Construction: Near-Term Outlook Still Bright
BMI View: As expected, the Hong Kong government's plan to boost housing supply and to improve the city's transport links continues to move into full swing. We expect the construction sector to grow relatively robustly for the rest of 2012, and have revised up our 2012 construction real growth forecasts to 10.1% (previously 9.0%) due to the strong Q212 performance. For 2013, we are cautiously optimistic towards the sector as the large pipeline of projects and the launch of another round of quantitative easing in the US should provide a solid base to support construction activity.
As expected in our previous analysis of Hong Kong's construction sector, the sector continued to growing robustly in the second quarter of 2012. Data released from the Hong Kong Census and Statistics Department showed that real growth for the construction sector reached 10.2% year-on-year (y-o-y) in Q212, compared to -0.5% y-o-y in Q211.
|Recovery In Full Swing|
|Hong Kong Quarterly Construction Industry Value Data, In Chained 2010 Dollars|
This positive performance is reflected in the data released on the gross value of construction works performed by main contractors in Hong Kong. The value of construction works grew by 37.6% y-o-y in Q212, faster than the 30.0% seen in Q112. Activity in the buildings sector remained at a decade high, with the value of construction works in the subsector growing by 27.4% y-o-y in Q212. Meanwhile, infrastructure activity continued to grow in strength in Hong Kong. The value of construction works for the infrastructure sector surged by 57.4% y-o-y in Q212, compared with 39.5% y-o-y in Q112.
|Both Growing Strong|
|Hong Kong - Gross Value Of Construction Works Performed By Main Contractors At Construction Sites Analysed By Broad End-Use Group, HKmn, At Constant (2000) Market Prices|
Government Plans In Full-Swing
We believe this Q212 performance shows that the government's plan to boost Hong Kong's housing supply and to improve the city's transport links are moving in full swing. In the 2012/13 budget speech, financial secretary John Tsang announced that 47 residential sites would be placed on the land auction list under the government's 2012-2013 Land Sale Programme, as well as four commercial-business sites and two hotel sites. A sizeable portion of the land has already been awarded - the value of real estate transactions in Hong Kong peaked in March 2012 - and this has translated to construction activity.
|Hong Kong - No. of Property Transactions (LHS) and Value of Transactions (RHS), HKDbn|
Meanwhile, several large-scale transport infrastructure projects in Hong Kong, such as the US$7bn Guangzhou-Shenzhen-Hong Kong Express Rail Link, recently started construction. Based on data from our Key Projects Database, we estimate that around US$20bn worth of transport infrastructure projects are already under construction in Hong Kong.
These projects are mainly aimed at enhancing Hong Kong's access to the mainland and are critical to the city's economic outlook. China is expected to be the main driver of Hong Kong's economy, and is already Hong Kong's largest trading partner and largest source of tourists (60% of all tourist arrivals). This economic relationship continues to deepen despite the economic slowdown in China. For example, tourist arrivals in Hong Kong grew by 15.8% y-o-y in the first ten months of 2012, driven mainly by a 23.8% y-o-y increase in tourists from China over the same period.
|Driving Demand For Connectivity|
|Hong Kong Monthly Visitor Arrivals Data|
Therefore, the Hong Kong construction sector appears on track to grow robustly for the rest of 2012, prompting us to revise up our full-year construction forecasts, with real growth for the sector expected to reach 10.1% in 2012 from a previous forecast of 9.0%. This is despite higher base effects, where the latest revision of historical data by the Hong Kong statistics department showed that real growth for the construction sector was 8.4% in 2011, higher than our estimate of 7.5% (Hong Kong economic data is measured by chain volume over the preceding year, which in this case is 2010).
|A Better Decade|
|Hong Kong Construction Industry Forecasts|
Cautiously Optimistic On 2013
Beyond 2013, we continue to be cautiously optimistic towards Hong Kong's construction sector, and have revised up our construction forecasts for 2013, with real growth for the sector forecast to reach 4.9%. Although the severe slowdown in China's economy is a dampener on the demand for building and infrastructure facilities, the large pipeline of construction projects being released by the government should provide a solid base to support activity.
Over the past quarter, we saw several large-scale construction projects in Hong Kong (such as the Shatin to Central Link and the Tsuen Wan West station mixed-development project) take pertinent steps towards implementation.
The growth in land supply has also prompted the government to design Hong Kong's first new long-term housing strategy in 14 years. To ensure that the new builds will be taken up by the middle income strata, a committee is mooting price-control measures such as taxes and restrictions on loans to non-locals for second homes. Such developments lead us to believe that this influx of new supply would be priced to sufficiently meet local demand, thus stimulating the continuation of further residential construction.
Besides a large project backlog for infrastructure and affordable housing, the third round of quantitative easing (QE3) by the US Federal Reserve could increase the demand for speculative investments in Hong Kong such as real estate. This could in turn, drive property developers to increase their building activity to meet demand. Hong Kong's currency is pegged to the US dollar, thus its monetary policy is tied to the US policy. The release of QE3 means that borrowing costs in Hong Kong will remain very low over the medium term. Combined with increased liquidity from the US, monetary conditions in Hong Kong would be ideal to finance property purchases. Although the Hong Kong central bank has taken steps to tighten mortgage lending - it has limited the maximum term on all new mortgages to 30 years - it remains to be seen if measures taken will be sufficient to curb the demand for real estate. Indeed, Bloomberg reports that Hong Kong real estate developers such as Cheung Kong and New World Development were expected to sell the most homes in six years on the back of QE3.
Infrastructure The Long-Term Outperformer
However, we believe that this boost in the demand for housing is not a long-term phenomenon. Residential property prices in Hong Kong appear significantly over-extended, while global economic activity is expected to remain anemic over the coming years. This creates a strong likelihood for a correction in property prices, which is an indication of slowing demand for housing. Furthermore, the maturity of the Hong Kong's construction sector means that there are limited greenfield non-residential building opportunities over the long-term, capping the sector's growth potential.
|Hong Kong Infrastructure And Residential & Non-residential Building Industry Real Growth Forecasts|
On the other hand, there are still several infrastructure (such as Hong Kong's international airport) that the government is keen on improving to facilitate economic development. Therefore, even though we believe construction activity in the coming decade (2012-2021) will outperform the previous decade (2002-2011), we expect it to be primarily due to the infrastructure sector. Real growth for Hong Kong's infrastructure sector is forecast to grow an average of 5.2% per annum between 2012 and 2021, compared to 1.0% in the residential and non-residential building sector over the same period.