Legislative changes and major infrastructure projects fuel construction sector growth in Myanmar

The construction sector in Myanmar has experienced some turbulence in recent years. Changes to the regulatory framework and budget deficits have had an impact on the construction of houses, while plans to upgrade the country’s infrastructure have faced economic and political constraints. Nonetheless, the government is determined to move forward with new regulations and secure funding for a series of major infrastructure projects. Therefore, players in the sector are generally optimistic about developments ahead in 2018.

Indeed, opportunities presented by the country remain vast. With a population of 51.5m distributed over some 677,000 sq km, according to the 2014 census, there is major demand for housing, roads, power stations and other utilities, railways, and port and airport development and expansion. Furthermore, the population of cities such as Yangon, Mandalay and the capital, Naypyidaw, have grown considerably in recent years, and while Myanmar remains a predominately rural and agricultural country, the non-agricultural sector is accounting for an increasing share of GDP. These demographic and economic changes have implications for the construction sector, creating investment opportunities for both foreign and domestic players.

Key Figures

The most recent data from the Central Statistical Organisation (CSO) shows the construction sector contributing some MMK4.45trn ($3.4bn) to GDP in current prices in 2015, equivalent to around 6.1% of the total. This was slightly up on the previous year, when the MMK3.78trn ($2.9bn) contributed represented 5.8%. In 2015 construction represented around 17.7% of the MMK25.14trn ($19.2bn) in GDP contributed by the industrial sector overall, second only to processing and manufacturing, which accounted for 59.8%.

According to figures cited by the World Bank the sector is responsible for around 5% of the labour force, most of whom are employed by small and medium-sized enterprises (SMEs), which, according to the World Bank, account for 90% of all construction sector businesses. Following a period of very high sustained growth, the economy has been slowing. Figures from the IMF show Myanmar’s GDP rising from $16.7bn at current prices in 2006 to $64.36bn in 2016, a compound annual growth rate of 14.4%. However, over the 2014-15 period, GDP growth was around 7.5%, with this moderating to 6.6% in 2015-16. The slowdown is partly due to external factors, with health of the Chinese economy being particularly important, given that it is Myanmar’s largest source of foreign direct investment (FDI) and imports.

At the same time, the country was hit badly by Cyclone Komen in 2015, while political and security issues in parts of the country have also had an impact (see Economy chapter). Nevertheless, the IMF projects that growth is rebounding, with an estimated growth rate of 7.2% in 2017 and 7.6% in 2018.

This slowdown of the economy has had a knock-on effect on the construction sector, with this in turn affecting banking activities. Approximately 30% of all outstanding credit from banks is allocated to construction and real estate companies, with this allocation being split roughly equally between the two. According to the World Bank, lending to construction companies grew by 37% between FY 2014/15 and FY 2015/16, demonstrating the importance of the sector to the overall health of the economy.

Still, longer-term economic and demographic factors point to sustained growth for the sector. “The current slowdown in the construction market should not be seen a sign that demand for new residential, commercial and office projects has stalled,” Cao Duy Thinh, managing director of real estate group HAGL, told OBG. “Myanmar still offers a wealth of opportunities for investors in the construction sector, with a huge demand for housing and more commercial areas, such as Myanmar Plaza and Junction City.”

Regulations

According to World Bank figures, construction activity experienced a slowdown in the first half of 2017 compared to the first half of 2016, driven by decelerating demand in the residential segment. This was compounded by a decision in May 2016 by the Yangon City Development Committee (YCDC) to suspend the construction of about 200 high-rise buildings. The suspension was attributed to concerns regarding whether building standards were being followed correctly and questions being raised around permits.

The incident highlights one of the main challenges in the sector today – the need to develop an improved regulatory framework. Progress is being achieved in overcoming this challenge: in 2016 an updated Investment Law was passed, along with a new Condominium Law. The aim of the latter is to address issues such as the common ownership of plots and foreign ownership of condos. While additional by-laws were passed in late 2017 to clarify areas that have been holding up construction, further administrative processes need to be developed before foreigners can truly purchase condominium units (see Real Estate chapter).

Bodies & Authorities

At the government level, a number of bodies have responsibilities related to the sector. These include the Ministry of Construction (MoC), which is responsible for building and maintaining much of the country’s infrastructure, and the Department of Urban and Housing Development, which falls under the authority of the MoC, and is responsible for many of the country’s mass housing projects.

Local authorities, such as the YCDC, also play a key role within their jurisdictions. Furthermore, the Directorate of Investment and Company Administration (DICA) is active in mobilising investment locally and internationally, both for the sector and more generally for the country. Under the DICA, the Myanmar Investment Commission (MIC) is the main body responsible for foreign investment approvals and licences, with regional equivalents recently established to speed up and encourage investment in their respective areas. However, large projects must still pass through the MIC.

The Ministry of Transport and Communications is also important for the sector, in that it oversees and maintains the country’s hard ICT infrastructure, among other responsibilities. Furthermore, there are several important state-owned enterprises within transport and hence for the construction sector, namely Myanmar Railways, the Road Transport Administration Department, Inland Water Transport and Myanmar National Airlines. The maritime and air transportation sectors are regulated by the Myanmar Port Authority and the Department of Civil Aviation, respectively.

Two other key bodies are the Myanmar Construction Entrepreneurs Association and its business arm, Myanmar Construction Development (MCD). The latter often works in joint ventures with bodies such as the YCDC, with an example of this being the Myanmar Metropolitan mass housing project, through which the Yangon regional government plans to invest some $64bn in three of the city’s townships over the next few years, with the MCD being the project’s other major shareholder, according to local media.

Another key body in the sector is the Myanmar Real Estate Service Association, which represents construction interests to the government and other institutions (see Real Estate overview). Other important authorities include the management bodies of the different special economic zones (SEZ). These areas provide locations for the establishment of new factory, warehouse and plant constructions, as well as nodes for transport and ICT logistics infrastructure.

These zones include Thilawa SEZ in the Yangon Region, which, per an announcement in December 2016, is to be joined by a new SEZ with an airport and deepwater port to serve the Dala, Kawhmu and Kungyangon townships. In addition, the governments of Myanmar and Thailand are collaborating on establishing a deepwater port and SEZ in Thanintharyi Region.

Plans have been announced for other SEZs, including one in Kyaukpyu in western Rakhine. First announced in September 2013 the Kyaukpyu SEZ is backed by Chinese and Singaporean FDI and will also include a deepwater port. However, further progress on this project may be affected by recent unrest in the territory.

Big Plans

Major plans for infrastructural development also bode well for construction, with the Ministry of Planning and Finance overseeing the implementation of the National Transport Master Plan, under which $21.7bn is set to be invested in road, rail, aviation and maritime projects between 2014 and 2030.

Under the initiative, road infrastructure is set to receive $9.5bn of investment, with 36 north-south and 45 east-west highway projects under development, followed by railways with $5.3bn, seaports receiving $3.8bn, the aviation segment seeing $1.9bn and inland water transport receiving $1.1bn in funds.

Transport may also receive a boost from Myanmar’s future participation in China’s Belt and Road Initiative. This global infrastructure project involves a series of transport corridors, two of which run through Myanmar, with Chinese investment and finance at the forefront. Transport projects so far associated with the initiative include the Kyaukpyu SEZ and port, along with the Kolkata to Kunming highway project, known as K2K. This 2800km road was nearing completion in August 2017, according to local media reports. Furthermore, Myanmar lies on the east-west corridor of a proposed China-Singapore rail link, which will connect Kawkareik in Kayin State with Hue in Vietnam. Along with the southern sub-corridor, which links Dawei in south-eastern Myanmar with Bangkok, other sub-corridors are set to connect Yangon and Mandalay.

Transport & Utilities

Beyond the projects receiving support from the Belt and Road Initiative, the country is also engaged in a number of significant transport projects. These include the $500m upgrade of the Yangon-Bago railway which is expected to reach completion by 2020, along with the development of a deepwater port at Dawei and the construction of Hanthawaddy International Airport, both scheduled for completion by 2022 and valued at $350m and $1.5bn, respectively. Furthermore, the India-Myanmar-Thailand trilateral highway, built largely by Indian investors, is on track to open by December 2019.

Myanmar is also pursuing a National Electrification Programme (NEP) that seeks a major extension and upgrade of the national grid. Under the NEP the objective is to provide universal electricity access by 2030, with an additional 6m people set to connect to the grid by 2021. The achievement of the plan requires large-scale investment in a range of utilities infrastructure, from power and relay stations to pylons, with the NEP being largely overseen by the Ministry of Electric Power and Energy (MEPE).

In order to meet these objectives, the MEPE signed a deal in January 2017 with Singapore-based, international utilities group Sembcorp to build a $300m gas-fired power plant in Mandalay. The authorities have also committed to upgrade the national power capacity to 16,500 MW, and to improve and extend the electricity transmission line system – both by 2020.

More Housing 

The government has further set itself ambitions plans to increase the stock of public housing. Some 180,000 low-cost housing units are scheduled to be built by FY 2020/21, many of which will be in the Yangon Region, where rapid population expansion is a significant factor behind a serious housing shortage. However, other cities are also facing housing pressure: the 2014 census, released in September 2017, showed a shortage of some 3.82m housing units countrywide, with around 2% of the population homeless.

PPP: Tackling such infrastructure challenges requires major investment, with the government open to private sector and foreign participation. Indeed, the MIC has 10 prioritised sectors for investment promotion, with these including the construction of affordable housing, the establishment of industrial estates, the energy sector and the logistics industry.

Public-private partnerships (PPPs) are one of the preferred methods for achieving these objectives. While Myanmar did initiate a few such schemes under the previous administration, PPPs remain a relatively new phenomenon in the country, without a specific law in place to regulate them. Yet the new Investment Law, which began to be implemented in April 2017, along with amendments to other regulations, are all creating an ecosystem for PPPs to gain a larger foothold. The Investment Law gives tax holidays of between three to seven years for companies participating in priority areas, such as infrastructure and housing construction. Furthermore, the proposed new Regional Investment Law would allow public sector investment in construction without securing central government funding.

Examples of PPPs under way include the MCD and YCDC joint mass housing project mentioned previously, along with the Yangon Bus Public Company, which was set up in early 2017. The Okura Prestige Hotel in Yangon is also being constructed under a PPP arrangement with Investment Law approval, involving a number of Japanese firms and the locally-based Yangon Technical and Trading Company. In July 2017, the DCA also announced that it would be tendering for upgrades to three airports, namely: Kawthaung, in Tanintharyi Region; Mawlamyine, in Mon State; and Heho airport in Shan State, with each being built through PPPs.

Building Blocks

Myanmar’s construction cycle is strongly affected by seasonal weather patterns, with a heavy rainy season during the summer months usually restricting activity. This causes a seasonal slump in prices, with 2017 being no exception. The humidity can also affect stored materials in a country with little climate-controlled warehousing, particularly for construction materials. Contractors therefore try to avoid storing large amounts of cement, in particular, in their inventories during the rainy season.

Many other materials are imported, particularly in the high-tech and high-performance segments, with the most recent available figures for 2014 showing imports of stone, plaster, cement, mica, ceramics and glass valued at $143.68m, double the $78.93m imported in 2012. Actual figures may diverge from this, given informal cross-border trade and capacity constraints within the statistics collection agencies, although 2016 saw some decline in construction sector imports, according to the World Bank, perhaps due to an overall downturn in sector activity. However, contractors are exposed to some foreign exchange risk, with the Myanmar kyat depreciating significantly against the US dollar in recent times. In April 2012, when a managed float regime was introduced, the kyat stood at MMK821.62:$1, while in February 2018 it was at MMK1328:$1.

At the same time, Myanmar possesses its own construction materials industry, with cement, brick, and iron and steel made locally. Since mid-2016 foreign construction materials manufacturers have also found it easier to enter the country, with trade restrictions eased on joint ventures with local firms.

Imports have to meet MoC standards, with joint-venture companies having to re-register as trading companies to reap the benefits. Current examples of such ventures include a 51:49 partnership between South Korea’s LG International and Blue Diamond, which began test production at a cement plant in the country in late-2017, and the Mawlamyine Cement joint venture in Mon State, which is a partnership between Thailand’s Siam Cement and Pacific Link Cement Industries.

Cement Production

According to the International Cement Review the country has 26 different cement plants, with some of the larger owners being Myanmar Ceramic Industries, the Ministry of Defence-owned Myanmar Economic Corporation (MEC), Sin Minn Cement Industry, SCG Cement and Apache Cement, which is part of Shwe Taung Cement. Another recent development has been state cement plants partnering with private sector vehicles to upgrade and improve their production facilities. One example of this is the No. 33 Heavy Cement Plant in Kyauske Township in the Mandalay Region, which in June 2016, announced a partnership with Myanmar Conch Cement to boost total output from 300 tonnes per day to 5000.

In 2016 Myanmar’s domestic demand for cement was around 8m tonnes per annum, with around half imported. Such domestic upgrades help the country meet its needs without exposure to foreign exchange risks. This also increases capacity for what many expect to be significant future growth as infrastructure and housing expansion projects get under way.

To this end, Apache Cement is working with the International Finance Corporation on a $110m expansion of a plant in the Mandalay Region that will see clinker production expand from 1500 tonnes per day to 5500 tonnes, while cement production will rise from 2800 tonnes per day to 7200 tonnes. However, his expansion has created some controversy among local residents, with the dispute highlighting the need for greater legal clarity in regard to land ownership, environmental impact assessment and compensation for locals. Nevertheless, the expansion plans already projected or in the pipeline will see the country’s cement production capacity rise to some 20m tonnes per annum.

Iron & Steel

Meanwhile, Myanmar’s iron and steel industry is also increasing capacity. The sector currently contains both state-owned and private sector facilities, with the state sector consisting of five mills, two owned and run by the Ministry of Industry (MoI) and three under the MEC. However, one of these, the MoI owned Mill No. 5, is currently not in operation. In addition, there are three galvanized steel manufacturers, MEGA Steel, the MEC and Myanmar POSCO, and one colour-coated steel manufacturer, MPCC.

With Myanmar lacking large manufacturing industries of its own, such as automotive, shipbuilding or home appliances, construction has long been the main source of demand for steel. There is particularly high demand for galvanised and colour-coated sheet steel. In 2014 these products accounted for some 90% of total steel demand, with the construction sector historically accounting for around 65% of total steel consumption.

Myanmar also imports a great deal of its more high-performance metals, with imports of base metals and base metal products doubling over the 2012-14 period, from $864.73m to $1.68bn, according to the CSO. China and Thailand are major sources of imports, along with Japan, India and South Korea.

Along with cement, the government is aiming to reduce steel imports through similar joint ventures. State-owned steel plants are expected to be gradually transferred to the private sector via this process. One recent example of this being the Bagan steel foundry, which the government is building while seeking a Thai partner to help develop its projected 400,000 tonnes per annum capacity. In 2016 steel consumption in the country was estimated by the local press at around 2m tonnes per annum, and research published by POSCO in October 2016 estimated this figure would rise to 3m tonnes by 2020 and 5m tonnes by 2025. This means per-capita steel consumption would rise from 41kg in 2015 to 60kg in 2020 and 80kg in 2030. Consumption stood at around 1.6m in 2014, with a compound annual growth rate of 13.4% over the 2009-14 period.

Nevertheless, production has not consistently risen in tandem with consumption, rising from 50,000 tonnes in 2009 to 170,000 tonnes in 2012, before falling to 153,000 tonnes by 2014. Steel production capacity stood at 650,000 tonnes in 2014, resulting in a capacity utilisation rate of only 23.5%.

One reason for this has been persistent problems with the reliability of the country’s electricity supply, with the grid sometimes experiencing outages that affect production output. There are also ongoing concerns over human resources capacity and the technological level of some existing facilities, leading to quality control and environmental issues.

Another key building material in Myanmar is brick, with demand and pricing tending to be inversely related to cement. The brick industry has been undergoing major changes in recent times, with hand-made brick businesses being squeezed out by machine-made varieties. Early 2016 saw the demise of the hand-made brick industry in Yangon, with the YCDC ordering the closure of many unregistered kilns. The hand-made varieties were larger and cheaper than machine-made, and their discontinuation resulted in price increases for bricks.

Prices

Indeed, according to a June 2017 report from Rider Levett Bucknall, the price of 100-mm-thick clay wall bricks averaged MMK110 ($0.084) per unit in the first six months of 2017, up from MMK101 ($0.077) in mid-2016 and MMK100 ($0.076) in the second half of 2015. At the same time, ordinary Portland cement fell in price from MMK140 ($0.107) per kg in late-2015 to MMK115 ($0.088) the following year and MMK103 ($0.079) per kg in the first six months of 2017, following the inverse relationship with brick noted above.

Other related materials, such as reinforced concrete and stone aggregates, also fell in price, with the 30 megapascals version of the former material falling in price from MMK101,480 ($77.51) per cu metre to MMK85,880 ($66) per cu metre between the second half of 2015 and the first half of 2017. The 20mm variety of stone aggregates fell from MMK37,101 ($28.34) to MMK32,460 ($24.79) over the same period.

Meanwhile, high-tensile steel bars (10-32mm) and mild-steel round bars (6-25mm) saw price increases, with the former rising from MMK480 ($0.367) per kg to MMK670 ($0.512) per kg between the second half of 2015 and the first half of 2017. The latter rose from MMK490 ($0.374) per kg in the first half of 2016 to MMK675 ($0.516) per kg, with figures for late 2015 and earlier currently unavailable.

Internationally, steel prices largely flatlined in the period between June 2016 and June 2017, rising slightly from $222 per tonne to $281 per tonne, according to data from the London Metal Exchange. Aluminium, meanwhile, rose from $1591 per tonne in June 2016 to $1886 per tonne in June 2017, with copper rising from $4630 per tonne to $5699 per tonne.

Thus, certain building costs have undoubtedly been rising, particularly for imported metallic products priced in dollars, while other materials have experienced price deflation. At the same time, Myanmar has been experiencing relatively high overall inflation over the last decade, with a peak inflation level of 11.45% in 2015. However, this fell to an average annual rate of 9.42% in 2016, before falling further to 6.97% in January 2017. The DICA predicts a continuous annual decline in the inflation for the next few years.

Wages

Labour costs remain lower in Myanmar than many other ASEAN state. According to survey data undertaken by the DICA in 2016, construction companies typically paid general workers an average of MMK150,000 ($114.57) per month, with day-rate workers such as carpenters earning MMK8000 ($6.11) per day and electricians MMK6000 ($4.58). A company director might typically receive MMK1m ($763.82) per month, and an architect MMK500,000 ($381.91).

The minimum wage since September 1, 2015 has been MMK3600 ($2.75) for an eight-hour work day, although companies with less than 15 workers are exempt from this regulation. Myanmar’s minimum wage represents around one-third that of Thailand’s and two-thirds that of Cambodia’s.

Wages help keep the country’s construction costs low. The DICA survey showed the average construction cost of a steel frame factory in Yangon to be between $20,000 and $25,000 in 2016, not including the outfitting costs of machinery or furniture, with a reinforced concrete version coming in at $30,000. Finishing costs would then add around $15,000 more, while the soft costs would be 7-10% of the total, including 2% for third-party quality control services.

However, low wages are often accompanied by low worker certification. “In Myanmar, a carpenter may not have a qualification or a tower crane operator may not have a licence for the work he does,” Thura Aung, managing director of AMPS Construction in Yangon, told OBG. “A lot of the workforce is not properly trained.”

Furthermore, the low level of human capital in the sector is connected to a lack of awareness of international standards. “Myanmar still lags behind in terms of health and safety education,” Daw Mie Mie Soe Nyunt, director of Kyauk Sein Nwe Construction, told OBG. “It is crucial to train workers to improve the quality and efficiency of the construction sector.”

The labour force situation may be changing, however, with the new Investment Law also allowing foreign participation and investment in the education sector. Technology and vocational institutes are one area that the government is keen to prioritise, drawing on international expertise and best practice. Currently, the technical and vocational sector is dominated by private sector institutions, although there are also 35 state-run technological universities and colleges in the country (see Education chapter).

Outlook

The construction sector is expected to expand considerably to meet the demands of a growing economy and population. However, building capacity in human resources and construction materials will need to be prioritised to achieve goals, along with the development of a more robust regulatory framework. At the same time, questions remain over financing, with much riding on the success of current efforts to encourage PPPs. Nonetheless, the outlook for the sector remains optimistic overall, with determined efforts under way to address all current challenges.