Construction may level off after impressive 1Q showing

KUALA LUMPUR: Led by the property sector, the value of construction works done in the first quarter of the year grew a sharp 21.2% to RM25 billion —the fastest year-on-year (y-o-y) pace since Q42012 and the highest level since data collection began in 2008. Value of works done grew by a slower 11.3% y-o-y last quarter in contrast.

The value of residential property works increased 33% y-o-y to RM7.2 billion in the first quarter, according to data released by the Department of Statistics last Friday. This is the segment’s fastest growth rate since 2Q2012 and the highest level since 2008. The growth in residential property contributed 41% of the total growth rate.

Non-residential property also delivered impressive numbers, growing by 20% to RM8.1 billion, the fastest pace since 2Q2009. The segment contributed 31% of the total growth rate.

Yet some economists said there is little guarantee that the strong performance would continue in the near future as the full effects of property cooling measures introduced last year begin affecting works on the ground.

“Most construction works in the first quarter had been planned before the measures were introduced, so the numbers would not have been affected yet. I would watch for the cooling measures’ effects on the property sector from the second quarter,” Suhaimi Ilias, chief economist at Maybank Investment Bank, told The Edge Financial Daily.

In fact, the signs are clear. New planned supply of residential properties fell from 45,019 units in the second quarter of 2013 to 33,462 units in the first quarter of this year, according to the Valuation and Property Services Department. The number of new planned supply correlates closely with the value of residential construction works, with some lag (see chart).

The government introduced a string of measures in the second half of 2013 to cool the property market which had seen house prices rising 53.5% between 2009 and last September. In July 2013, Bank Negara Malaysia (BNM) capped the maximum tenure of loans for properties to 35 years (loans could go up to 45 years previously). Then in October, the government introduced a new real property gains tax regime, banned the use of the developer interest-bearing scheme, and doubled the floor price for foreign buyers.

Nonetheless, Suhaimi believes that growth in civil engineering works, especially in transport infrastructure, may provide support to the coming quarters’ results. The value of civil engineering works grew a mere 10% to RM8.4 billion in the first quarter.

Meanwhile, special trades grew 49% y-o-y to RM1.3 billion.

Quarter-on-quarter, the value of construction works done increased by only 1.1% in the three months to March.

The private sector contributed RM18.1 billion or 73% of total work value, the highest ratio since data collection began in 2008. Construction works by the public sector, on the other hand, amounted to only RM3.5 billion, the lowest since 2008.

BNM will announce the first quarter’s gross domestic product (GDP) on Friday. While construction activity measured under GDP only takes into consideration the value-added aspect of the sector, the total value of construction works provides guidance on what to expect.

BNM forecasts the construction sector to grow by 10% this year, down from 10.9% last year.

This article first appeared in The Edge Financial Daily, on May 12, 2014.


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