Is construction boom losing momentum in Pakistan?

By Nasir Jamal

 

Is the construction boom – one of the major drivers of rapid growth in both industrial and service sectors during the last five years and a big provider of unskilled to highly skilled jobs – petering out?

People in the construction business say that the pace of activity in this sector has begun to decelerate and investment is declining due to numerous factors. These include rising prices of materials, slowing economy, spiking interest rates, political uncertainty and shrinking or stagnating income of the middle class.

“I see a major slump in the construction sector over the next six months to one year due soaring input costs, rising food and energy prices and uncertain political conditions,” says Dr Mahmood Hussain, a former chairman of the architecture department of the University of Engineering & Technology,Lahore.

“It is just a speculation which may prove wrong in the end if the existing political and economic conditions change for the better,” he adds. Some maintain that the construction industry has already lost its growth momentum with no new major project being launched.

“No new housing or commercial building project has been launched in Lahore or elsewhere in the last 12 months or so. Do you know of any?,” asks a leading builder from Punjab’s capital Akber Sheikh.

“The multi-storey buildings or housing projects you see coming up in major cities these days are the ones that were launched more than a year ago. None of them is (a) new (project),” he insists.

Akber says, many public sector projects have been suspended due to price escalation. He estimates that prices of most construction materials have gone up by 30 to 60 per cent in one year while steel rates have almost doubled. “On top of that the lingering political instability is affecting the already weak consumer and investment sentiment badly,” he says.

Abdul Qadir, an architect associated with a major developer, believes that the sales in the housing sector have dropped by at least 25 per cent in the last one year.

“The developers are compelled to cut their profit margins substantially in order to attract customers,” he says. But, the construction activity will not come to standstill because “the people will continue to require new houses, office space and shopping malls and plazas,” he adds.

There is an estimated housing backlog of seven million units with a huge shortage of office and commercial space across the country. Construction growth plunged to 15.2 per cent during the first 10 months to April of the last financial year from just below 18 per cent in 2006-07, according to the latest Economic Survey of Pakistan.

The sector has grown at an average 10.2 per cent in the last five to six years on the back of brisk activities in the housing, industrial and commercial sectors. Large public sector spending on physical infrastructure and reconstruction in the areas affected by the devastating earthquake in October 2005 also contributed to its growth significantly.

The rising income of middle classes, record jump in overseas remittances – which have gone up to above six billion dollars a year -, low mortgage rates until a couple of years ago and higher economic growth played crucial role in the growth of construction business. House sales rose sharply and high-rise buildings began emerging in the big cities to fill the gap between demand and supply of office space and modern shopping malls.

Dr Mahmood says a lot of people also whitened their black money by investing in housing and commercial buildings. “If you do a survey of multi-storey structures that have come up in the cities, you would find most of them lying vacant even after their completion. Investors have purchased them to whiten their black money. They did the same in the real estate market and pushed the prices to new record heights.”

The Economic Survey estimates that construction and mining machinery imports have gone up by 33.1 per cent in the first nine months of the last fiscal to March. It says the construction business absorbed almost 6.56 per cent labour force in the fiscal 2006-07, up by 0.8 per cent from 6.13 per cent from the previous year. The construction sector plays a crucial role in stimulating the economic growth and reducing poverty by generating new jobs.

“You can well imagine its importance in any economy – developing or developed – from the fact the sub-prime mortgage crisis in the United States has chilled the global economy,” points out architect Abid Butt .

“Globally, construction and engineering services are considered as one of the largest fragmented industry that account for over 10 per cent gross domestic product (GDP)of many countries and one of the major sources of employment to unskilled, semi-skilled and skilled workforce. Also, it plays a key role in the economic uplift of a nation as its growth stimulates almost 40 allied industries,” he maintains.

In spite of its critical importance to the economic development, construction remains one of the most neglected sectors.

“Construction business is facing numerous problems and issues ranging from unavailability of skilled labour and workmanship to basic and finishing materials,” says Qadir.

“It is a big problem for a developer to obtain bulk quality materials from the market. The price volatility also prevents us from evaluating correctly the cost of a project on its completion,” he complains.

“These problems will stay even if the economy picks up and demand for housing and other building moves up. The government needs to formulate an effective policy to resolve these issues – open training facilities for labour, streamline allied industries and improve quality of materials, end price volatility, etc,” says Abid.

Abid says, Pakistan has in the past exported its construction and engineering services, construction materials and labour to the Gulf states and earned substantial foreign exchange. “It could do so again and reap huge profits. But it would have to promote the local private firms and build their capacity through an effective policy before it could launch itself in the global market,” he insists.

Dr Mahmood says the unprecedented growth in the construction sector in the recent years had its downside as well.

“All the housing projects launched during this period were meant for the affluent classes. There was not a single project that catered to the low-income groups. Since private sector investment is motivated by profit, the government would have to take the lead in initiating projects for the low-income segments of population,” he says.

“This kind of intervention has become even more critical in view of the high land prices and soaring energy and food inflation, further squeezing their ability of middle and low income groups to have a roof to live under.”

Abid says, the urban environment and civic services are yet another victim of unbridled commecialistion allowed in the name of encouraging construction sector in the recent years.

“The government should look into this aspect and review its policies and building bye-laws to prevent further degradation of urban environment and deterioration of basic services to the citizens,” he adds.

Source: Daily Dawn, 7/7/2008

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