Sri Lanka in for a Construction Boom over Next 5yrs Driven by Reconstruction and Rehab Requirements

29th July 2010, www.lankabusinessonline.com

Post-war reconstruction and rehabilitation requirements in Sri Lanka and the general economic revival are expected to trigger a construction sector boom over the next five years, a report by a brokerage said.

Listed cement manufacturers, cable companies and those making PVC pipes and tile are expected to get more business and benefit from the building boom, NDB Stockbrokers said in a report on the construction industry.

"We expect the construction sector growth to surpass the expected growth in Goss Domestic Product of 7-8 percent over the next five years."

Over 700 billion rupees worth of construction-related projects are planned by the government during 2010-2012, according to the Ministry of Finance and Planning.

Sri Lanka's 30-year ethnic war by Tamil separatists in the north and east ended in May 2009, resulting in an immediate economic revival and anticipation of higher growth, with GDP forecast to grow seven percent this year.

Infrastructure destroyed or neglected by war are being repaired or upgraded and new facilities being built.

"Although certain contracts may be awarded to foreign principles, a substantial part of the work would be re-assigned (by way of sub contracts) to local contractors," the brokers said.

"In addition to the large scale projects initiated by the state, we estimate construction projects worth a similar amount, will be initiated by the private and informal sector."

NDB Stockbrokers said the rapid growth of the construction industry could create problems such as increased prices of raw materials like steel, cement and sand.

"In addition, the skilled labour force in Sri Lanka may be insufficient considering the expected growth in the construction projects."

The brokers said they expect the value of construction projects awarded to local contractors, including subcontracts, will increase annually by about 50-60 percent over the next three years.

"In addition to contractors, main suppliers to the construction industry such as cement, cable, PVC pipes and tile manufacturers are expected to benefit from the revival in the sector.

"Certain companies that are listed in the Colombo Stock Exchange are expected to benefit and we expect exceptional growth in profits," the report by NDB Stockbrokers said.

The construction sub segment of the industry segment recorded an average growth of 7.5 percent over the last three years.

However, growth in the building construction sector slowed in 2009 owing to the economic downturn and high lending rates.

Growth in the residential construction sector was also hindered by problems faced by developers like the Ceylinco Group when an unlisted finance subsidiary collapsed.

"Sri Lanka's residential property sector was not immune to the slowdown in the global markets," the brokers said.

"Sale of apartments slowed down considerably over the last two years, while very few new projects were developed."

Even the projects that were underway were affected and were slowed down.

But NDB Stockbrokers said future prospects in the building construction sector were improving with the housing construction sector expected to "rebound strongly" over the next five years.

The recovery of the northern and eastern regions, worst hit by war, is expected to generate "significant" construction and resettlement requirements, the report said.