Market Monitor Construction Singapore 2020

Subdued GDP growth in 2019 and 2020 is impacting private construction activity in the city state.

In the medium-term the construction sector is facing a protracted slowdown in growth. Output growth, in real terms, is expected to decrease to 2.7% in 2020 and 0.5% in 2021. Mainly affected are the residential and commercial construction subsectors. There is a slowdown in private projects, while businesses face fierce competition, tighter margins and slow payments.

That said, the outlook for the public construction sector segment remains benign. Government investment in infrastructure and civil engineering works remains high. Annually, it is expected to be between SGD 27 billion and SGD 34 billion in 2020 and 2021. This will mainly benefit multinational building companies. Several megaprojects are currently underway or in the pipeline, including the Thomson-East Coast MRT Line, the new Tuas Mega Port and Changi Airport Terminal 5. Public sector projects are expected to account for 60% of overall construction demand in 2020.

The profitability of many construction businesses remains low and profit margins are expected to deteriorate further in 2020. Small and medium-sized contractors in particular continue to suffer from tight cash flow and deteriorating margins. This is due to a lack of projects, increasing competition, and higher labour and rental costs. 

Singapore´s construction businesses are heavily reliant on banks for loans and project funding. Government measures to cool down the property market include tighter lending criteria (such as higher deposit requirements, lower loan-to-value limits, additional stamp duty and higher interest rates) for both private consumers and developers. 

On average payment duration in the industry is 60-120 days. Payment behaviour has slowly deteriorated since 2017. Slow payments in the construction industry increased to 49% in Q4 of 2019 from 47% in Q3 of 2019, mainly due to payment delays by special trade contractors. Payment delays are expected to rise further in 2020, especially in the residential and commercial construction segments. Overall, the protracted default rate in the industry remains high. 

Construction insolvencies increased by about 5% in 2019 year-on-year, and another 5% increase is expected in 2020. Construction businesses can now choose adjudication under the recently updated Building and Construction Industry Security Payment Act (with an emphasis on debtor protection and corporate rescue), rather than resorting to litigation or arbitration. While this offers valuable breathing space and a chance of survival for struggling SMEs, slow payments continue to trouble businesses. 

Due to sluggish demand, tough competition, tight margins, slow payments and increased insolvencies our underwriting stance remains restrictive for the residential construction, commercial construction and construction materials segments, especially for smaller contractors. That said, we remain generally open for businesses active in the public construction segment.