Brokerage expects long-term outlook to remain positive

Brokerage expects long-term outlook to remain positive

By Shabiya Ali Ahlam

The bullish sentiments on the construction sector that prevailed over the last two years have reversed in the short to medium term, with a number of headwinds expected to negatively impact its growth prospects, a brokerage said yesterday. 

However, the analysts opined that they remain optimistic of the sector’s status shifting towards the positive, provided the ongoing economic reforms reach completion within the set timeline. 

“We may not be as excited about the short-term investment of the industry but we are very bullish about the long-term investment. With the stages of growth of our country and economy, there are no two words that there is a lot to be done in this sector, but we feel strongly that it can be done,” opined Asia Securities Chairman Dumith Fernando.

The statement was made at the stockbroking and research firm’s latest ‘Wealth Insight Series’ that explored the construction sector under the theme ‘A Pause in Growth, but What’s Beyond 2018?’.

Presenting the research findings, Asia Securities Research Vice President Naveed Majeed attributed much of the sluggish sentiments to the ongoing fiscal discipline, as specified by the International Monetary Fund, which has led to the trimming of infrastructure spending.

However, the recent cautious messages on the sector made by the Central Bank, with a readiness to bring macroprudential measures to bear on a possibly overheating construction and property development industries are also said to have impacted the market, according to industry sources. Asia Securities said that while the infrastructure expenditure for 2018 is expected to be higher than 2017 levels, it would not be as high as the estimated levels, delivering a direct blow on the sector.
Analysis of the demand aspects show that on the residential front the segment is projected to grow by 10.7 percent within the next five years, whereas on the project segment, where there will be an addition of over 3000 apartments by 2019 and 6000 hotel rooms by 2020, a slowdown is expected till the supply is absorbed by the market.  According to Majeed, the absorption is likely to “take a while” mainly due to the government having repeatedly missed its tourist arrival targets since 2015. 
Meanwhile, it was also noted that the government approving 50,000 houses in the Northern and Eastern Provinces will add to the implications of the overall sector.

On the supply side, the commodity prices that will continue to increase are expected to trim the margins of the sector since Sri Lanka is largely dependent on raw material imports. The negative implications on the fall in cement production are also likely to trickle down to the rest of the value chain even though consumption is projected to increase by 8 percent by 2021.

With changes in consumption trends in both the residential and commercial project sphere, Asia Securities said that the aluminium industry is expected to grow by 9.7 percent by 2021, while the tile market will grow by 10.9 percent in the same period. 

However, labour scarcity continues to be the biggest and most challenging factor with there being a shortage of approximately 400,000 labourers to fuel the industry.

“The long-term growth story of the construction sector still remains intact. But headwinds will impact the market in the near term,” reiterated Majeed.