Smaller contractors continue to suffer from tight cash flow and deteriorating margins due to a lack of projects and higher labour and rental costs.
- Singapore’s construction sector value added shrunk in 2017 (down 6.1%) due to a subdued performance in private construction, steming from continued lower demand, less favourable economic conditions and bigger supply of already completed private housing projects and offices. SME contractors continue to suffer from tight cash flow and deteriorating margins due to a lack of projects, increasing competition, and higher labour and rental costs.
- Public construction accounted for about 70% of building activity in 2017 (60% in 2016), following the government’s higher spending on infrastructure and civil engineering contracts (worth between SGD 20 billion and SGD 24 billion, up from SGD 15.9 billion in 2016). In order to support the industry and give a boost to troubled smaller contractors the government announced it will spend SGD 1.4 billion over the next two years to upgrade walkways and renovate community centres, sports halls, police stations, etc.
- Singapore´s construction businesses are heavily reliant on banks for loans and project funding. Despite a more difficult outlook for the Singaporean banking sector as a result of lower growth in China and a less favourable domestic economic outlook, bank lending remains non-restrictive to the construction sector for the time being.
- Payment duration in the industry is 60-120 days on average. Payment morality slowly deteriorated in 2017, and this negative trend is expected to continue in H1 of 2018. According to the Singapore Commercial Credit Bureau (SCCB) construction is the only sector that registered a year-on-year rise in the number of slow payments (up from 50.82% in Q3 of 2016 to 53.3% in Q3 of 2017).
- The protracted default rate in the construction industry remains high. At least the number of businesses under liquidation has decreased year-on-year by about 15%, as banks are more prone to accept restructuring options as opposed to resorting to liquidation.
- In 2018 the decline is expected to ease on the back of continuous public investment in the sector. While our underwriting stance is generally open for businesses related to public sector construction we are more cautious about the private building segment and SME contractors in general.