A new study out today outlines the changing landscape of the growing construction sector. The study by Asia Securities (ASEC) suggests that the next 10 years will see a shift in growth from infrastructure to housing.
A presentation delivered by Asian Securities Researcher Kanishka Perera outlined this transition likely to happen in the construction sector. Perera said, “The long term drive of the industry will come from residential based businesses.”
According to Perera, the Government is set to invest an estimated Rs. 590 b over the next two years on various infrastructure projects related to roadways and water supply. However, few of these projects will offer real opportunities to local companies.
“Even though there are huge foreign funded projects coming along we do not see much of that trickling directly to our construction companies because most of them do not have the technical expertise or the capacity to take those on,” said Perera.
Drawing on current demographics trends, Perera predicts a future demand for housing. “If our population grows at about 0.8 – 0.9% per annum and we have roughly about 3.9 people per household, then there could be up to 40,000 new homes required per annum,” he said.
In addition to addressing the demand for new homes, Perera also highlighted that with the average age of a Sri Lankan house being more than 12 years old, many home owners would opt to refurbish their homes thereby adding to the construction boom.
Perera also cites trends that suggest the average size of a house has increased over time. “This will create a new demand in the tile sector because the greater the square foot of the house, the greater the amount of tiles will be required and other raw materials in general,” he said.
Tiles will also receive a boon due the expansion of use from bathrooms to entire households. “With the availability of large tiles and increasing household income, people tend to put in tiles on floors because it’s seen as prestigious and easier to maintain,” said Perera.
Other industries set to benefit from this housing boom include cement. “Cement makes up for around 20% of total construction costs for residential houses,” says Perera. Though cement will compete with tiles, the product will still see great demand due to larger houses.
According to ASEC speakers, the construction sector is seeing a promising annual compound growth of 18%. When the civil war ended in 2009 the sector contributed only 6.5% of the national GDP, by 2014 that had risen to 10%.
In addition to the boom seen in construction, ASEC speakers also said that the mining industry has seen comparable growth and that the two industries were linked. As construction rapidly increases, so too does the demand for raw materials from mining.
ASEC’s report, out today, will contain detailed analysis of various companies linked to the construction industry and will feature recommendations for investment strategies.