Hong Kong Infrastructure Report Q1 2008

Hong Kong is one of the most competitive construction markets in South-east Asia and a showcase for international innovation in design and engineering. After a five-year slump, new government projects as well as other infrastructure development have provided the necessary impetus to Hong Kong's construction industry which has also benefited from the boost in construction activity in Macau and China. The focus of the government is now on transport, ports, housing, tourism-related developments, hospitals, and improvements to the environment. This report forecasts that the construction industry is likely to log an average annual growth rate of 0.82%, and traverse a low-flat trajectory over the 2008- 2012 period. The industry is expected to be valued at US$5.35bn in 2012.

During the last few years, Hong Kong's construction industry has not received significant state-led investment. However the scenario is expected to improve. Around 93 projects worth HKD24.19bn (US$3.09bn) are expected to be undertaken in 2007. Major investments have been initiated for the development of railways in the region. These include the US$4.6bn Shatin to Central rail link, the US$1.28bn Kowloon Southern Link and the US$1.28bn railway link to Lok Ma Chau Spur Line. The US$3.3bn development of the West Kowloon Cultural District and the recently commissioned Shenzhen Bay Bridge are some of the other major projects.

With minimal barriers to entry, Hong Kong's construction market is renowned for being extremely competitive. Low tax rates, a stable political environment as well as its strategic location make Hong Kong an attractive investment destination. The Special Administrative Region (SAR) is also known for its relatively low levels of corruption.

A large number of international contractors operate in Hong Kong, while local players are relatively small and mostly undertake sub-contracted work. Land and labour costs in Hong Kong are among the highest in Asia. The consequent migration of the region's manufacturing base to other Asian nations, specifically China, has prevented Hong Kong from becoming a major manufacturing hub. Moreover, the SAR economy is closely tied to that of China, making it vulnerable to any major fluctuations in the latter.

BMI's view is that overall economic momentum in Hong Kong will lead to some trickle-down effect for domestic construction activity. The focus on infrastructure projects and the increased allocation for public work contracts over 2007-2008 is expected to provide some boost to construction activity.