Big changes ahead for construction players

  • Business
  • Saturday, 02 Jun 2018

MRT3 axed: An MRT train moving towards Kajang from Kuala Lumpur on the Sungai Buloh-Kajang route. The new government recently announced it has scrapped the MRT3 project.

HARDLY a month since Pakatan Harapan formed the federal government, several big changes have already taken place - with many more in the pipeline.

Keeping to the promises under its election manifesto, the government quickly announced the zero-rating of the unpopular goods and services tax (GST), and then the scrapping of two mega projects – the KL-Singapore High Speed Rail and the MRT 3.

The cancellation of the two mega projects worth over RM100bil so far, has already sent some construction stocks tumbling to multi-year lows.

Analysts have singled out players like GAMUDA BHD, MMC Corp Bhd, and GEORGE KENT (M) BHD to be the worst-hit, but acknowledge that any contractor with rail exposure will also be impacted by the negative sentiment.

WCT Holdings Bhd, MALAYSIAN RESOURCES CORP Bhd (MRCB), SUNWAY CONSTRUCTION GROUP BHD and Gabungan AQRS Bhd are among other players set to be hit by the cancellations.

MRCB and Gamuda formed the consortium tasked to handle the civil works of the scrapped HSR job.

Gamuda’s share price tumbled to RM3.46 last week, its lowest since March 2013, while MMC Corp fell to RM1.49, its lowest since March 2009.

George Kent saw a sharp fall of 67.5% to RM1.28 from RM3.94 since the general election on May 9.

Siva: Some developers may not be able to afford to develop the land immediately after acquiring it.
Siva: Some developers may not be able to afford to develop the land immediately after acquiring it.

Building material players have not been spared either, with companies like cement producer Lafarge Malaysia Bhd also seeing their share price tumble 29.05% over the past month to close at RM2.98 on Friday.

At this point, the fate of other mega projects, such as the RM55bil to RM60bil East Coast Rail Link (ECRL) and the RM9.4bil Gemas-JB double-tracking rail projects remain unknown, facing deferment, renegotiation or outright cancellation.

In a nutshell, construction players and other companies exposed to mega infrastructure projects are now faced with a new reality.

The government is aggressively looking to cut costs, with national debt at over RM1 trillion, and axing mega infrastructure projects are a sure way of saving billions of ringgit.

This also means that there are unlikely to be major domestic infrastructure projects in the near term.

Many construction players have been heavily reliant on domestic jobs, and have never had to venture overseas due to the abundance of large infrastructure projects here.

However, this may no longer be the case.

Some of these construction companies, as well as building material players may now have to relook their strategies, including exploring other markets to sustain their order books.

While Malaysia will definitely continue to have various infrastructure projects in the pipeline, the jobs available in the near future may not be as big as the recently-scrapped planned billion-dollar projects.

No more land hoarding

Another sector that may be impacted by changes in policy under the new ruling government, is the property sector.

Pakatan, in its election manifesto, has pledged to provide more affordable housing for the rakyat and outlined plans to build a million affordable houses within two terms of its administration.

It said the task would be placed under the purview of a National Affordable Housing Council to be chaired by the Prime Minister.

“One of the main reasons for the high house prices is the difficulty in developing new lands, especially after several giant developers, including some GLCs, who monopolise land to build their private land banks.

“Worse, they do not build on these lands after acquiring them. They simply hoard the land.

“As a result, land prices surge, contributing to a surge in property prices,” the coalition says in its manifesto.

It adds that this impacts smaller developers, who also find it hard to compete with giant developers.

“The Pakatan Government will set a time limit within which the companies must complete their constructions so that no corporate giants can hoard land banks without developing them,” the manifesto reads.

If this is enforced, property players will have to change the way they do things.

Property players are known to embark on land banking exercises, whereby they acquire landbanks and then hold on to the assets until they are ready to develop it.

Companies with strong cash flow do not mind paying interest on the land assets for several years, as the value of the land also increases with time.

Setting a timeframe within which the companies have to develop the land means the developers will no longer be able to do this.

Malaysia Institute of Estate Agents (MIEA) past president Siva Shanker says this may not be the best way to tackle the issue of high property prices.

“The state must try its best to not get involved in how businesses run their business.

“Landbanking is an important strategy for developers. If a developer buys a piece of land at arm’s length, the state should impose such limitations,” he tells StarBizWeek.

Some developers, he adds, may not be able to afford to develop the land immediately after acquiring it.

However, Siva says he is confident the new government will be able to tackle this issue in a logical and people-centric manner, based on the decisions it has made over the past few weeks.

“A ruling like this could be imposed in cases whereby the land is given to the company by the state, or at a subsidised price for specific purposes.

“In such cases, it makes sense to enforce a ruling like this as there could be elements of profiteering if the company holds on to the land for too long,” he says.

Another challenge for the sector is in the one million affordable homes the government plans to build, as this could result in the government being in competition with the private sector.

The housing and construction sectors have huge multiplier effects and, while it is necessary to cut spending and to provide more affordable housing, it is crucial that these sectors continue to flourish.

The government, however, has repeatedly assured that its policies will be business-friendly, and this has given confidence to market.

At only three weeks old, the Pakatan government has already kept to its word on some of the pledges in its manifesto.

Moving forward, it will be interesting to see which of the pledges will be prioritised, and which will have to be put on hold given the larger-than-expected national debt.

It will also be interesting to see if it is prepared to review and tweak some of the pledges, if they are viewed as not-business friendly, in line with feedback from stakeholders.

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