[Asia Economy Reporter Lee Seon-ae] With the presidential election just one day away and various industries seeking beneficiaries, the construction industry appears poised to enjoy favorable conditions regardless of the winner. According to recent polls, the leading candidates have been narrowed down to two, and many of their real estate-related pledges share common ground.
On the 8th, according to the Korea Exchange, the representative domestic construction sector exchange-traded fund (ETF), 'KODEX Construction,' rose 9.6% compared to a month ago. Despite the ongoing weak market caused by geopolitical risks stemming from Russia and Ukraine, the construction sector has instead seen gains. Leading construction stocks such as Daewoo Construction, GS Construction, and DL E&C have also shown recent upward trends. This is interpreted as investor sentiment based on the perception that the construction industry will benefit regardless of who wins the election, given their pledges.
Song Yu-rim, a researcher at Hanwha Investment & Securities, explained, "In the past, the presidential election, as a major event, has acted as a positive factor for construction stock prices. There is a broad consensus that expanding housing supply is the first measure to stabilize housing prices. Recently, measures to accelerate redevelopment and reconstruction projects, such as easing safety inspection standards and increasing floor area ratios, have also been mentioned to enhance project speed and profitability, making it an unconditionally positive factor in any form."
However, the attractiveness of investments is expected to vary by sub-sector. The securities industry assesses that large construction companies > mid-sized construction companies > building materials sector, in that order, have higher appeal.
The greatest expectation for large construction companies lies in the revitalization of redevelopment and reconstruction projects. Not only is the expected market size substantial, but the urban renewal market is dominated by the strong brand power of large construction firms, making them the biggest beneficiaries. Although it is difficult to estimate the exact market size, considering that there are approximately 3.7 million housing units nationwide over 30 years old and more than 100 redevelopment and reconstruction sites currently awaiting contractor selection, the market is undoubtedly worth hundreds of trillions of won. As of the end of 2021, the order backlog for housing construction secured by the four major companies exceeded 100 trillion won, with urban renewal accounting for more than half, so the activation of redevelopment and reconstruction projects could primarily revive the order backlog.
Mid-sized construction companies are also expected to benefit from the expansion of housing supply. Particularly, the fact that public sector residential construction orders last year dropped by more than half compared to the previous year, reaching the lowest level since 2006, actually raises expectations for order recovery this year. However, when looking solely at this year's performance, growth is weaker than that of large construction companies, and cost burdens such as rising raw material prices may be relatively higher, slightly reducing investment attractiveness.
The building materials sector is also expected to benefit. Following indicators such as increased building permits and the number of apartment units supplied for sale, production volumes of concrete pile companies?at the forefront of construction work?domestic cement sales, and order backlogs of finishing material companies like furniture have surged. However, until raw material prices stabilize, a selective approach focusing on companies with individual momentum seems necessary.
Kim Seung-jun, a researcher at Hyundai Motor Securities, emphasized, "Looking at the stock price returns over the past month, the construction sector ranks among the top compared to other sectors. Depending on the election outcome, beneficiaries are expected to be determined as small- and medium-sized housing stocks favorable for public orders or large housing stocks favorable for private orders. Ultimately, as deregulation policies emerge after the election, construction market sentiment is expected to improve."
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