Construction sector long-term growth story remains intact despite near-term slowdown
November 13, 2017 – Asia Securities, Sri Lanka’s leading independent stockbroking and research firm, hosted the sixth instalment of its ‘Wealth Insights’ series of investor events on Monday 7 November. The event titled ‘A Pause in Growth, but What’s Beyond 2018?’ focused on the near-term and the long-term outlook for the construction sector and brought together industry leaders with institutional and high net worth investors.
From left: Royal Ceramics Managing Director Aravinda Perera, Siam City Cement Regional Controller Asanka Dissanayake, Asia Securities Vice President
– Research Naveed Majeed, Prime Lands Group Chairman and Co-Founder Brahmanage Premalal and Access Engineering Managing Director Christopher Joshua
The session’s discussion focused on unearthing deeper insights into sector dynamics that should better inform investment decisions.
The event kicked off with Asia Securities’ Construction Sector AnalystNaveedMajeed presenting highlights from the sector reports and Asia Securities’ outlook of the construction industry. Majeed’s presentation concluded that while the long-term growth story for the construction industry still remained intact, the sector will see some headwinds that will cause a slowdown in the near-term.
He pointed that the slowdown will be led by the infrastructure sector where sluggish growth is expected due to ongoing fiscal discipline, which has seen budgets for infrastructure expenditure halved from previous estimates while a pickup in commodity prices will lead to pressure on margins. However, a looser monetary policy combined with an uptick in consumer spending power and resumption of delayed infrastructure projects will provide longer-term growth.
The presentation was followed by a panel discussion consisting of prominent industry figures; Royal Ceramics PLC Managing DirectorAravinda Perera,Prime Lands Group Chairman and Co-Founder BrahmanagePremalal, Access Engineering Managing Director Christopher Joshua, and Siam City Cement Regional ControllerAsanka Dissanayake.
Commenting on the infrastructure sector, Joshua noted that while the expectation was for large-scale infrastructure demand to pick up in the last two years, this been held up mainly due to funding constraints from the Government side. Joshua also went on to address the broader issue face by the construction sector in the labour shortage. He pointed out the reason for this as a combination of the construction sector picking up rapidly in the past two years, which has caught the labour supply off guard and also the lack of infrastructure to provide a trained labour pool.
On the tile industry, Perera noted that the key threat to the tile industry continues to be cheaper imports coming into Sri Lanka. He pointed that imports now account for approximately 60%, mainly from China, as market share has been chipped away from the higher priced local producers over the past few years. Without anti-dumping laws in place, unlike for most of the regional countries, he sees this as a threat that will continue to impact the local tile players in the long-term.
On the opportunity that lies within the tile industry, he noted that less than 15% of Sri Lankan houses were tiled as of 2013, which provides a large market for the tile players to penetrate into. He pointed that an increased number of households will turn to tiling their homes (as opposed to already having concrete floors), as income levels continue to grow within the rural population.
Speaking on the apartment space, Premalal noted that a sharp increase in land prices over the last two years led to an increasing number of people moving away from houses towards apartments. Operating in the medium end high-rise apartment market, Premalal stated that for projects located in tier II cities, it is now a necessity to include other amenities such as a gymnasium and a swimming pool (which used to predominantly be a feature of high end high rise residential buildings) which are increasingly sought after by buyers. He stressed that the pricing point is key when marketing apartments, noting that apartment prices have increased sharply in recent times. Dissanayake spoke about the recent capacity expansions by the larger incumbents of the Sri Lanka cement industry which comes in a time where the construction industry is seeing a phase of tepid growth. He noted that while the capacities may not see high fill rates in the near-term, he sees that the capacity expansion will be required to keep up with the long-term growth for construction sector led by the infrastructure and residential sectors.
Speaking about the recent fall in local cement demand, Dissanayake noted that the slowdown was mainly seen in the retail sector, while consistent flows were not seen coming from the commercial sector to offset the fall in the retail sector.
-Pix by Lasantha Kumara