Construction contracts to drop 16% this year

Construction contracts to drop 16% this year

Domestic construction contracts are expected to shrink by 16 percent to RM13 billion this year, on the back of the fiscal tightening and property cooling measures introduced by the government, according to Alliance Research Sdn Bhd analyst Jeremy Goh. “With fiscal tightening setting in, we believe that a slowdown in government related projects is inevitable as a more prudent spending stance is taken,” he noted in his report.

On average, government related projects account for 72 percent of all the contract awards over the last five years.

To address the narrowing current account surplus in the balance of payments, the government now carefully considers public sector projects – giving priority to low import content as well as high multiplier projects while those with high import content will be “sequenced”.

“As for private sector contracts, we reckon that there is risk of a slowdown as well,” said Goh.

“This follows from the various property cooling measures that will take effect this year such as higher Real Property Gains Tax (RPGT), higher minimum property price for foreigners, lower margin of finance as banks are required to use net selling price, and prohibition of Developer Interest Bearing Scheme (DIBS).”

With the expected decline in construction activities, construction players will likely look for contracts overseas, he said.

Meanwhile, Alliance Research has rated the sector neutral from overweight.

“Our top large cap pick is Gamuda Bhd as its earnings growth is supported by the MRT and potential enhancement from the recent acquisition of Kesas. For the small caps, we like Ahmad Zaki Resources Bhd which is a beneficiary from the rollout of Bumi-projects,” added Goh.
Farah Wahida, Editor of PropertyGuru