Lower interest rates fuel recovery in constructions

Backed by the current lower interest rate regime, Sri Lanka’s construction firms are expected to see considerable relief on the borrowing costs, aiding a smoother financing for the ongoing projects, according to First Capital Research (FCR).
In an investor note, FCR highlighted that the interest rate has come down in an accelerated downward trajectory. As of February 22, this year, the average weighted lending rate came down to 11.50 percent, from 24.21 percent recorded a year ago.
“Additionally, the current lower interest rate regime is expected to stimulate demand for new construction from the potential homebuyers and businesses, further benefitting the construction sector players,” it said.
Historically, economic activities are observed to have spiked with a stronger credit growth, when the interest rates drop below 15 percent, indicating a gradual revival in the severely stricken construction sector.

Further, the rebound in tourism, driven by a robust influx in tourist arrivals, has opened up new opportunities for construction, in particular with the commencement of refurbishment activities. A number of hotels, including Galadari and Hunas Falls, have already taken steps to kick start refurbishments.
“With these refurbishments typically involving a wide range of construction activities, including renovations, remodelling and upgrades to facilities and amenities, it is a promising avenue for the construction sector to seal more projects in the period ahead,” FCR said.
These developments are further supported by the gradual moderation of the prices of the construction materials. 
According to the Ceylon Institute of Builders, Sri Lankan’s construction cost has reduced to the levels on a par with the neighbouring countries such as Indonesia, Malaysia, Vietnam, etc.
Meanwhile, FCR expects the current momentum to further improve, with the anticipated restart of the donor-funded projects, which have been on halt since 2022.
“Although the country has no access to bilateral financing, multilateral funding still flows through, as the multilateral borrowings are being repaid during this period, despite the external debt restructuring. Hence, the donor-funded projects are heavily sought after among the construction sector players and the restart of these halted projects is likely to come through soon,” it said.
Sri Lanka’s construction sector faced multiple challenges since the pandemic in 2020, while the current crisis pushed the sector to the rock bottom. As a result, the industry experienced a 60 percent contraction and 500,000 job losses. (NF)