Labour shortage, elevated interest rates still plague Asia-Pacific construction sector

A SHORTAGE of skilled labour and higher-for-longer interest rates continue to affect construction growth opportunities in 2024, according to a market report by global construction consultancy Linesight on Thursday (Mar 21).

The report highlighted that the Asia-Pacific (Apac) region will continue to be the main driver of construction growth, partly due to domestic investment in infrastructure, renewable energy and manufacturing. 

According to Linesight, Singapore’s construction sector is expected to grow by 3.3 per cent in 2024, with sustainability and innovation, particularly in green construction and smart infrastructure to remain as focal points.

It said the surge in e-commerce, 5G expansion and widespread adoption of cloud computing and artificial intelligence (AI) are driving growth in the data centre markets in Apac.

Singapore has a pipeline of data centre projects worth S$2.2 billion, and although land availability may pose constraints, Linesight said the city-state remains committed to “strengthening its Tier 1 status as an Apac data centre hub”.

For the life sciences sector, the firm noted that Singapore continues to lead the way in research and development in the region, backed by significant investments in artificial intelligence to accelerate drug discovery. This surge in research and development activities is expected to drive the construction of more laboratory facilities.

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Linesight expects Apac to be the future hubs for semiconductor and battery manufacturing, with the region’s battery manufacturing capacity doubling by 2030.     

With a surge in the usage of electric vehicles in major markets, the Apac region is expected to dominate the electric vehicles’ supply chain. Singapore will stand to gain from this as it ramps up efforts to increase foundry capacities, said the consultancy.

However, the report highlighted the shortage of skilled manpower as a critical issue for projects across the region. 

It said the degree and nature of labour shortage varies among countries. In developed countries, there is an acute shortage of labour due to demographic factors such as ageing populations, while in emerging markets, there is significant availability of low-skilled labour but a shortage of skilled labour.

In Singapore, although the job vacancy rate in the construction industry dropped to 1.8 per cent in the third quarter of 2023, this was still higher than pre-Covid levels, and 100 basis points higher than that in Q3 2019.

The Republic’s construction industry is heavily dependent on low-cost foreign labour. The report noted that as construction activities picked up post-Covid, the number of foreign work permit holders in construction, marine shipyard and processing industries increased by 12 per cent between December 2019 and June 2023.

Besides a shortage of skilled labour, other key challenges for the city-state’s construction sector included an ageing population and low birth rates, said the report.

The consultancy noted that despite the government’s efforts to promote industry reform that enhances productivity and efficiency, the lack of available skilled labour will persistently impede the potential expansion of the construction sector.

John Butler, Linesight’s managing director for Apac, added: “In the face of strong demand and persistent labour shortages, recruitment, training and widespread implementation of more efficient delivery methods will be essential to fulfil the region’s construction potential, and to support the global transition to net-zero emissions by 2050.”

With the anticipation that the US Federal Reserve will not increase interest rates any further this year, Linesight expects liquidity conditions in the construction industry to improve.

The firm noted that the easing and tightening of monetary policy parameters had helped in containing inflation across many countries in Apac. Many central banks in the region have adopted more restrictive monetary policy positions to preserve price stability.

“Elevated interest rates have created challenging conditions for new construction with increased cost of financing and impacts on contractor’s profit margins. However, as inflation cools, interest rates are expected to reduce in coming quarters,” it said.

In Singapore, the construction industry is also not spared the higher-for-longer interest rates. 

The report flagged increased business costs due to rising wages and high pass-through costs from suppliers as key challenges for the industry here.

Looking ahead, Linesight said: “Construction inflation in Apac countries is projected to decelerate in 2024, supported by easing material prices, however labour costs are likely to remain a challenge impacting project cost and timelines.”

It noted that construction costs have normalised, with material prices stabilising. Steel prices have decreased from 2022 highs in most countries, while prices of energy-intensive materials such as cement and concrete remain elevated but stable. However, copper prices remain volatile and are likely to increase across the region.

Last year, Singapore’s construction industry grew 7.4 per cent in real output, driven by a surge in infrastructure projects, residential and commercial developments and government initiatives.

The commercial sector led the way, expanding by 32.2 per cent in real terms in 2023, fuelled by tourism, hospitality, retail, office and data centre projects.