Headwinds for Vietnam construction industry

The COVID-19 was a critical factor along with slow licensing procedures in pushing down new launches. Photo: Quoc Tuan.

In 2H 2021, accelerated public disbursement in infrastructure is pivotal to uplift the industry. Besides, investment opportunities are concentrated within some businesses’ own growth stories.

Negative impacts

According to CBRE, in 1H 2021, new launches in HCMC dropped 9% YoY while Hanoi went up 10% but still from a low level from 2019. The COVID-19 was a critical factor along with slow licensing procedures in pushing down new launches. Therefore, construction activity has been limit  ed given the delay of projects and less workload to ensure health for employees during the pandemic according to Government direction. In July and August, construction activities were further limit  ed given the stringent lockdowns from Directive 16 in HCMC and some other provinces, cities.

Besides, according to the General Statistics Office of Vietnam (GSO), in 6M2021 the average price of housing construction materials and domestic gasoline prices increased by 5.03% YoY and 17.01% YoY, respectively. Steel prices, which account for 11- 16% of input costs surged 40% vs the end of 2020 and put pressure on the gross margin of contractors.

Consequently, several projects were forced to halt construction due to the surge in building material prices. Moreover, fierce competition also explained the gross margin reduction in 1H 2021. According to VDSC, FECON JSC (FCN) and Licogi 16 JSC (LCG) recorded improved gross margin thanks to the better margin contribution by other segments including real estate and energy infrastructure construction.

2H 2021 outlook

VDSC said Vietnam's transport infrastructure sector would remain the largest driver for the construction industry. Promoting public investment, especially infrastructure projects, is expected to boost the construction industry in the next five years. 

According to Fitch Solutions, the infrastructure industry value would reach VND 158,167 billion in 2025, implying a CAGR of 10% during 2020- 2025. Strong government commitment and a large pipeline of projects are key drivers. Specifically, the total state budget capital under the medium-term public investment plan for the 2021-2025 period is VND 2,870 trillion (43% higher versus 2016 – 2020 period), including VND 1,500 trillion for key economic regions and VND 1,370 trillion for other regions. Long Thanh Airport is the largest project- construction kicked off in January 2021. Phase 1 of this project is expected to be completed in 2025. The total investment cost is USD 16 Bn. VDSC expects that if these large-scale projects are ramped up, it would likely boost the construction industry.

In the context of a hard time to win contracts given the fierce bidding process, businesses that do not go through the competition with other contractors have an edge. As mentioned earlier, infrastructure construction is supported by a strong pipeline monitored by the government focusing on building public infrastructure such as roads, highways, etc. This segment would be expected to have the strongest growth per Fitch Solutions’ forecast, said VDSC.