Thai construction sector cooling down

Thomas Hundt

The public sector triggered a construction boom in 2015 and 2016 with an investment offensive. Afterwards, real growth in the sector flattened out. In the first half of 2022, price-adjusted construction investments even shrank by 5 per cent compared to the same period last year. Both public and private construction investments declined.

Only private investment in housing and other construction services increased in the first half of 2022. Real estate analysts have confirmed the trend and reported that because of the Covid-19 pandemic more people are moving from inner cities to the surrounding areas where more new apartment buildings are being constructed.

Companies are also expanding their warehouses because of supply chain problems and the need of e-commerce companies for additional logistics centres. The 4.2 million m 2 of space in modern logistics centres are well occupied, according to CBRE real estate analysts.

BETTER YEARS AHEAD

The economic outlook is expected to brighten. The Ministry of Finance expects the overall economy to recover in the second half of 2022 and the Bank of Thailand (BoT) has even forecast economic growth of more than 4 per cent for 2023.

The projected recovery will require investment in new buildings and infrastructure, but financial resources are scarce. Companies, households and the State are highly indebted and can hardly afford financing. Rising interest rates and increasing construction costs are further complicating their planning and calculations.

Large construction companies report that the procurement of building materials accounts for about 60 per cent of their construction costs. Steel, cement and concrete have become significantly more expensive in 2022. Wages are also rising sharply due to the scarce availability of workers.

INFRASTRUCTURE PROJECTS DELAYED

An action plan of the Ministry of Transport envisages transport projects worth billions of Thai baht from 2019 to 2036 (table 2). Authorities draw up individual plans according to these targets and put the projects out to tender. The Department of Highways and the Expressway Authority of Thailand, for example, are currently having several motorways constructed. The Ministry of Energy will unveil a new master plan in 2022, which could spur the lukewarm investments in energy facilities.

Government agencies have also set up major rail projects that private operators are executing. Some projects have been delayed because they are under judicial review. Some of the executing consortia have also miscalculated and are looking to restructure their projects.

OVERSUPPLY OF OFFICES AND APARTMENTS

Investment in apartments has tended to decline since the Covid-19 pandemic. Real estate developers are launching fewer projects and are disposing of their stock of unsold apartments. New apartments and houses are being built mainly in the outskirts of the Bangkok metropolitan area , because the trend towards working from home will continue.

The office market is also feeling the impact of the new system of work; demand for offices is stagnating and rents are falling. However, the supply is increasing. About 1.2 million m 2 of office space is currently under construction, according to consultancy firm CBRE, and will add to the existing stock of 9.5 million m 2 .

POSITIVE TRENDS IN INDUSTRIAL BUILDINGS

Investors developed many industrial sites and built ready-to-occupy factory buildings from 2006 to 2016. The industrial parks are now well-filled. The larger operators, such as Amata, WHA, Rojana Industrial, Nava Nakorn and the Industrial Estate Authority of Thailand, have announced new projects as they expect new businesses to set up shop.

Thailand offers itself as an alternative location to China. These hopes are being fulfilled. Thailand scores high in international competition and has a large industrial base. The national investment promotion agency, the Thailand Board of Investment (BOI), reports that it approved a total of 750 new investment projects with a total value of US$ 11 billion in the first half of 2022. The figure was 42 per cent higher than in the same period in 2021.

The projected recovery will require investment in new buildings and infrastructure, but financial resources are scarce.

SHOPPING CENTRES AND HOTELS SHOULD OVERCOME THE CRISIS

In the Bangkok shopping metropolis more than 7.9 million m 2 of retail space were available in mid-2022, 95 per cent of which is occupied. Another 1.5 million m 2 of retail space are either under construction or are planned, according to CBRE.

However, the retail sector is suffering from cooling consumption. The retail stationary sector now has to defend itself against competition from online shopping. Malls and shopping arcades are therefore focusing more on gastronomy and entertainment for locals and foreigners.

Tourists and business travellers have been returning to the “Land of Smiles” in large numbers since Spring 2022. Many hotels and resorts will now have to be renovated or newly rebuilt. However, investors still lack the necessary confidence and capital.

There is also a need to catch up in building technology and construction planning. Energy efficiency, for example, plays a subordinate role. Some clients are rethinking. Electricity prices are rising and the State is increasing the energy requirements for buildings to reduce greenhouse gases.

MANY SMALL BUSINESSES AND FEW CONSTRUCTION GIANTS

The nominal value added of the construction industry in the first half of 2022 was 5 per cent below the previous year's level in priceadjusted terms, and amounted to the equivalent of US$ 6.5 billion. The industry is currently going through a tough time. Even in the Covid-19 pandemic years of 2020 and 2021 it grew by 1.3 and 2.7 per cent in real terms.

More than 90,000 construction firms were registered at the Department of Business Development as of August 2022. Most of them are micro-enterprises with fewer than 10 employees. Experts and organisations such as the Thai Building Information Model Association are asking the firms to specialise more and modernise their construction technology. Digital technology should also be used more widely.

The three joint stock companies Italian-Thai Development (ITD), CH Karnchang (CK) and Sino-Thai Engineering & Construction (STEC) are the largest construction groups in the country (table 3). They get involved in large projects and are working with international construction companies. The local construction groups are also active abroad.

Foreign construction companies set up subsidiaries if they see long-term opportunities for success. Chinese and Japanese construction companies have a local presence. Firstly, because many investors come from both countries and award construction contracts to partner companies they know. On the other hand, they have set up joint ventures with Thai partners to improve their chances of winning contracts.

OPPORTUNITIES FOR WESTERN TECHNOLOGY AND GERMAN KNOW-HOW

German construction, engineering and consulting companies as well as architects are also in demand in Thailand. German architect Ole von Scheeren was in charge of designing the Mahanakhon Tower, Bangkok's tallest building and landmark.

Thai BAUER, a subsidiary of the German BAUER Spezialtiefbau GmbH, carries out specialist foundation engineering work. The branch of the planning and consulting group Dorsch works, among other things, as a project management consultant, supervises projects and prepares documents. The engineering office EGS-Plan in Bangkok develops energy-efficient buildings. There are also sales opportunities in fittings, security systems and interior furnishings, which the Häfele branch, for example, distributes.

NEW LAWS, BUT OFTEN OLD STANDARDS AND CONSTRUCTION PLANS

Thailand passed the Eastern Economic Corridor Act in 2018 and the Public-Private Partnership Act in 2019. Both laws are intended to ensure faster and more transparent approval of public-private partnership (PPP) projects. Previously, large PPP projects only went to domestic consortia. Now international firms will be more involved.

The private PPP operators and builders pay attention to the price-performance ratio when awarding contracts to general contractors and subcontractors. European construction technology and execution often serves as a model. Foreign specialists are therefore in demand. However, project planning and construction management change frequently.

The Government Procurement and Supplies Management Act 2017 provides the legal basis for public procurement. However, the law is not implemented optimally in practice, according to international experts and the Thai Court of Audit.

Government agencies are required to publish their tenders on the central website (http://www.gprocurement.go.th). When public authorities tender EPC (Engineering, Procurement, Construction) contracts, domestic construction companies are still more likely to win. International companies should therefore find out at an early stage about future awards if they want to work with potential EPC contractors.

Germany and Thailand have been exchanging information specifically on new developments in the railway sector since 2018 in the German-Thai Railway Association. However, contracts for the railway line from Bangkok to Nakhon Ratchasima in northeast Thailand are negotiated directly between the Thai and Chinese governments on a G2G (government to government) basis.

Contact details: Thomas Hundt Director Thailand, Cambodia, Myanmar, Laos GERMANY TRADE & INVEST www.gtai.com