Infrastructure and residential developments bolster growth in Malaysia

Over the years, large-scale public and private projects have dominated the activities of the Malaysian construction sector, driven by governmental and investor efforts to implement successive five-year plans aimed at becoming a developed nation.

Transformation

The five-year 11th Malaysia Plan (11MP), covering 2016-20, focuses on transforming the construction sector, among other economic areas. Detailed under four main strategies, its goals for the sector include the continuation of a separate Construction Industry Transformation Programme (CITP), to run from 2016 to 2020, which is meant to help the sector meet market demand and propel the industry into the international arena.

The government expects real construction activity to grow by 8.4% in 2016, a large increase when compared to the roughly 5% of economic activity for which the sector has historically accounted. Indeed, construction spending as a percentage of GDP has been gradually rising over the past 10 years, highlighting its growing importance as a pillar of Malaysia’s economic expansion and the importance of its links to the growth of many other sectors.

The construction sector’s share of GDP was estimated to have increased from 3.4% to 4.5% over the previous five-year blueprint, the 10th Malaysia Plan (10MP) covering 2010-15. During this time, activities in the infrastructure and residential subsectors were targeted in order to underpin growth of 11.1% in the construction sector, which also provided 1.2m jobs in that period, representing 8.9% of total employment. Between 2011 and 2014, 29,435 construction projects were awarded, valued at RM470bn ($116.3bn), with private-sector projects totalling RM387bn ($95.8bn), or 82% of total value, and public-sector projects comprising the remaining RM83bn ($20.5bn).

Civil engineering has been a significant contributor to sector growth. In the fourth quarter of 2015, the value of construction work performed was RM30.1bn ($7.5bn), up 11.2% year-on-year and driven primarily by civil engineering projects, according to the Department of Statistics.

Johor State recorded the highest value of construction work performed in Q4 2015, comprising RM6.9bn ($1.7bn) or 22.8% of the total value. Selangor was a close second, with RM6.6bn ($1.6bn) in value (22%), followed by Wilayah Persekutuan with RM5.5bn ($1.4bn, 18.2%), Sarawak with RM2.3bn ($569.3m, 7.8%), and Pulau Pinang with RM1.5bn ($371.3m, 4.9%). These five states’ contribution accounted for 75.7% of the total value of construction work performed throughout the country during the quarter. The value of construction work executed by the private and the public sector was RM20.5bn ($5.1bn) and RM9.7bn ($2.4bn), respectively.

Malaysia Plans

During the 10MP, large-scale projects executed included the completion of Kuala Lumpur International Airport 2 and the Re-Gasification Terminal in Melaka. Line 1 of Klang Valley Mass Rapid Transit (KVMRT) from Sungai Buloh to Kajang was built, and an extension of light rail transit (LRT) was constructed from Kelana Jaya and Sri Petaling to Putra Heights. The electrified double-track railway was laid from Ipoh to Padang Besar, and the Kuala Lipis to Bentong section of the Central Spine Road was completed. Meanwhile, in Penang, a second bridge was opened in 2014 after a six-year construction period at a cost of RM4.5bn ($1.1bn). The 24-km bridge, which won the Institution of Civil Engineers 2015 Brunel Medal, connects Batu Laung on Penang Island to Batu Kawan on the mainland.

The 11MP lays out plans to spend more than RM28bn ($6.9bn) on construction contracts over the plan period with a resulting projected 10.3% annual expansion of the sector, which is expected to contribute RM327bn ($80.9bn), or 5.5%, to GDP, and 1.2m jobs. The four construction-related strategies detailed in the 11MP’s “transforming construction” focus area cover enhancing knowledge content, driving productivity, fostering sustainable practices in the construction value chain and increasing internationalisation of the sector.

To enhance knowledge content, the plan focuses on the quality of the sector’s human resources, small and medium-sized enterprises (SMEs), the capacity and capability of contractors run by bumiputera (ethnic Malays and other indigenous groups) and conducting frequent manpower planning to reduce the mismatch between labour supply and demand. Initiatives under this strategy include fostering greater collaboration between the Construction Industry Development Board and professional boards and training institutions. In addition, a skilled trade apprenticeship programme will be introduced to produce a highly skilled workforce, and the proportion of skilled foreign labour will be increased by bringing in a new levy system and simplifying entry requirements.

The government aims to increase the labour productivity of the sector by 1.6 times, from RM39,116 ($9683) per worker in 2015 to RM61,939 ($15,332) by 2020. To achieve this, the 11MP urges the sector to adopt construction methods that leverage technology and modernisation, as well as increase the capabilities of low-skilled labour. Driving the rise in productivity will be the take-up of pre-fabricated industrialised building systems (IBSs) and the enhanced use of ICT by providing a common platform to use building information modelling. To increase the sustainability of built infrastructure, the 11MP lays out a system by which green practices are integrated into the sector (see analysis).

The fourth strategy for the sector involves internationalising firms by building their capabilities and scale. This will be achieved by encouraging high-performing construction SMEs to bid for international projects in partnership with larger corporations, or to form multidisciplinary consortia.

Sector Plan

The CITP emphasises the importance of making improvements to standards and takes on issues affecting the general public, workers, businesses, and consumers alike: unsafe working environments resulting in high accident and fatality rates, poor-quality work leading to disintegrating infrastructure, and construction permit approval delays.

In encouraging quality, safety and professionalism in the construction industry, the CITP aims to make Malaysia a model for the emerging world in terms of sustainable infrastructure, while more than doubling the construction industry’s productivity and increasing wages. The CITP lays out many initiatives to reach its goal, one of the most important being the implementation of the quality assessment system in construction (QLASSIC), which measures the quality of workmanship based on construction industry standards. Since builders using conventional construction methods will struggle to achieve the requirements need to gain high QLASSIC scores, an incentive will emerge for builders to adopt modern construction methods such as IBS. As an added incentive, using modernised building methods will ease the way when Malaysia ratifies the Trans-Pacific Partnership (TPP) trade deal with 12 Pacific Rim countries, which will expose the sector to more competition and scrutiny.

Plan Projects

The 2016 budget included RM40bn ($9.9bn) for extending public transport infrastructure, with most of the allocations earmarked for expanding LRT, mass rapid transit (MRT) and rapid bus transit systems. Analysts say firms acting as the main contractors on existing projects will benefit from the current economic climate. “We are neutral, but one thing for sure is the construction pie is increasing, where big companies like Gamuda, IJM, WCT and Sunway Construction are the expected beneficiaries,’’ said Vincent Khoo, head of research at UOB Kay Hian, an investment bank based in Singapore, in comments on the 2016 budget. In East Malaysia, Khoo believes the construction of the Pan Borneo Highway is likely to benefit Hock Seng Lee and construction companies in Peninsular Malaysia, as the region has a shortfall of building firms.

The growth in construction activity will be built on an array of civil engineering and residential real estate developments, especially affordable housing supported by government initiatives. Projects such as the Refinery and Petrochemicals Integrated Development (RAPID), the Pan-Borneo Highway, the Tun Razak Exchange (TRX) and Merdeka PNB118 ( formerly KL118 Tower), were highlighted in the 11MP.

Merdeka PNB118, a 118-storey mixed-use tower on 7.7 ha, is expected to create a gross development value (GDV) of more than RM6bn ($1.5bn) over five years as well as 10,000 jobs. At 630 metres high, Merdeka PNB118 will overtake the 452-metr-high Petronas Twin Towers as the tallest building in Malaysia. Owner Permodalan Nasional awarded the RM2.12bn ($524.8m) construction job to a consortium of Samsung C&T and its local partner, UEM Group. The tower will satisfy local and foreign green building standards, and is to be fully completed by 2024.

TRX is a 70-acre development in central Kuala Lumpur owned by 1Malaysia Development Berhad (1MDB) and identified as the initial project under the Economic Transformation Programme to double the country’s per capita income by 2020. To be built over 15 years, TRX is estimated to have a GDV of RM40bn ($9.9bn). As of March 2016, parcels of TRX land had been transacted or earmarked for development by Lend Lease Group, Mulia Group, WCT Holdings, Lembaga Tabung Haji and Affin Bank. Other high-profile projects include construction on the Pengerang Integrated Petroleum Complex (PIPC), which started in 2012 on 9100 ha of land. The complex will house oil refineries, petrochemical plants, naphtha crackers, a liquefied natural gas import terminal and a regasification plant. The PIPC is expected to add value to the downstream oil and gas segment, which should benefit from lower oil prices. The two projects within the PIPC area are the RM5bn ($1.2bn) Pengerang independent deepwater petroleum terminal and state-controlled Petronas Chemicals Group’s RM60bn ($14.9bn) RAPID project. Preparation of the RAPID project site is in progress and expected to be commissioned in 2016. RAPID will have a refining capacity of 300,000 barrels per day. Supplementary petrochemical plants will add value to the petroleum products it produces. Petronas Chemicals Group is expected to award contracts totalling $3.9bn under the project, spending RM6bn ($1.5bn) a year between 2017 and 2018, RAPID’s peak capital expenditure period. The private sector has committed RM128bn ($31.7bn) in investments in the PIPC, according to statements in January 2016 by Mohd Yazid, CEO of the Johor Petroleum Development Corporation.

Adding to the country’s petrochemical supply and security are the construction of pipelines from the Malaysia-Thailand joint development area to Kerteh, Terengganu, and the construction of the RGT-2 regasification terminal in Pengerang, Johor. Samsung C&T is performing the engineering, procurement, construction and commissioning work on RGT-2, which will secure a stable natural gas supply for RAPID as well as the Pengerang Co-generation Plant and the peninsular gas utilisation grid. Construction of RGT-2 is expected to be completed by April 2018.

The 11MP also lays out plans for the construction of new power plants to produce 7626 MW to replace retiring plants and meet growing peak demand.

Mixed Used

With a potential GDV of RM150bn ($37.1bn), the 197-ha redevelopment project called Bandar Malaysia could drive the domestic construction sector in the near to medium term. Located 5 km from central Kuala Lumpur, the integrated, mixeduse development’s master plan includes retail and commercial space for 220,000 people to live and work in. The plan calls for the construction of residential space, grade-A offices and retail space, business-class hotels, and facilities for conferences and exhibitions, as well as health care and wellness. The quality of construction would be sustainable and ultimately be eligible for green building index township certification, in part because of its excellent transit links: it would form the terminus for the proposed high-speed rail (HSR) linking Singapore to Kuala Lumpur. Iskandar Waterfront Holdings and its foreign partner China Railway Engineering Corporation have agreed to invest $1.7bn for a 60% stake in the project.

Outside the Greater Klang Valley, one of the country’s biggest infrastructure projects is the RM27bn ($6.7bn) Penang transport master plan, intended to create an integrated transport system that will reduce congestion and increase economic activity. The plan involves building monorail and tram lines, two LRT lines as well as a rail line and a bus rapid transit (BRT) system. SRS Consortium, the project delivery partner for the plan’s rail and expressway work, estimates that the first phase of the project could be completed by 2017. In addition, a cable car between the island and mainland is being built by Penang Sentral, a subsidiary of Malaysian Resources Corporation Berhad (MRCB), with completion expected by 2018.

Rail Projects

The HSR service will run non-stop from Bandar Malaysia to Singapore, while a transit service will make stops at Seremban, Malacca, Muar, Batu Pahat, and Nusajaya before reaching Singapore. Bandar Malaysia will be the northern terminus of the HSR line, and it is also envisioned as a major transport hub, with links being constructed to MRT Lines 2 and 3, the KTM railway service, the express rail link, BRT and highway networks. Tenders for the HSR had not yet opened as of April 2016, but pre-qualification was expected to begin by mid-year, while construction on the line is forecast to commence by late 2017.

Transport projects under way in the Greater Klang Valley include the KVMRT system, being built in phases. Line 1 has been under construction since 2012 and is expected to begin operations in mid-2017. As of April 2016, tenders were under evaluation for various works on Line 1 and Line 2. Construction on the RM28bn ($6.9bn), 52.2-km KVMRT Line 2 was expected to start in the second quarter of 2016 and be completed by the second quarter of 2022, served by 37 stations, 11 of which will be underground.

In southern Malaysia, the planned Johor Bahru-Singapore rapid transit system (RTS), which will span the Straits of Johor, is expected to be operational by 2018.

An extension project, LRT3, will cost an estimated RM10bn ($2.5bn) over a construction-to-operation period of 2016-20. MRCB and George Kent were appointed by the transport company, Prasarana Malaysia, as the project delivery partner.

Roads & Ports

Construction work continues on the Central Spine Road, the Kota Bharu-Kuala Krai Highway in the north-east, the East Coast Expressway, the West Coast Expressway and the Pan Borneo Highway. In addition, construction of the Damansara-Shah Alam Elevated Expressway (DASH) is expected to begin in 2016 and be operational by 2020. According to media reports, Projek Lintasan Kota Holdings has pre-qualified SPAZ for the DASH construction works.

For its part, Kuantan Port Consortium, a jointly owned company of IJM, is investing RM3bn ($742.6m) to develop a new deepwater terminal (NDWT) adjacent to Kuantan Port. Construction of the NDWT, worth RM1.2bn ($297m), was awarded to IJM’s wholly owned unit, IJM Construction.

Materials & Imports

The sector’s development relies to a great degree on the functioning of the country’s iron, steel and cement industries. Metal outputs that are manufactured in Malaysia include ferrous (iron and steel products such as alloy and carbon steel) and non-ferrous (tin, aluminium, zinc, copper, and lead) as well as fabricated metal products.

From 2012 to 2014, annual changes in manufacturing production for construction-related clusters increased from 3.1% to 4.9%, then fell to 4.2%, according to Bank Negara Malaysia. For the same three-year period, the annual changes for the production index of construction-related non-metallic mineral products were 2.9%, -0.4% and 6.9%, while basic iron and steel and non-ferrous metals went from -6.6% to 3.4% and 2.8%, and fabricated metal products recorded changes of 13.8%, 12.2%, and 2.8%.

According to the Malaysia Investment Development Authority, the construction sector accounts for around 69% of total steel consumption in the country. The majority of the country’s apparent steel consumption (ASC) is concentrated in long products, which are principally used in the construction sector. The annual growth rate for steel demand is forecast at 4% over 2016-18. ASC is projected to increase from 10.4m tonnes in 2015 to 11m in 2016.

Cheaper imports of iron and steel, particularly from China, could help to boost builders’ profit margins, said investment bank UOB Kay Hian in an investor note in January 2016. The firm added that the significant drop in prices of construction raw materials makes it likely that construction companies will see moderate improvements in their margins going forward.

Because construction materials such as cement and steel are manufactured in Malaysia, the Master Builders Association Malaysia foresees no short-term impact on the construction sector from the depreciation of the ringgit. However, it is a different story for mechanical and electrical components such as copper for wiring, cabling and lift products as 70% of these are imported.

Labour Force

A reliance on low-skilled foreign workers (FWs), particularly in labour-intensive sectors such as construction, has prompted the government to overhaul its employment policy for FWs. The 11MP included plans to cap the proportion of FWs in the workforce at 15% of the total by 2020. The FW levy system, the cost of which is borne by employers, is also under scrutiny. In February 2016, the government announced a hike in the FW levy. For the construction industry, the FW levy was increased from RM1250 ($309) to RM2500 ($619) per FW. However, it was adjusted to RM1850 ($458) in March following objections by employers. That same month the government announced it had frozen the intake of new foreign workers with immediate effect.

Construction-sector firms are concerned their profits will plummet when the country signs the TPP, which calls for higher labour standards that could drive up construction costs. Consultancy firm PwC has noted that the TPP will obligate Malaysia to grant workers labour rights under an International Labour Organisation declaration in 1998. According to PwC, Malaysia has one of the lowest ratings in the world for the extent of collective labour rights.

Outlook

A long list of infrastructure projects will likely act as a buffer for the sector in the near term while the economy adjusts to the many shocks it has experienced in the past two years. While it waits for conditions to improve – especially the value of the ringgit and oil prices – it might be in the sector’s best interest to concentrate on improving the quality and sustainability of its built products. As the government makes adjustments to the labour mix and pushes for internationalisation in the industry, change seems to be afoot – but that need not be a matter for concern for the firms and investors that are looking ahead.