Wealth Insights Series: Construction – Transitioning from Infrastructure to Residential

Asia Securities, Sri Lanka’s leading independent stockbroking and research firm, hosted the third instalment of its “Wealth Insights” series of investor events on Monday 2nd November 2015. The event, titled “Transitioning from Infrastructure to Residential” focused on the outlook for the Construction sector and brought together industry leaders with institutional and high net worth investors. 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 analyst and Head of Research, Mr. Kanishka Perera, presenting highlights from the sector report and Asia Securities’ strong positive outlook of the Construction industry. Mr. Perera’s presentation concluded that resumption of stalled infrastructure projects will drive near-term growth while rising income levels and population growth will lead to housing taking over as the growth driver in the longer-term.

The presentation was followed by a panel discussion consisting of prominent industry figures; Mr. Christopher Joshua, Managing Director, Access Engineering PLC; Mr. Sanath Manatunga, DGM – Corporate Banking, Commercial Bank of Ceylon PLC; Mr. Nayana Mawilmada, Director General, Urban Development Authority; Mr. Asanka Dissanayake, Manager-Controlling, Holcim Lanka Limited.

Mr. Dissanayake stated that longer term decision making on policy will have a key impact on driving growth for the broader sector. Speaking on the cement sector, he stated that while it is attractive there are challenges especially with price controls. Looking at the longer term, when land prices pick-up, there will be significant scope for condominium development as long as interest rates remain stable and affordability is maintained. Lack of certainty is one of the main risks which they see for the industry.

Mr. Mawilmada stated that growth in infrastructure will be more sustained and the demand from housing will come in faster with two important transformation in the next 5-10 years. First, Colombo will see a significant growth in mass transport. Then we will start to see a shift in the housing market. Sri Lanka is currently a single family detached housing country. However, rising densities will lead to a shift towards a multi-family housing structure. Furthermore, he stated that there is a lot of supply at the high-end and low-end but, there isn’t much supply to the middle-income side and presents an opportunity for private players to exploit. The government wouldn’t be directly involved in putting up housing projects with virtually almost all being private public partnerships. The government will however, be involved in pushing financing for housing as they see it as being underpenetrated.

Speaking from the banking point of view Mr. Manatunga said that there is a change in the thinking pattern on lending to long-term construction projects where banks did not previously participate in a material manner. The sector is also seeing a shift in lending to local sources from the earlier foreign sources. Apartment construction is one place where they are seeing growth coming from but, a concern the banks have is whether there is an oversupply as they are mostly high end ones.

Mr. Joshua stated that foreign funded projects led by foreign contractors helped local contractors gain expertise in infrastructure projects through sub-contracting. The government also pushed for subcontracting to the local players. The ultimate impact of this has been a transfer of technical knowhow and track record to the local players to bid for the larger infrastructure projects. As a short-term risk he mentioned that saturation is an issue with a slowdown in construction with the new government coming into power. Echoing Mr. Dissanayake, Mr. Joshua also stated that implementation and uncertainty are the key risks for the sector.

About Asia Securities
Asia Securities, Sri Lanka’s leading independent stock brokerage firm, offers best-in-class research across macroeconomics and multiple sectors listed on the Colombo Stock Exchange. The “Wealth Insights” series which has garnered significant investor interest, focuses on investment ideas and outlook for key sectors. Asia Securities provides the broadest reach among investors including domestic institutional, high net worth and retail, as well as foreign institutional and high net worth clients.