expansion in the sector, with double-digit growth expected in 2014.
“The principal trend for the cement industry is the slow transition into green or eco-labeled products that reduce emissions and employ more sophisticated technology,” Paul Vincent H Arcenas, vice-president for strategic planning and marketing at Cemex, told OBG. “These products are not only environmentally friendly but enable customers to save costs.”
PUBLIC WORKS: The construction sector should continue to see healthy growth on the back of massive public infrastructure spending across the country. “This year [2013] alone in infrastructure, our public works has spent around a little less P200bn ($4.8bn), and next year the projected amount is around P260bn ($6.3bn),” Augusto Manalo, president of the Philippine Constructors Association told reporters in November.
The government’s input into the sector is relatively new. “Traditionally, the demand for our industry comes at a ratio of 13:7 from the private sector and the government sector. However, it is interesting to note that the government’s share has been increasing at a steady rate – to a 1:1 ratio – because of the massive public works. And with government inputs in infrastructure, an investor is also encouraged to duplicate it, driving up growth,” Ordoñez told OBG. The government plans to spend P299.4bn ($7.2bn) on infrastructure projects in 2013 and increase it to P834.5bn ($20.1bn) by 2016.
OUTLOOK: The construction sector is set to continue to see healthy growth on the back of massive infrastructure spending by the state and private players across the country. In addition, material input costs such as cement, glass and iron will likely come down in the medium term as demand from China and India gradually eases off, and local producers expand production capacity. However, the sector’s actual growth may fall short of expectations as the government struggles to roll out large-scale developments in a timely manner and land acquisition for projects becomes difficult.
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