Construction & real estate sector buoyant

But China slowdown tempers optimism

Reviewing the Q2 International Business Report (IBR) results, I was pleased to see some good news for construction & real estate companies: Profitability expectations around the world are up. However, my optimism is tempered somewhat by recent news from China and it will be interesting to see how businesses react in Q3.

More of this later. First to the good news.

The proportion of business leaders expecting their profits to rise over the next 12 months climbed to net 46% in Q2, up from 36% three months previously. This continues a steady rise from just 10% in 2010, to 34% in 2011, to an average of 40% over the past 12 months. BRIC (60%), North America (55%) and APAC (51%) are the most bullish. Those in the troubled eurozone (21%) the least.

These results tie in with strong recent data from around the world. More than a third of all homes bought in the US in May were not even under construction yet; that’s close to a seven-year high. In the UK, mortgage approvals rose to over 58,000 in May, their highest level since December 2009. In Australia, house prices have climbed by 2.6% over the past 12 months.

The major cloud on the horizon is China. With fears of a housing bubble growing, the new leadership last month took strong action to rein in credit expansion. The People’s Bank of China initially refused to offer credit to cash-strapped institutions, interbank lending rates spiked and the stock market tanked. It has since said it will not allow banks to fail but the result is likely to be a significant deceleration in the rate of credit expansion.

Growth in China has already moderated (to 7.5% in Q2) and a further slowdown is expected. But what does this mean for the Chinese construction & real estate sector?

Well, the official construction Purchasing Manager’s Index (PMI) slid to 59.3% in June, down from 62.2% in May. The new orders index also dropped from 53.4% to 51.7%. Anything above 50% still indicates expansion so there is no immediate panic but the PMI has been on the slide since April.

This is an issue to watch closely. The new leadership has made it clear that it wants to rebalance the economy away from investment towards consumption. Sustainable growth is the new mantra. Businesses in the sector will have to adapt to this new era of reduced access to finance.

Perhaps the so-called ‘ghost cities’ in China are a thing of the past.

Sian Sinclair is global leader for real & construction at Grant Thornton.