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South East Asia | Market report 2016

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Market overheating, project delays and cost overruns are giving way to a period of steady, rather than spectacular, construction growth across key markets in the Asia Pacific region over the next few years.

Hong Kong, Singapore and Australia are expected to maintain, and in some cases increase, the pace of infrastructure output as markets adjust to a new era of public spending

Hong Kong has been a major focus for construction in the region in recent years, with an ambitious series of major transport projects sucking in labour, resources and engineers from across the globe. These include the HK$180bn (£14bn) rail investment programme and the Hong Kong to Macau road crossing, which incorporates long sections of viaduct and undersea tunnel.

The resulting pressure on labour, materials and engineering resources has caused cost increases and delays, notably on the Guangzhou-Shanzhen-Hong Kong express high speed line between Kowloon and the border with China, and on the Hong Kong Macau road crossing.

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Wan Chai Bypass

The Wan Chai bypass snakes along the north shore of Hong Kong island

A report published by consultant Arcadis highlighted Hong Kong’s overheating problems in January. Its research shows that construction costs in Hong Kong were the third highest in the world behind London and New York, running between 40% and 60% higher than those in cities in Continental Europe.

But last year there were signs that the workload boom in Hong Kong was starting to tail off. “As far as we’re concerned, 2015 was slower than expected,” says Mott MacDonald development director Mike Barker. “Political unrest caused a constriction in work emanating from the government.”

Slow workload flow

Consultants believe the pro-democracy demonstrations, which made headlines around the world in early 2015, triggered political disputes within the Hong Kong Legislative Council. Infrastructure spending decisions got caught up in the disputes between elected representatives, with the result that officials failed to sign off a series of key infrastructure spending decisions. The result was that less consultancy work was commissioned, although output remained high. According to research body Timetric Construction Intelligence Centre, output increased from US$14.3bn (£9.9bn) to £13.8bn last year.

South East Asia

South East Asia

At the same time, the Hong Kong government seems to be trying to clear the market of the major projects which have caused the local construction economy to overheat. Some, like the West Island line metro extension to the Island Line has now opened, and projects like the South Island Line and the Kwung Tong extension and Wan Chai expressway, which threads a motorway in tunnel along the congested waterfront of Hong Kong island, are also nearing completion.

Civil engineering work for the high speed link to China is also nearing completion, and the line, originally expected to open last year, is now expected to open in 2018.

As workload has slowed, competition has suddenly increased with consultants feeling the effects first

As workload has slowed, competition has suddenly increased, with consultants feeling the effects first. Fee bids have started to drop with some firms reporting undercutting by as much as 80% as their competitors have sought to hold together teams built around major projects together in the hope that they will win new work.

But the lull is not expected to last for long.

Consultants like Atkins sense a change in spending emphasis. Aviation is taking over from rail as a key infrastructure spending focus. The Hong Kong Airport Authority is gearing up for a major programme of work centring on the construction of a third runway at the international airport on Chek Lap Kok island. Mott MacDonald and Atkins are working with the Authority to design the third runway, which is to be built on 650ha of reclaimed land. 

The project also includes a huge terminal building, the size of the airport’s massive existing 550,000m2 terminal. Design work for this to be put out to tender later this year.

Hong Kong’s third runway

The new terminal will also be connected to the existing terminal area via a 2.5km long people mover to be built in tunnel. A tunnel of similar length with also be needed for the baggage handling system, as passengers will be expected to check in or pick up their luggage in the existing terminal area before heading out to the new terminal. Mott MacDonald is currently working on detailed designs for these tunnels and for the new concourse building.

Barker is also looking forward to new projects from Hong Kong metro operator MTR, which is expected to let design contracts in the next 12 to 18 months. Although large, they are smaller in scale than the high speed rail line, now expected to finish in 2018, or the massive £5bn, 17km Shatin to Central line, phase two of which is expected to be complete in in early 2020s

In the property market, the redevelopment of the site of the former international airport at Kai Tak is also expected to get going

But as these major projects near completion, Atkins also expects the focus to shift away to existing infrastructure. “ The next phase is asset upgrading,” says Atkins Asia Pacific chief executive office Chris Birdsong. This is likely to include electrification and signalling work on the MTR subway system, now almost 30 years old.

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vincom landmark 81 tower

Atkins and Arup are working in this tower in Vietnam

There is also expected to be a renewed emphasis on housing expenditure, which, in space constrained, Hong Kong and Kowloon translates into tower block construction. Hong Kong has committed to building 250,000 homes in the next 10 years.

“That equates to around 40 towers a year, a massive expansion programme, says Barker.

Housing and infrastructure spending are also going to be major drivers in the wider region, notably Singapore, which is also recovering from a construction downturn.

Singapore slows in 2015

In Singapore, the property market slowed considerably last year, contributing to a major drop in construction output. Consultant Arcadis forecasts that construction output in Singapore will have fallen from £19.5bn in 2014 to between £14.6bn and £17.4bn last year.

But next year spending fuelled by major infrastructure projects like the Changi Airport third runway is expected to grow again. Singapore’s Building and Construction Authority expects to award construction contracts worth between S$27bn (£13.1bn) to £16.6bn in 2016. Sixty five per cent of this will come from the public sector.

Like Hong Kong, Singapore also expects to spend more on housing, public buildings and water and sewerage projects. Steady growth is predicted to continue until 2020, boosted by metro projects, the 20.5km North-South Expressway which incorporated an 8.8km viaduct and 9.6km of tunnel and the Deep Tunnel Sewerage System phase 2 which includes 30km of tunnel and 70km of link sewers.

High Speed Malaysia-Singapore rail

There are also longer term plans to build a high speed railway between Kuala Lumpur in neighbouring Malaysia and Singapore, although the two countries are still some way off agreeing details.

Comparable in size to the Singapore market is that of Thailand, which has slowed down during the recent global financial crisis, but which is starting to pick up again. Forecasting organisation Timetric Construction Intelligence Center predicts that increased spending on infrastructure and housing will boost the value of construction output to £12.11bn to £13.8bn between 2014 and 2019.

The fuel for growth is urbanisation

Chris Birdsong, Atkins

Long term prospects for the region are strong as growth in the region’s emerging economies gathers pace. “The fuel for growth is urbanisation,“ says Birdsong. Major cities are becoming increasingly urbanised with population growth bringing with it the need for investment in energy and transportation infrastruction. The Philippines is seen as a particular growth market. It is politically stable and needs to invest in energy, transport and marine infrastructure. Vietnam is also growing. Atkins and Arup are working on a 460m high rise tower in Ho Chi Minh city and Birdsong expects to see more investment in mixed use property developments transport and energy infrastructure.

Urbanisation is also expected to generate work to produce low carbon infrastructure as south east Asia seeks to reduce its reliance on coal fired energy and motor vehicles (See box).

Consultants also see opportunities in work relating to Chinese and Japanese investment in these economies. Although this spending is tied to the involvement of Chinese and Japanese contractors respectively, British consultants often pick up work with Chinese contractors because of their expertise in project management and because of their familiarity working in different countries. At this stage, some Chinese contractors lack project management expertise and are relatively inexperienced at working outside their domestic markets, and foreign consultants can often fill this gap in their knowledge.

Low carbon Hong Kong

Hong Kong’s rapid evolution into a densely populated, high growth city and trade hub has been accompanied by increasing pollution, creating need for a low carbon strategy as it develops its buildings and infrastructure still further.

Key challenges facing Hong Kong are the need to build new housing and infrastructure to accommodate a population increase from 7M to 8M over the next 20 years.

To help develop this, the ICE, working with the Chinese University of Hong Kong, has urged the Hong Kong government and local property owners to develop low carbon expertise, focusing on improving energy efficiency in buildings and increased use of retrofitting and existing asset renewal.

“How we design, build and operate the city’s infrastructure will have a huge influence on efforts to reduce the carbon impact of how we travel, cool and light our buildings, provide clean water and deal with sewage and solid waste.” says the report, entitled Infrastructure: Shaping Hong Kong, published in January.

It suggests that Hong Kong

  • set itself a long term carbon reduction target, beyond existing Hong Kong government targets
  • Set up an inter ministerial committee to drive carbon reduction
  • Explore the establishment of an infrastructure council to establish long term spending priorities
  • Look at ways to encourage the private sector to adopt green procurement policies
  • Boost research and development
  • Educate the public so that people change their behaviour and adapt lower carbon spending decisions

Download Infrastructure: Shaping Hong Kong here 

 

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