Construction industry future outlook positive, but challenges remain: RIU study

Jul 20, 2018 (LBO) - As a part of its ongoing research into the real estate and construction industry Research Intelligence Unit (RIU) conducted a survey among multifarious construction industry companies operating in Sri Lanka. Working with LECS, who recently held the 7th edition of their annual Construction Expo, the aim of this latest RIU research report is to shed light on the emerging and pressing issues of the industry as well as enable RIU to forecast future growth opportunities in the real estate and construction industry. The survey respondents were from a variety of sectors representing General contracting, HVAC-R, Specialty trade (Concrete, painting, etc), Design Build, Plumbing, Home builder, Real estate developer, Electrical and Mechanical industries.

The sample also represents all small, medium, and large scale enterprises. An underlying positive trend was noted as many respondents felt the situation of the industry had not changed compared to previous years. The study findings confirmed that 25 percent said the situation has improved and only 13 percent felt it has worsened. According to the survey, respondents expect the luxury apartment market to further expand and have a strong growth potential compared to other sectors.

Some 35 percent believe that the hotel sector will have good prospects for the construction sector. The data supports this view as 2017 records the highest tourist arrivals ever. Earnings from tourism was also up by 11 percent. As a result of this, recent performance of the tourism sector it is likely to impact positively on both luxury apartments market and hotel industry with the latter having a cross-fertilization effect.

The survey the third most lucrative sector (31 percent) for the construction industry is the semi luxury apartments and housing sector. The demand for urban housing is largely under-served and pressing. The survey also checked the average cost breakdown of the construction. According to this construction materials take up about 30 percent of the total cost which is the largest component of the cost.

Second is the cost of subcontractors which amounts to about 25 percent of the total cost. Construction labor would consume 20 percent of the cost while non labor construction is only 10 percent of the total cost. In the survey respondents were asked to rank the top three issues faced by the construction industry.



56 percent of the respondents said labor shortage is the number one issue faced by the industry. This is in line with RIU study conducted early this year which revealed that the industry is challenged by a shortage in skilled construction workers due to two factors; firstly, there is a large number of potential labour who seek employment as trishaw drivers and secondly, due to worker migration to the Middle East where there is a much higher earning potential. RIU also predicted labor shortage can increase wages consequently causing cost of construction to go up by at least 7 percent. As per the respondents the 2nd issue faced by the industry is high land prices and the 3rd most critical issue facing the construction industry is the heavy taxation on construction materiel. Most of the material used in the construction is imported and comes under heavy taxation. To mention a few, steel bars and rods are taxed at 89.66 percent, ceramic tiles ate 107.6 percent), and sanitary-wear at 72.

4 percent (source: Advocata). These taxes have become prohibitively expensive for developers to offer attractive packages. The industry as a whole is committed to the idea of green technologies and knows that by working sustainable features into the design and construction of a building, it is possible to reduce environmental impact of the construction industry, save money and create lasting value. 69 percent of the respondents believe general public is aware about the green technology and 68 percent said they would be willing to pay for it. Construction sector is a critical sector for the Sri Lankan economy. Following the end of the war construction sector experienced fast pace growth for over a decade.

Currently the industry is estimated to be work around US 8 billion dollars. Sri Lanka is in the verge of a new phase of development and the construction sector is set to play a key role in this transformation.