Chief Editor November 15 2023

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Rising construction costs in Singapore to persist in 2024

The challenges faced by the construction industry in the aftermath of the Covid-19 pandemic have evolved, with earlier concerns about manpower and building material shortages giving way to a different set of issues. Although the sector no longer grapples with insufficient manpower or building materials, a surge in construction costs poses a substantial hurdle and is anticipated to rise further.

Notably, China and India remain the primary sources of foreign labor for the construction sector. While there has been an increase in the number of work permit holders post-pandemic, a shortage of skilled labor persists, exerting upward pressure on overall construction expenses. Dormitory space shortages for migrant workers have compounded the problem, making it both challenging and expensive to secure such accommodations.

Over the past three years, construction costs have exhibited an upward trajectory across various building types, with residential flat construction costs witnessing a notable 26% increase between 2021 and 2023. The Building and Construction Authority's Tender Price Index reveals a similar trend, indicating a 30% rise in construction costs for condominiums and commercial buildings over the same period.

Industry analysts posit that these elevated construction costs, stemming from factors such as labor and material shortages, will inevitably translate into higher home prices as these costs are passed on to end-users and homebuyers. Projections for 2024 suggest that costs will remain high, with the average tender price for construction projects in 2023 being approximately 8% higher than in 2022. While a slowdown in the rate of increase is expected, a return to pre-pandemic price levels is unlikely.

Despite initiatives to reduce dependence on unskilled foreign labor, these efforts often come at the expense of increased costs associated with high-value products, such as pre-cast components, and design for manufacturing and assembly components. The rising cost of building materials, particularly concrete and steel, has been a significant contributor to the overall increase in construction costs, although there are indications of a gradual downward trend since the peak in the previous year.

How does local construction firms fare?

Recently, KSH Holdings Limited, a public listed company in Singapore reported a net loss for 1HFY2024. Their core business is in construction and real estate development.

In today's inflationary climate, the influence of rising prices due to general inflation has gained increased prominence in fueling the escalation of construction costs. This phenomenon adds to the complexities posed by supply chain disruptions, the effects of climate change, shortages in labor, and the rising costs of materials and manpower.

In July this year, TA Corporation announced that Tiong Aik Construction Pte Ltd ("TA Construction"), a whollyowned subsidiary of the Company, was placed under provisional liquidation. 

TA Construction was grappling with a severe tightening of cash flow, stemming from challenges in collecting payments and retention monies—partly attributable to potential liquidated damages claims. Simultaneously, the company is confronted with escalating demands for additional funding to address the surge in labor and material costs. The rise in interest rates has resulted in increased borrowing costs and an unfavorable financing environment. This, combined with a slower-than-anticipated uptake of available-for-sale properties developed by the Group, has constrained the Group's capacity to sustain cash flow for TA Construction. Consequently, this situation has also impacted the company's ability to secure new projects given its existing financial condition.

Hope for Construction Sector

Singapore's construction sector, rebounding from the disruptions caused by the Covid-19 pandemic, has shown positive growth, expanding by 6% year on year in Q3. However, new challenges such as geopolitical tensions, sustained high-interest rates, and increased borrowing costs have raised concerns among builders. These factors, coupled with the impact of high oil prices on transportation and operational costs, threaten to affect profit margins.

Mr Toh Tiau Lai, Managing Director of Lian Bee Metal Pte Ltd, is cautiously optimistic on the economic outlook of the construction sector for 2024. His firm specializes in steel rebar and they have a healthy order book from recurring and new customers due to their professionalism in timely delivery and good workmanship. 

To navigate these challenges, companies in the construction sector are adopting strategies such as more advanced planning for manpower and material sourcing, simplifying construction methods, and exploring ways to optimize designs. Additionally, companies are extending project timelines and implementing more robust procurement strategies to cope with delays.

BCA Forecast on Singapore Construction Demand

In response to the forecasted demand, the Building and Construction Authority (BCA) anticipates that construction contracts awarded in 2023 will range between S$27 billion and S$32 billion. The public sector is expected to contribute significantly, accounting for 60% of this demand, supported by a robust supply of Housing and Development Board Build-to-Order flats, while private sector construction is projected to contribute between S$11 billion and S$13 billion.