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July 21, 2019

Construction sector contracts 7.6pc in Q3FY19

Business

July 21, 2019

KARACHI: Construction sector witnessed a sharp contraction of 7.6 percent in FY19 from 8.2 percent growth during FY18 on back of poor macroeconomic factors, ban on purchase of immoveable property worth more than four million by non-filers, and court proceedings against a leading property developer.

Another major factor behind this decline was the fall in margins of the real estate developers, the State Bank of Pakistan (SBP) in its quarterly report revealed. Restrictive regulatory measures created uncertainty in the real estate markets.

On top of that, the prices of imported raw materials also increased which pushed up the cost of construction substantially.

The increase in financing costs further escalated the cost of production. House financing remained virtually stagnant in Q3FY19, compared to Rs2.7 billion increase in the same period last year, the report said.

However, the increase in costs was not commensurate with increase in prices of housing units. As margins weakened, more projects became unviable for developers due to the prevailing market dynamics. A major construction input, cement, also went down during the period under review. Cement production recorded contraction of 5.4 percent during Jul-Mar FY19, compared to double-digit growth of 12.4 percent in the same period last year.

Cement production registered the first decline in the last eight years during the July-March FY19 period.

The decline may have been greater had it not been for cement exports, the SBP said, which partially offset the weakness in domestic demand.

The cement sector has been going through a major expansionary phase in recent years, mirroring the increase in economic activity in the country. Public sector development spending, complemented by CPEC outlays on infrastructure, provided a boost to the cement industry.

However, this type of support might not be as forthcoming during the ongoing phase of macroeconomic stabilisation.

Steel industry too witnessed a double-digit decline of 11.0 percent during the nine month period compared to remarkable increase of 27.5 percent during the same period last year.

In addition to policy related impact, the exchange rate depreciation played a detrimental role in the sector’s outcome as price of imported raw material (ie scrap and coal) soared.

Upward adjustment in electricity prices further dented domestic steel producers’ margins. On the international market front, US-China trade tensions kept steel prices suppressed in the global market, which put the importers in the driving seat.

According to the Pakistan Bureau of Statistics data, in the third quarter of FY19, imports of scrap steel went up almost 25 percent, whereas finished steel stayed below five percent.

Consequently, the earlier imposed antidumping duties on imports became ineffective, adding to the already challenging business environment for the domestic steel producers.

It may be noted that the SBP has introduced a policy for promoting low cost housing in March 2019 for lower income and special segments of the society, such as widows, children of martyrs, transgender people, and persons in areas severely affected by terrorism.

The central bank has allowed certain regulatory relaxations to banks/DFIs. “With 90:10 loan to value ratio, a housing unit/apartment having up to Rs3 million value can be financed at a relatively low rate of 5 percent for up to 12.5 years,” SBP said. “The loans are refinanced by SBP and banks have been exempted from the exposure limit of 10 percent on real estate to the extent of exposure taken on low cost housing.”

For those who do not own houses, rents posted a sharp YoY increase during Q3FY19 due to base effect – quarterly revision in house rents was unusually modest in Q3-FY18.

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