Hong Kong: The Contractors' Experience

Chapter Two - The Construction Industry Today

Chapter Two The Construction Industry Today The official statistics show that the construction industry has contributed an average of over 5% per annum to Gross Domestic Product (GDP) over the last 10 years but this is a long way from giving the full story of the sector's true contribution to Hong Kong. Construction is but the starting point of the whole real estate industry and its contribution is clear to see from Hong Kong's skyline. Whilst the number of tower cranes on view may be a good indicator of the construction industry's activity, the number of buildings is the indicator of the broader real estate industry's contribution . All projects on completion are used, traded, maintained and managed throughout their life so the spin-off effect on the economy from initial construction is massive. Official statistics bury this effect by the manner in which they are compiled. The conventional representation of GDP by what is seen to be the major economic sectors does not separately identify either the construction or real estate sectors as shown in Fig. 2.1. However, an alternative representation, also shown in Fig. 2.1, which disaggregates the underlying statistics and re-arranges them to bring together all the components which relate to construction and real estate shows that it is the second largest sector, exceeded only by the conglomerate sector of wholesale, retail, import/export trades, restaurants and hotels. The difference between the two sectors is only marginal if averaged over the last ten years for which statistics are available. The constituents of the construction and real estate industry's contribution to GDP is given in Table 2.1 which shows the knock-on effect of construction to real estate development, leasing and ownership of premises. This is because construction produces an asset with a long life. Even in Hong Kong which has been know to demolish and rebuild within twenty-five years of a project's completion, the norm is for buildings and infrastructure to last for upwards of sixty years. Hence, the construction industry's contribution to the other major economic statistic - Gross Fixed Capital Formation (GFCF) - is also significant. This statistic represents investment expenditure by both private and public organizations which is vital to economic growth. The constituent parts which relate to construction and real estate as shown in Table 2.2 are: expenditure on building and construction which averaged over 35%; 18 Hong Kong - The Contractors' Experience Community, social and personal seNices (15%) Financing , insurance, real estate, and business seNices (24%) Others (11%) (a) By conventional economic sectors Community, social and personal seNices (15%) Financing, insurance , and business seNices (16%) Others (4%) Transport, storage, and communication (10%) Manufacturing (14%) Wholesale, retail and import and export trades, restaurants and hotels (26%) Real estate, property and construction (25%) Manufacturing (14%) Wholesale, retail, import and export trades, restaurants and hotels (26%) (b) By re-ordered economic sectors Fig. 2.1 Contribution to GOP by economic sectors (1992) The Construction Industry Today 19 gross developers' margin which averaged over 17%; transfer cost of land and buildings which averaged over 6%. During the period 1986-93, an average approaching 60% of capital investment was in construction and real estate. In 1992, it had dropped to about 54% due to the rescheduling of the Port and Airport Development Strategy (PADS) as a result of slow negotiations with China. These are now resolved and a return to previous levels or expansion to greater levels is expected. The balance of GFCF is on machinery and plant and other major fixed capital items in all industries. Table 2.1 Contribution to GOP of activities related to the property and construction sector (value added at current market prices) A B C D E Year GDP HK$ Mn % of GDP HK$ Mn % ofGDP HK$ Mn % of GDP HK$ Mn % ofGDP HK$ Mn 1983 201 .515 1.893 0.9% 12,885 6.4% 13,558 6.7% 22,496 112% 50,832 1984 239,789 1,831 0.8% 12,917 5.4% 12,989 5.4% 24,396 102% 52,133 1985 253,873 2,350 0.9% 12,679 5.0% 13,594 5.4% 26,671 10.5% 55294 1986 296,008 2,558 0.9% 14,253 4.8% 16,352 5.5% 30,034 10.1% 63,197 1987 366,795 3,032 0.8% 17,024 4.6% 22,089 6...