Construction Sector

Construction Sector: Construction costs to rise with supply push on public housing

The news: Sim Lian Group Limited, construction player turned property developer, voiced its concerns that construction cost may rise with recent policy news of the increase in speed of the pace of public housing supply. The temporary policy, rolled out recently, calls for the building of HDB flats ahead of order. It seeks to clear the demand backlog and to help young couples get their flats faster. HDB will pick up the construction pace, with plans to deliver 25,000 units this year, up from 22,000 units previously.

Our thoughts: The stepping up of the public housing construction pace may drive up construction costs, affecting profit margins for both construction companies and developers, since both may end up sharing the cost burden. Abrupt and/or frequent changes in housing policies may create short-to-medium term volatility in construction costs, land supply and the selling prices of residential developments (particularly the mass market). In a more volatile environment, developers have to be more accurate in forecasting future demand and/or supply, as well as be able to exercise good control over their costs (eg. land, construction and financing costs), as failure to do so will result in erosion of margins. This also implies that smaller developers may be more cautious when investing in future projects, as “timing” their project releases when the market is positive, may become more difficult, particularly if they do not have the holding power.. However, with a strong pipeline of projects out there (eg. MRT lines and rejuvenation of estates like Jurong), we think construction players may be able to pass on more of the cost increase to the developers and hence maintain our overweight call on the sector. Within the construction industry, we like BBR (BUY, TP S$0.52), Kian Ann Engineering (BUY, TP S$0.31), KSH (BUY, TP S$0.31) and Lian Beng (BUY, TP S$.0.67).