Asia-Pacific: Global construction motor
By Scott Hazelton31 May 2012
The Asia Pacific region now accounts for approximately 40% of global construction spending and will lead global construction growth in 2012 with an increase of +7.1% over the 2011 level. China and Japan lead in terms of growth, with each expected to see a +8.4% increase, but for very different reasons and with very different outlooks.
Japan's construction market had been in decline since the mid-1990s. The reconstruction from the devastating earthquake and tsunami in March 2011 has spurred new building activity, but the effort has been slower than originally anticipated. IHS Global Insight has revised down its estimate of repair and reconstruction spending from 3% of GDP to 2%. Slow action by the central government, including lots of bureaucracy and labour shortages, are to blame.
Japan's weak economy is also an issue. Real GDP declined -0.7% in 2011, pulled down by declines in exports and inventory investment.
But the short term still looks strong, thanks to reconstruction work. Residential construction is expected to increase +9.7% in 2012, while non-residential spending will grow +12.6%. The need to rebuild capacity in the auto sector, following the earthquake is a big factor for the non-residential sector.
But once the momentum of reconstruction dissipates beyond 2014, Japan will revert to the near-zero construction growth that has been its hallmark for over a decade.
China's frenetic pace of construction growth is slowing. Whereas there was +10.8% growth in 2011, the rate of expansion for the sector is now in single figures - +8.4% in 2012 and +8.1% in 2013.
Even so, China remains the region's fastest growing construction market, fuelled by infrastructure spending. Its 12th Five-Year Plan targets investment to develop interior and western provinces and tie them to the more highly developed coastal provinces that have seen most growth in the past.
The real estate market remains complex. At the high end, rising house prices have created a fear of an asset bubble, and the government has taken steps to curb this, with restrictions on foreign ownership and limits on owning more than one property. At the other end of the spectrum there is a need for affordable housing for which the government has instituted debt financing programmes and an initiative to construct 36 million affordable units over the next five years.
India is also experiencing slower growth in construction as tight credit conditions, particularly for small subcontractors, put a brake on development. Growth in 2012 is expected to be a moderate +5.5%. India will see healthy non-residential construction growth over the next five years with particular strength in the office segment. Infrastructure improvements will remain a high priority for India in order for it to remain on track to become a significant global competitor.
In fact, infrastructure spending will dominate in Asia this year. There is a heavy influence from China, but all the region's rapidly developing economies are contributing. Consider the relatively small construction economy of Laos, where construction has begun on its fourth international airport.
The US$ 45 million Attapeu International Airport will be completed by June 2013, and is being built by the Vietnamese company Hoany Gia Lai (HAGL), showing that the larger economies do not have a monopoly on international contracting. Indeed, HAGL has been licensed to build another airport in northern Huaphanh province with construction due to start next year.
Energy projects are also endemic in the region. Among the many power and pipeline projects is the Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline project, a multi-billion dollar, 1800 km venture. While the project still faces significant hurdles, US energy companies are interested in participating, and US commercial involvement would be a huge lift for the ambitious project before the July 2012 deadline to set a construction timetable.
Throughout the Asia Pacific region, non-residential construction fares well in most markets. In the export-led markets of the region, economic improvement in the US and Europe will improve industrial production once again and require expansion. While China has overcapacity in some areas, it will pull back in its most inefficient industries to focus on newer, higher value sectors such as pharmaceuticals.
Improving incomes will also create greater domestic consumption, with the consequent need for retail space. Evolving standards of living are also going to create demand for more and better health care and education, driving institutional construction activity.
While there will be challenges for Asian construction in 2012 compared to prior years, it should weather the concerns. Most Asian economies have ready access to capital to improve their infrastructure and productive capacities as well as the long term vision to make the necessary investments.