Building and construction boom in Papua New Guinea

By GEORGE TIPPING
Commercial Director of K G Contractors Ltd and
Past President of the PNG Institute of Builders

The question on everyone’s lips must be “will the Global Economic Crisis (GEC) affect the PNG construction boom”?
The simple answer is YES, but the real question that should be asked, is “how much will it affect the PNG building and property industry”?
There have been a number of articles written by eminent persons and institutions on the subject of the GEC and its affect on PNG economic activities.
The article that follows concentrates solely on the building and property industry but my reasons for my conclusions relate to the economic forces in play affecting PNG.
Whilst there is a financial crisis in most countries around the World, PNG is certainly the exception.
The main reason is that PNG banks and financial institutions (with minor exceptions) have not participated in overseas lending and share purchases.
The banks have been flush with funds and have been able to lower then maintain interest rates at historically-low levels.
That situation changed recently.
Almost every central bank around the world has been lowering interest rates because of the GEC, but PNG has recently been increasing them.
Deposit and lending rates are up by as much as 2% and the banks are now lending with more caution and requiring greater equity in the project from borrowers.
This will have an effect on new building and property activities being financed within PNG, particularly on the smaller and more marginal projects.
We can visually see the projects underway forming the current building boom.
The boom has come about because of past shortages in all types of accommodation projects including hotel rooms, housing, apartments, commercial office space (both private and government), factories, and shopping centres.
All new building projects require vacant land and this shortage has been particularly severe on residential land for housing.

National residential housing

This sector has been a major disappointment due to the severe shortage of serviced land and the extraordinary high prices now being obtained in the current property market.
I have been warning in the PNG Year Book for the last three years that there was an urgent need to get this sector actively working due to the fact that the “limited window of opportunity” was starting to close.
The sad fact now is that with interest rate increases and market prices in excess of K300,000 for a standard three-bedroom new house / land package, house prices have gone way beyond the capacity of even senior national employees.
Whilst building cost increases have taken place in the vicinity of K20,000, the real increase is being charged by those owning the serviced land.
The window of opportunity has definitely now closed on national residential housing and all the newly-developed policies, reports and public announcements by the National Housing Corporation and others will not revive the situation.
What is needed is a very radical increase in serviced land being made available at affordable and realistic prices but I cannot see that happening in the next few years.
To provide an example of what is happening, a standard residential block of vacant land at 9-Mile was recently advertised for K150,000.
Many of you would all be aware that this same land could have been purchased at 10% of that price only a few years ago.

Hotels

The first-tier major hotels in the NCD have had a very good income during the past few years because the demand has far outstripped supply.
They have been able to increase their tariffs and still the demand has been there, so they have increased the tariffs again and again to the point where they have suddenly met stiff tariff resistance and room occupancies have dropped.
This is whilst everybody else around the world is reducing tariffs.
This overseas tariff reduction will continue because of the GEC but PNG is not immune to those economic forces and we can expect to see less business visitors than in the past. However, on the other hand, the middle-tier of accommodation have improved their occupancy levels because of more-affordable tariffs.
Despite this, there is still a shortage of short and long-term hotel accommodation in the NCD and it is my belief that development of new hotels will continue but with more emphasis on the 3 to 3.5 star level.
Within the last year The Airways (67 rooms), Gateway Hotel and Ela Beach Hotel (44 rooms) have commenced expanding their room numbers and improving their premises. We have not yet seen any physical building activities at the Crowne Plaza and Holiday Inn.
However, the Holiday Inn is expected to have a major new building programme commencing in 2009.
It is interesting to note that the foreign-based new hotel developers such as the Korean CMSS Casino Hotel and Vision City Hotels upon their completion will compete directly with the established hotels in the NCD.

The current building boom

We can now see four-tower cranes on the NCD skyline, something that could never have been imagined in 2004.
In Hunter Street is Nambawan Super’s nine-storey mixed commercial and residential building (Fletcher Morobe) .
On the rear of the old Papuan Hotel site we can see the major high rise project for Steamships Properties (Fletcher Morobe) and we have seen the activities on the former Hornibrook site also for Steamships (HG Constructions).
We can all see the activity in Harbour City being developed by Curtain Brothers for Nasfund.
The first building is nearing completion (Fletcher Morobe) with the ANZ Bank as tenant, the second building being built by Curtain Bros themselves with a third Nasfund commercial building still to come.
These are the higher-profile projects and as usual it is in the NCD and Lae that we see the larger projects in the PNG building boom.
Lae has a six-storey 18 luxury apartment complex under construction (Lae Builders & Contractors) and a Nambawan Super mixed commercial / residential 8 storey building expected to commence soon.
But there are also a very large number of smaller projects in these cities as well as Madang, Alotau and Mt Hagen all continuing the boom in most urban centres around the whole of PNG.

The Exxon Mobil LNG project

Early visual works are expected to commence in 2010 and part of these comprise the building of two training colleges at Idubada (within the grounds of Port Moresby Technical College) and at Hides.
These are temporary construction colleges which are intended to run for five years then be handed over to PNG.
A permanent training college will be built later for LNG operations at the main plant 20km outside Port Moresby in the Boera district.
The main construction activities are subject to the final decision on proceeding with the world size project which everyone is working positively towards achieving.
A positive decision to proceed will bring another construction and property boom to Port Moresby and many other areas of PNG.


Investors from overseas

Where in the world can you now receive a good interest rate or invest / develop property and still receive an attractive return on investment?
Investors need a country with a relatively stable political and economic environment, a currency that will not devalue and where commercial business law can be understood? The obvious answer must be PNG.
With the GEC severely affecting their home based operations, I believe that the overseas investors who are still cashed up will consider PNG for their new projects.
One of these type of investors already here is Vision City which is being built at a remarkable pace and which now has a recently-erected heavy duty tower crane for all to see.
I expect that we will see more of this type of major investor visiting PNG in the near future to assess the prospects for their property investments.

In summary

What does the future hold for the building and property industry in PNG?
The following prediction excludes the impact of both Exxon Mobil and Interoil LNG plants and is based on supply and demand and other influences that are occurring now as well as known planned projects.
Despite the internal impediments of higher interest rates, inflation, hesitation by some PNG investors due to the GEC, slow NCDC and utility service providers approvals, it is my prediction that the current building and property boom will continue at a high level of activity, particularly for large projects.
How long will this boom last? That is the hard question to answer.
My crystal ball suggests we have another three to four years before the boom slows to more-manageable levels.
However, if the Exxon Mobil LNG project is confirmed, then we will have a scenario of a much larger building and property boom making the current boom seem small by comparison.

A word of caution

Despite the boom, building companies and property developers can still experience financial problems due to many factors and “go broke”.
This boom has shown that there are some inexperienced people in the industry and some medium-sized companies who are taking on projects of significantly greater complexity and size than their experience and working capital will allow.
Late project completions are occurring and these can be devastating on both the builders and property investors’ cash flow.
Errors in tender calculations do occur, increased numbers of tenders and pressures on staff to perform tasks for which they may not be sufficiently experienced is occurring. We have seen a great deal of new and costly equipment coming into the industry.
This is a good sign providing the contractor has a continuing income producing role for that equipment.
The GEC has shown that banks and commercial companies must follow sound commercial practice and not discard the basic rules of business.
Greed has certainly been a factor in the GEC.
The profit factor and human nature being what it is, advantage has been taken of the unsatisfied demand in accommodation in the NCD to dramatically increase rentals and sales prices.
There is always a limit.