Lessons from Greatearth's bust: Integrated players best placed to tackle construction woes
The challenging operating environment as a result of the pandemic has been plaguing the construction sector and starting to take its toll.
THE plight of defunct contractor Greatearth underscores the severity of the headwinds that have been plaguing the construction sector.
Since the pandemic first broke, construction companies have seen work disrupted by the circuit breaker as well as stringent safe-distancing measures at worksites. Arguably the biggest challenge, however, is tighter border controls which have restricted the flow of foreign workers and resulted in a manpower shortage.
Companies have had to hike salaries to retain their existing workers, who also have to be tested regularly for Covid-19. All this has driven up costs and put pressure on margins. Supply chains have also been disrupted, which has impacted the supply and cost of construction materials. In short, it's created the perfect storm for the construction industry.
Analysts say that construction costs have gone up anywhere from 10 to 30 per cent as a result. RHB analyst Vijay Natarajan reckons there is some sharing of the burden between contractors and developers for existing projects, although developers are likely factoring in the spike in construction costs when undertaking new projects and passing costs on to buyers.
Property developers have also had to contend with delays with respect to the completion timelines of their ongoing projects.
But the challenging operating environment has started to take its toll. Notably, affiliated companies Greatearth Corporation and Greatearth Construction are being wound up. As a result, there will be further delays in the construction of five build-to-order housing projects and two public projects as HDB sources for new contractors to complete the remaining works. Several subcontractors are reportedly staring at sizeable losses due to unpaid fees owed by Greatearth, while over 2,900 home buyers are expected to be affected by the disruption.
Already, existing delays for public and private housing projects have resulted in some prospective buyers turning to the rental market as well as the HDB resale and private resale markets as some may be unable or unwilling to wait for their new home.
Analysts expect that construction players with exposure to property development should be better placed to ride out the storm, given the fairly buoyant state of the property market.
"Construction players will have to grapple with low margins for some time, but if they are a developer, they may be able to pass on some of these increased costs (to buyers)," Mr Natarajan said.
Diversified revenue streams
Being able to fall back on diversified revenue streams also helps.
Construction and property group Tiong Seng Holdings posted an operating loss of S$683,000 for H1 2021 at its construction business, albeit narrowing from S$6.3 million a year ago. Operating profits from its property development and engineering solutions segments, however, helped mitigate some of the fallout, keeping it in the black with a net profit of S$1.4 million.
Meanwhile, Wee Hur Holdings posted its first loss in over 40 years for H1 FY2021 - to the tune of S$25 million - weighed down by its construction and purpose-built student accomodation (PBSA) businesses. These losses were partially offset by gains from the property development business and workers' dormitory business.
But even as the pandemic continues to present challenges for its other businesses, Wee Hur appears fairly sanguine where property development is concerned as it ramps up to launch its 115-unit condominium Bartley Vue for sale this month.
An integrated player such as Chip Eng Seng Corp or Lian Beng Group may also be better placed to meet construction timelines versus a pure play developer. Integrated players will be able to plan better, according to DBS analyst Derek Tan. "Developers are passing on the increased construction costs to consumers but if there are limitations to how much they can pass on, they would need to look at which avenues to cut. An integrated player would have more leeway - there's more flexibility and, possibly, more control over raw materials and inventory."
The eventual relaxing of curbs to allow the inflow of foreign workers should help alleviate some of the pressure on the construction sector. But even as the pandemic is contained, analysts say that construction costs may not return to pre-pandemic level since some of these increased costs are due to structural changes - such as the shift towards ensuring a better living environment for workers.
As Singapore works towards reducing its reliance on foreign labour, automation will be a key part of helping the construction industry adapt to the new normal.
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