By Ms Alice Tan, Senior Director, Research and Consulting
Contagion drags sentiment worldwide
The COVID-19 outbreak has escalated into a pandemic within three months since December 2019. Since early March 2020, the number of cases outside China has exceeded those within China and the pandemic has gripped more than 180 countries especially in the US, Europe and the Middle East. Fears of economic and financial fallout from COVID-19 has resulted in steep losses across major stock markets. Even the two rounds of emergency interest rate cuts to near zero by the US Federal Reserve on 3 March and 15 March did not stem the stock market rout. Market sentiment has turned south rapidly within two weeks of March as equities and currencies plunged lower, closely tracking the number of new confirmed cases of COVID-19 that has been escalating daily to about 280,000 globally at the time writing.
Brewing issues for Singapore’s Construction and Real Estate
COVID-19, with its far-reaching and unpredictable spread, morphs into an elusive ‘black swan’ event that will continue to derail economic, business and social activities worldwide. The prospect of an economic recession this year is becoming possible as more countries have declared lockdowns to contain the pandemic. These involve mandatory geographic quarantines, travel bans and recommendations to stay home, close schools and businesses, and restrict mass social gatherings.
Singapore, being an open economy and similarly imposing travel restrictions on visitors from more countries, will not be spared from the sudden fallout of visitors, trade and investment. While the impact is felt immediately by businesses in the tourism, hospitality, retail and service-oriented sectors, our local construction and real estate industry is facing a daunting challenge – global supply disruptions of construction materials and labour that has impacted construction progress onsite. These disruptions, if prolonged, would have far-reaching implications on property developers’ ability to meet the five-year Project Completion Period for residential projects. This commentary explains the growing issues, which are becoming multi-faceted and would impact various stakeholders in the industry.
Halts to labour and material supply
Since mid-February after the Lunar New Year, construction progress of various property developments in Singapore has been affected due to labour and materials disruptions, as mainland Chinese workers were either served Leave of Absence or not allowed to return to Singapore in the near term. Key construction materials, mainly aluminium components, tiles, kitchen carpentry and fittings from mainland China were not delivered on time as many factories have not reverted to full capacity. As a slight reprieve, mainland China gradually resumed production since mid-March and supply of these materials to Singapore are gradually restoring.
To help businesses on manpower crunch during this period, the Ministry of Manpower (MOM) is waiving levies for employers with eligible foreign workers serving quarantine leave of absence or stay home notices. However, it has not done so for all foreign workers, as MOM opined that the measures to deal with the short-term fallout should not negate longer-term efforts for companies to restructure and become less reliant on foreign manpower.
Disruptions are now multi-faceted
To compound woes, greater difficulties now abound for the construction industry as the COVID-19 situation deteriorated. Disruptions to production and supply chains have now widened beyond mainland China to other key production countries in the US, Europe and recently, Malaysia.
Supply disruption of construction materials from Europe such as marble, tiles, kitchen equipment and other specialist Mechanical & Electrical equipment and components added procurement difficulties for contractors as the pandemic raged across Italy, Germany, France, Spain, Middle East, after these countries imposed lockdowns since mid-March. The lockdown imposed by Malaysia that restricted visitors and workers from traveling in and out of the country from 18 to 31 March has created huge inconveniences for many Malaysians working in Singapore, especially in the construction industry. The Singapore government has explored ways to provide accommodation for Malaysian workers who chose to stay in Singapore, and has helped employers with the related costs. However, it is observed that, anecdotally, many others have also stayed in Malaysia, adding labour pressures on various trades dependent on Malaysian workers, such as the construction industry where most Malaysians work as tower crane drivers, heavy machine operators, supervisors and foremen and other specialist tradesmen.
Delays in Prefabricated Prefinished Volumetric Construction (PPVC) are a concern due to the requirement of only fully fitted PPVCs being allowed to be installed on site. To ease pressures on PPVC projects affected by delayed supplies of construction materials from mainland China, the Building and Construction Authority (BCA) has allowed 13 ongoing projects (as at 4 March 2020) to firstly install partially completed PPVC modules on-site and finish the work when the delayed materials arrive. However, Malaysia’s lockdown creates a fresh disruption in supply of PPVC modules or precast concrete carcasses, with reportedly about 80 per cent of these coming from factories in Johor Bahru. According to BCA, there are a total of 44 PPVC projects, of which 35 are private residential and HDB projects, in various stages of progress. Now with even the supply of PPVC modules, and various other construction materials (such as cement, precast modules and carpentry) being disrupted in Malaysia, no other work can continue.
Beyond these disruptions, the psychological and operational impact of COVID-19 on the construction workforce with over 340,000 foreign workers could affect their well-being, health and productivity. Many of the foreign workers are residing in dormitories and are exposed to higher threat of widespread viral outbreak within their confined communities. With news of some foreign workers being infected and new confirmed COVID-19 cases continuing to rise in Singapore, contractors are likely to face greater difficulty to retain and recruit foreign and local workers.
Invariably, the confluence of these disruptive factors of manpower and material shortage, worker morale, and heightened precautionary measures at dormitories and worksites, would collectively bring about a resultant slowdown in construction progress. Should the COVID-19 pandemic prolong and lockdowns in Malaysia and other key exporting countries continue, the extended challenges could be beyond the direct control and mitigating measures that contractors can deploy. As such, delays in construction progress of residential projects in Singapore are envisaged to be significant at least for the first half of 2020.
Given such onerous downsides, the foremost task now is for the authorities to calibrate key measures as soon as practicable, with the goal of saving businesses before company survivability in the construction industry deteriorates further.
Difficulty for private developers to support contractors
Plagued by the disruption difficulties, more contractors are submitting requests for Extension of Time (EOT) for their construction completions to property developers. The authorities have also encouraged developers to take a sympathetic view of construction project delays and grant requests for EOT. However, it would be a difficult call for developers at this stage to grant EOT to the main contractor based on contractual or ex-gratia basis. There are two considerations that are likely weighing on the minds of developers. First, developers will have to review contractors’ proposed mitigating measures and their substantiation that such measures are insufficient to resolve delays, so as to invoke provisions such as force majeure. However, most standard forms of construction contracts in Singapore do not spell out pandemic as a force majeure event, rendering the contractors’ case for EOT based on COVID-19 difficult. Would developers then grant EOT on an ex-gratia basis?
The next consideration comes in. Despite the clear issues of supply disruptions and construction delays, the five-year Project Completion Period (PCP) deadline imposed on developers is a key deterrent for most of them to grant EOT to contractors. Currently, developers must build and sell all units in a residential project within five years from the time of land acquisition, failing which, the remission of Additional Buyer’s Stamp Duty (ABSD) will not be granted, and developers have to pay ABSD of 15 per cent and 25 per cent of the land price plus interest, for sites acquired before 6 July 2018, and on/after, respectively. As such, developers must adhere to the project completion and sell-out timelines strictly within five years to avoid the ABSD payment, where this timeline is becoming a compressed issue for all players in the construction and real estate supply chain.
The downstream impact arising from non-EOT being granted to contractors would add further hardships on contractors. Many contractors continue to incur overhead costs even if their projects are partially stopped. Developers, too, would face cash flow disruptions as they are not able to draw-down progress payments from financial institutions arising from construction delays. Adding to their cash flow constraints, contractors are likely to face difficulty to collect progress payments from their developer clients with a slowdown in construction progress. These immediate financing issues, coupled with the subsequent ‘’bunching up’’ of resource crunch and higher construction costs at the later stages of construction to keep up with timelines, could impact quality deliverables, which do not bode well for the industry and homebuyers.
Beyond the interests to deliver completed properties in time for homebuyers, the interest of the stakeholders (e.g., contractors, suppliers and developers), especially in this unprecedented time of COVID-19 pandemic, needs to be closely considered by the authorities. The hardship that is to come for the construction and real estate industry could be greater than initially envisaged, as the global economy is forecast to worsen with various industries hard-hit by the pandemic and job losses are inevitable. Demand for private homes could wane as a result, putting greater pressures on developers. With the prevailing unsold inventory of more than 30,000 private homes and assuming 9,000 new homes could still be sold annually, it could take more than 3 years from now, i.e. beyond 2023, to absorb this inventory. Therefore, some developers who bought land during the 2017/2018 period may either narrowly meet or miss the five-year PCP deadline in the event that demand weakens.
Taking into consideration this multitude of pandemic-induced issues plaguing the construction and real estate industry, a pre-emptive approach towards the prevailing five-year PCP measures imposed on developers need to be introduced. In November 1997, the PCP for residential projects was extended from 4-5 years to 8 years due to the fallout from the Asian Financial Crisis. PCP was later cut to 6 years in 1999. In Budget 2009, the government allowed developers to apply for extension of PCP by up to 1 year for private residential projects without having to pay an extension premium. From 5 August 2010, the PCP was cut from 6 years to 5 years for all government land sale sites, due to shortage of supply then and to ensure the availability of adequate homes. Presently, this threat of home shortage has diminished, and with the fallout caused by COVID-19 becoming a bigger concern, it is time to consider calibrating PCP back to 6 years.
A case-by-case basis approach, during this time of growing pressing issues for the industry, is less effective since time is required to review each case, and contractors in the meantime will continue to suffer. The PCP measure needs to be calibrated to apply for all residential projects so as to speed up implementation and conserve administrative resources, in a bid to cushion the construction and real estate industry from further hardships.