Asean construction sector feeling effects of US-China trade war

As the US-China trade war continues to brew, construction activity in Asia is at risk of becoming collateral damage, economists at Oxford Economics say.

They noted, however, that the impact on the sector across countries will vary widely with some areas receiving a boost, as manufacturing activity is diverted from China.

In Vietnam and Indonesia, economists said that non-residential construction is set to outperform the rest of the region, as these countries are better able to offset weaker global trade volumes with domestic growth.

The Vietnam commercial property sector is expected to be a star performer, with work done in hotel construction expected to register its third year of an acceleration in the pace of growth, with a 15 per cent year-on-year increase in activity forecast for 2019. In this sector, several international hotel chains have indicated their desire to increase their exposure, adding to other marquee developments in Ho Chi Minh City such as the Empire 88 Tower and the Hilton Garden Inn.

In Indonesia, the economy continues to experience improving business sentiment following President Jokowi's re-election, and looks to be repositioning itself following large-scale infrastructure developments to tackle infrastructure bottlenecks, which have been roadblocks to the business sector, and also to open up more tourist destinations.

The country is turning towards public-private partnerships to deliver some of its major projects, including energy and transport projects like the PLTGU Jawa-1 gas turbine. Consequently, economists expect total construction in Indonesia to see 11 per cent year-on-year growth, with the pace of activity then accelerating to average 21 per cent year-on-year growth between 2019 and 2023.

Meanwhile, though trade-reliant Singapore will not fare as well, with slowing economic prospects dampening construction activity, institutional building will nevertheless provide a bright spot for the sector.

Singapore's weak demographic outlook, with population growth set to fall below 1 per cent per annum over the next five years, will also act as a drag on construction over the long-run.

That being said, investment in health and education buildings is expected to provide a bright spot for the sector, with government expenditure increasing in response to an ageing society and technological disruption.

A large pipeline of commercial projects in Singapore, such as the Guoco Midtown mixed-use development and a mixed commercial development at Central Boulevard, increases the likelihood of supply overhang in the city as economic fortunes and corporate profits suffer, which will dampen developer appetite for new projects in the near term.

Also, significant Singapore public infrastructure investment projects will drive a rebound in construction work done, particularly in the early 2020s, and economists expect work done to grow by 8 per cent year-on-year over the next five years.

Overall, the construction sector in Singapore is expected to rebound in the early 2020s, to recover from the recent downturn, with activity having declined 10 per cent year-on-year from 2014 to 2018. However, economists emphasised that the recovery will be modest when compared to historical performance, with weak demographic trends and muted house price growth weighing on activity. Overall, residential building work done is projected to grow by 14 per cent year-on-year from 2019 to 2023.

Partly in response to the slowdown in global momentum, governments across the region are ramping up infrastructure investment.

The Philippines, Vietnam and Indonesia have the strongest outlook, with their governments committing a total of US$500 billion over the next four years in funding for much-needed transport and logistics projects. These countries top the list of countries in the region for infrastructure spending targets to 2024, while opportunities remain for countries like Malaysia.

In Indonesia and the Philippines, there has been a significant emphasis on transport projects improving linkages between regions and economic zones such as the US$3.4 billion Simpang Indralaya-Muara and Enim-Lubuk Linggau Toll Road, while Vietnam is undertaking large energy investments in projects such as the US$3.7 billion LNG Import Terminal, along with expansions to its transport network including the US$3.5 billion Can Tho City Rail line.

These projects will contribute to a rapid increase in civil engineering construction over the forecast period, with average annual growth of 22 per cent year-on-year for Indonesia, 20 per cent year-on-year for the Philippines and 14 per cent year-on-year for Vietnam projected from 2019 to 2023. Malaysia faces a more uncertain investment environment, but the government has indicated its commitment to restart several large infrastructure projects such as the US$33.53 billion Bandar Malaysia infrastructure project.

Even accounting for the significant amount of uncertainty in the global economy, economists expect that economic fundamentals will remain the key driver of relative performance for the construction sector across Asia. Those countries with robust population growth and the potential for continued economic development will see most activity in building and civil engineering construction.