Factors Influencing Construction Demand: Indonesia Study Case

Factors Influencing Construction Demand: Indonesia Study Case

Dona Alisyah Siregar

Seng Hansen

Department of Quantity Surveying

University Teknologi Malaysia, Johor, Malaysia


ABSTRACT

There have been so many researches done before in order to know the contribution of construction industry growth to the economic growth of a nation. To understand the relationship between construction industry and the economic growth, we must first look at the fundamental of construction industry growth. This means that we must observe the construction demand in a country. The observation can be divided into several categories depending on the types of construction output. Moreover we must look at the factors that influence the demand for the various types of construction output. In Indonesia, which has experienced the economic downfall during 1997-1998, is still trying to do their best in recovering their economy. Many attempts have been done by Indonesian government in order to improve their economic condition, especially for real sectors which affect directly to many people. Observing Indonesia attempts will benefit other countries which are now still struggling from the 2008 Economic Crisis.

 

Keywords: construction outputs, influencing factors, economic crisis, Indonesia.

 

 

INTRODUCTION

Background History

Although attempts to estimate construction demand are fraught with difficulties, it is still necessary to predict the level of demand for construction activity for a number of reasons (Ofori, 1990). It is necessary to understand the factors that influence the demand for the various types of construction output.

Issue

This paper is trying to discuss the factors influencing the construction demand for the various types of construction outputs. There are so many researches done before regarding to this matter. However, there is still lack of researches regarding to this matter with Indonesia study case. Indonesia is the biggest economy in Southeast Asia. Any changes in construction demand will affect many people as well as neighbouring countries. Especially Indonesia once had experienced a severe economic crisis in 1998 and still trying their best to raise their country’s welfare and stability. Therefore it will be very interesting to see how the political and social issues affecting the construction demand.

FUNDAMENTAL

Construction industry is one of the sectors which become a benchmark for the growth of the nation economy. This means that it is the first industry sector which will be influenced by the downfall of the nation economy and the first industry sector which will generate the nation economy. To understand the contribution of construction industry towards the nation economy, we must observe the factors that influence the construction demand.

When economics speak of demand they mean ‘effective demand’. Effective demand is money backed desire. Demand in this view is real, a genuine demand backed by the ability to make purchase, it is distinct from need (Myers, 2004).

In micro economics demand refer to a set of possible price-quantity combination. In written usage, the term ‘demand’ tends to be used as shorthand for quantity that will be bought at a certain price. In macroeconomics demand refers to a value of expenditure, found by multiplying price and quantity. If price are assumed to be stable, then demand in this sense comes to refer to the quantity of output that actually bought (Graham & Gruneberg, 2000, p.238).

Khairani (2009, p. 16) describes five requirements which must exist in creating construction demand:

  1. There must be users of the construction/building/work either for short or long terms
  2. There must be an owners either as an individual or as organization ready to own the construction
  3. There must be an individual or as organization ready to finance the cost of the construction
  4. There must be a party or organization willing to initiate the process
  5. There is a positive economic environment and other external factors (i.e. government incentive or encouragement) to stimulate such industry activity

If we talk about construction demand it is very important to consider the client of the construction industry. The construction industry client is the one who plays main role in initiating a project, providing the finance and managing administrative organization besides bearing the risk if there is a loss or damage in the construction product or gain profit from the successful construction product.

Construction outputs serve two main functions for the client, i.e. as place of investment and for their own use. From these functions, we can classify the construction industry client into two groups, i.e. public clients and private clients. Both the public and private clients can carry out construction for the first purpose or the second or both at the same time. The main difference between them is in the objective of carrying out the construction. The public client carries out the construction to provide amenities and welfare of the public whereas the private client is to obtain profit.

Figure 1. Construction Triangle

The main concern of construction industry client can be described in figure 1. It means what the client wants is that the construction project will be completed within the specified time, not exceeding the construction budget and according to the specified specification which will ensure the project quality.

 

Construction industry has unique characteristics. Ofori (1990) describes these characteristics as follows.

–       Not homogeneous, each can be considered unique

–       Large, indivisible and very expensive, and hence the market has limited buyers and sellers

–       Immobile, so that a surplus of supply of its products cannot be easily transferred to an area of high demand, and demand is also relatively concentrate in a specific location

–       Easily to influence by external factors includes economic, sociological, political, cultural

–       Sensitive to the government regulations or actions as the major client in this industry

 

Considering the construction industry as a whole, total demand for construction fluctuates in size as well as mix of various types, locations, time for construction, and its particular combination resources. Generally factors influencing construction demand includes:

–       Figure of client

–       Price of goods

–       Changes in income

–       Changes in taste or trend

–       Global technology improvement

–       Population changes

–       Government policies

–       Cost of credit

–       Availability of qualified resources

–       Change in market condition or future expectation

 

Stone (1976) also describes about the factor which determine the desirability of a particular unit of construction item as follows.

1. Kind of unit

Purchases of a dwelling unit may prefer a house or a flat. Some industrial enterprises may intend to have a space for industrial facilities whereas others require purpose-built accommodations.

2. Location

Purchaser for housing consider the neighbourhood, surrounding structure and facilities for daily activity of heir needed (for work, shopping area, education, leisure) and transportation facilities/access. Shopping center will particularly consider to prospective volume of trade (prospective catchment area), access of costumers. Client of industrial item the important consideration related to location are mainly relation to transportation/access for input and product distribution, waste disposal far enough from residential area etc.

3. Space and layout

Overall size, size of individual rooms their relation each other, possibility to extension, green house building related to energy saving are seem to be the main factors that considered by the housing users. While office and shopping space offered for sale on the open-plan concept, it will vary depend on the user requirement and concern. The achievement of a suitable trade mix is very important aspect. Interrelationship and optimization among space in the industrial building will very essential for manufacturing process.

4. Internal comfort

This including temperature, noise level and ventilation are important to consider by the user. The concern and level of importance of it, however will differ from each type of construction items.

5. Services

Plumbing, mechanical electrical services are also important for user’s consideration. For office, this facilities and services will probably the most important to support the working activities. Some of the office user may be require for extensive, hi-tech and sophisticated computers and telecommunication installations. The industrial building user will consider the comfort, convenience and automation in using mechanical and electrical facilities.

6. Aesthetics

Building form, design feature and the uniqueness of the building will become the important aspects which determine the price and desirability of the housing and shopping building users.

Also other factors i.e. age (design of services period) nature of title and other physical condition will together mixed to be considered before the purchaser decide to buy.

The determination of demand for goods and services produced by the construction industry is a complicated process. In addition, there is less knowledge and certainty about future figure in construction demand rather than other kind of industries.

Although to determine construction demand is very difficult and influenced by many different variable, it is still necessary to predict the levels of constructions industry demand for several reason. A vibrant and successful indigenous construction industry is an essential ingredient of a prosperous economy and makes possible:

  • The provision of social facilities (schools, clinics, hospitals, houses, etc.), and infrastructures facilities (roads, airports, sewers, etc.)
  • An infrastructure for the growth and development of society and encourages investment in its future
  • Positive influence in employment and manufacturing sectors
  • High quality buildings required by the finance industry
  • The development of other sectors such as e-business, retailing and tourism by providing the specialist buildings they require

Generally, the construction industry provides critical backward and forward linkages to the other economic sectors. In this point of view, to forecast the construction industry demand is very important for the provider of this industry (the contractors as well as the subcontractors), the client and the government.

In the view of backward linkages, the industry should be aware of the probable level and nature of its workload. The construction company can forecast their future workload from the total forecasting demand, further they can determine their business plan or future specialization. The financial institution and other manufacturing sectors will be affected by construction demand for their particular business demands. In forward linkage, prospective client are interested in level of demand for various type of building which indicate the prospect for a profitable completed item, i.e. apartment developer.

Government as the major client however will be very affected and at the same time will influence the construction demand. The government resolution and their policies towards this industry will make a “bigger picture” which includes the needs of the economy as a whole. Whilst the government has limited funds, the current difficult economic conditions may result in a reduction in the number of private sector construction projects causing an overall drop in demand for construction industry resources. This may affect the long term sustainability of the construction industry. The loss of a substantial part of the construction industry could be damaging to the economy in the long term. As a key client of the industry, the government had a key role to play in ensuring the long term viability of the industry, by ensuring that a sufficient construction demand in form of capital projects occurred to stimulate the economic climate as a whole.

Indonesia Case

As in the case of Indonesia, Biemo (n.d.) writes that before economic crisis at 1997, Biro Pusat Statistik (BPS, 2006) recorded the growth in construction sector reached 13.71% per year. This growth rate was far higher than the national economy growth which reached 7.85%. However, after the economic crisis came to Indonesia, construction industry is the worst sector which was affected from the crisis with minus 36.4% growth at 1998. Sutjipto (n.d.) states that with so many industries involved in construction industry activity have made construction sector becomes economic activator because construction sector can cause double impact or “multiplier effect” which is very useful in the growth of national economy. As the result, Indonesia government then has determined six economic corridors in order to boost the national economy and people’s welfare.

 

Figure 2. Indonesia’s Six Economic Corridors

Source: Indonesia Economic Quarterly June 2011, World Bank, pg. 33

 

Figure 3. Indonesia GDP Growth (in real GDP, Percent)

Source: Indonesia Economic Quarterly December 2011, World Bank

With many attempts and efforts, Indonesia now is on the track. Even when the 2008 economic crisis has affected many countries globally, Indonesia still becomes among the positive economic growth countries, together with China and India. As in figure 3 and 4, we can see the growth of Indonesia GDP and the growth of Indonesia construction industry.

Figure 4 below shows the growth of construction industry in relation to the growth of its share in GDP over recent years.

 

Figure 4. Share of Construction in GDP (in percentage)

Source: BPS

 

Table 1. GDP Growth Rate in relation to Industry Sectors (in percentage)

 

Industry Sectors

Quarter II-2011 to Quarter I-2011

Quarter III-2011 to Quarter II-2011

Quarter III-2011 to Quarter III-2010

Quarter I-III 2011 to Quarter I-III 2010

Growth Rate      y-on-y

 

(1)

(2)

(3)

(4)

(5)

(6)

1 Agriculture, Husbandry, Forestry, and Fishery

3.6

5.0

2.7

3.4

0.4

2 Mining and Excavation

-0.8

2.9

0.3

1.7

0.0

3 Manufacturing

3.2

3.1

6.6

5.9

1.7

4 Electricity, Gas, and Water Supply

4.0

1.3

5.2

4.5

0.0

5 Construction

4.4

3.1

6.4

6.4

0.4

6 Trading, Hotel, and Restaurant

4.8

4.4

10.1

9.3

1.7

7 Transportation and Telecommunication

2.1

3.6

9.5

11.2

0.9

8 Financial, Real Estate, and Company Service

1.0

1.8

7.0

7.0

0.7

9 Services

2.4

3.1

7.8

6.8

0.7

  PDB

2.9

3.5

6.5

6.5

6.5

Source: Pertumbuhan Ekonomi Indonesia Triwulan III-2011 BPS

From the above figures and table, we can see how Indonesia’s economic growth in the recent years and how much is the share of construction industry towards the national’s GDP.

 

 

RESEARCH OBJECTIVE

The objective of this paper is to understand the factors that influence construction demand for various types of construction output. Further, we relate these influencing factors with Indonesia’s construction industry growth.

 

 

RESEARCH METHODOLOGY

A proper methodology for the research is implemented in order to ensure that the research will achieve its objective without much deviation. Research methodology for this paper is designed into four phases as follows.

  1. First phase             –           Literature Study
  2. Second phase        –           Data Collection
  3. Third phase           –           Data Analysis
  4. Fourth phase         –           Result and Discussion

 

LITERATURE STUDY

Literature study is used as the main core of this research. Since there are so many researches done before regarding to this topic, researchers choose to correlate the topic with regards to Indonesia case. There is still lack of such studies regarding to Indonesia case. Literature study mainly comes from books as well as articles and papers.

 

DATA COLLECTION

All data used in this research are taken mainly from various legitimate sources from Indonesia government published data, and from other reports such as Malaysia and World Bank’s reports.

 

DATA ANALYSIS

Researchers choose to use Microsoft Excel 2010 as the tool to analyze the data. The data which have been collected are analyzed and eventually made into graphics and figures.

 

 

RESULT AND DISCUSSION

Types of Construction Output

It is possible to make forecast of total construction demand for various type of construction by just considering the factors that influence the demand. The different between each type of construction may be so great that each of them can be considered unique so that determinants of demand for them also differ between each construction output. Different evaluation techniques are required in order to assess level of demand for each output. Therefore it will become clearer if we consider factors affecting demand for each different output.

 

Actually Indonesia standard has differentiated the construction outputs into many various types, but for the sake of efficiency and effectiveness in analyzing the data, this paper divided the construction output into four main categories as follows.

1. Housing

2. Social Type Construction: Infrastructure and Other Public Sector Construction

3. Industrial and Commercial Building

4. Repair and Maintenance

 

Estimating the Construction Demand

These four types of construction output need different analysis depending on their functions and necessities. However, some factors will appear in more than one type of construction outputs.

 

Understanding the Factors

1. Demand Factors for Housing

Housing is a basic human requirement, therefore in assessment of housing demand, it is important to distinguish between ‘need’ and ‘demand’ concept. The fact that most clients of the housing sector do not differentiate between old and new houses, so the housing market includes both the existing stock and new units. The nature of this sector is that the stock is very much larger than the number of new unit completed annually. Hence to determine the demand for the new house, the whole housing market including the available stock should be considered.

The related resources are allocated through the market mechanism and the public sector, or through some mix of two. As discussed before, the clients of the construction unit have a main role in creating demand. Thus, in general, it is sufficient to understand that housing demand may be either for owner occupation or rent, or for some combination via share equity. The factors that will influence the demand of housing sector are generally same for all kind markets, however it will be more accurate if we could divided the evaluation of such factors into 3 main markets as follows (Myers, 2004):

  1. Owner Occupied Housing
  2. Privately Rented Housing
  3. Social Housing

The social housing is one which is provided by the government. The origins of social housing lie in the idea that governments should pay a subsidy towards housing to make up for the storage of accommodation available for low-income families. The factors that determine the demand for this type of housing are different from those driving demand for owner occupied housing and privately rented housing.

The estimating of housing demand is complex since the housing market is heterogeneous. Beside 3 main markets discussed above, there can be single and multi-family units that will influence the number of housing unit required under each of main categories.

However forecasting the housing demand can be derived from the housing necessity in a particular duration. This method called as “Need Based Method” (Ofori, 1990). The terms “housing need” refers to “the extent to which the present housing conditions falls below the levels considered necessary for health, privacy and the development of normal family living conditions”. It indicates the gap between the current stock of housing provision and the acceptable standard (usually measured in terms of occupancy rates, i.e. number of person/housing unit) for a particular time period. The standard is generally set by government and reflects a social norm of the country. The standard may be includes standard of space (overall size, number rooms, room sizes), congestion (relating to the number of person per household or room, or the area of living accommodation per person), availability of main facilitations i.e. amenity (number of toilet, type of toilet) etc.

One of the main factors which influence the construction demand in housing is the demography of a country. Demography relates to the social statistic of the country such as the population, health and diseases, average age, birth and death of populations. As in Indonesia case, the last population census in 2010 shows the increasing population numbers of Indonesian. With this many, Indonesia is a big market for housing industry. However there are still many factors which influence the demand for housing, such as the current price of housing, the salary of the clients, the interest of the currency, etc. In Indonesia itself, it shows that the middle income clients are the main factor which influences the demand for housing industry.

 

Figure 5. Indonesia Population

Source: Laporan Bulanan Data Sosial Ekonomi BPS Januari 2011, pg. 35

 

Table 2. Factors Affecting Demand for Housing

Factors affecting demand for housing
Owner Occupied Housing Privately Rented Housing Social Housing
Demographic Demographic Current rental price
Current price of housing Distribution of income Assessment of housing-need
The price of other type of housing Price of owner occupied housing Price level of other forms of tenure
Distribution of income and expectation of change Current rent prices and expectation of change Availability of finance, such as income-support and mortgages
Cost of borrowing money Cost of borrowing money Level of government budget
Government policies and regulations The law of rent and security tenure  
Other related prices    

 

2. Demand Factors for Social Type Construction: Infrastructure and Other Public Sector Construction

Public hospitals, roads, public schools, tunnels, prisons, museums, bridges, dams, and police and fire stations are examples of this type of construction outputs. Usually infrastructure projects and other public sector constructions get funding from the government. Thus, the government will decide the level of service that should be available in a city or country. However, due to lack of public funds, some countries may permit private companies to take part in funding this kind of projects, e.g. toll roads or bridges in Indonesia. Figure 7 shows that the quality of Indonesia’s infrastructure is still far behind its neighbouring countries such as Malaysia, Thailand and China.

 

Figure 6. Indonesia’s Infrastructure Investment (percent of GDP) Fell Sharply After the Asian Crisis

Source: Indonesia Economic Quarterly June 2011, World Bank, pg. 29

 

Figure 7. Quality of Infrastructure Index

Source: Indonesia Economic Quarterly June 2011, World Bank, pg. 29

 

Table 3. Factors Affecting Demand for Social Type Construction

Factors affecting demand for social type construction
Availability of finance Government subsidy
The state of economy Assessment of need
Government policies The condition of existing infrastructure and public buildings
Environmental conditions Availability of resources
Political conditions  

 

3. Demand Factors for Industrial and Commercial Buildings

Offices, factories, warehouses, hotels, shops, garages and all buildings except houses can be considered into this group. Myers (2004) states that industrial and commercial buildings are not required for their own sake, but for the services they can provide. This means the demand factors for this type of construction output is based on the specific function of the building, known as derived demand.

 

Myers (2004) also states that derived demand implies that buildings are rented or purchased not because they give satisfaction, but because they can be used to produce goods or services that can be sold at a profit. Therefore, investments in this type of construction output depend on the expectation that the business will make profits in the future. If business confidence is low, investment will not take place. Technological developments also take an important part in accelerating the growth of construction demand for industrial and commercial buildings.

 

Safety and political stability becomes the next factor that we should consider. As we can see during the downfall of Indonesia economy on 1998, almost all industries and commercial sectors stopped operating and came to insolvencies. The main reason of this is due to the unsafe and unstable political situation during that time. Construction industry suffered the most because many of its on-going and future projects were stopped or delayed.

 

Figure 8. International Productivity Comparison for Selected Countries, 2009

Source: Malaysia Productivity Report 2010/2011 pg. 125

 

Figure 9. Number of Indonesia Construction Workers (in millions)

Source: BPS and various sources

 

Figure 8 shows that Indonesia’s worker productivity index is still less than other developed countries such as Korea, United States and Australia, and still below than its neighbouring country, Malaysia. Whilst, workers productivity is one of the main factors which influences the construction demand.

 

Figure 9 shows the growth of Indonesian construction workers since 2001 in millions.

 

Table 4. Factors Affecting Demand for Industrial and Commercial Buildings

Factors affecting demand for industrial and commercial buildings
Business confidence Construction Productivity
Technological developments The potential of the premises
Changes in taste or fashion The state of economy
Expected levels of cost Government policies
Location Safety and political stability

 

4. Demand Factors for Repair and Maintenance

This last type of construction outputs still does not seem very popular in Indonesia. One reason is because Indonesia government itself still does not give much concern regarding to this type of construction output. In fact, many of the developing countries do the same thing as in Indonesia. They tend to give more funds in constructing new buildings and infrastructures in order to boost their economic power. On the other hand, the developed countries need greater repair and maintenance of the existing buildings and infrastructures rather than construct new ones, especially to the heritage buildings and structures.

However the demand for the repair and maintenance of buildings and infrastructure cannot be ignored. Indonesia government itself, with all of its weaknesses, has tried to preserve its cultural heritage buildings. There are at least 29 heritage buildings must be persevered, including Borobudur Temple, TMII, and Maros Prehistoric Caves according to Direktorat Kebudayaan, Pariwisata, Pemuda dan Olahraga, Bappenas 2009.

 

Table 5. Factors Affecting Demand for Repair and Maintenance

Factors affecting demand for repair and maintenance
Cost of repair and maintenance Cost of new building
The state of economy Community Care
Government policies The condition of existing buildings
Level of current income The ownership pattern

 

Trend and Direction of Indonesia Construction Industry

Indonesia with its population over 230 millions has many advantages to increase the demand of construction industry. However it seems to be still far from the global market investment and even comparing with its neighbouring countries in Southeast Asia such as Thailand and Malaysia. Indonesia still needs to improve their infrastructure, human resource as well as political stability and social security.

In fact, Indonesia government has tried some efforts to improve their country competitiveness amongst others. In doing so, they have made a plan of infrastructure budget up to 2014. Table 6, figure 11 and 12 show us the increasing of public works’ infrastructure and housing budget made by the government. It seems that Indonesia construction industry will grow even more steadily in the future.

 

Table 6. Prediction of GDP and the Necessity of Public Works’ Infrastructure and Housing Development Investment 2010-2014

Year

GDP

Public Works Development Investment

2010

6050

108.9

2011

6419

122.0

2012

6817

136.3

2013

7246

152.2

2014

7710

169.6

Total

34242

689.0

Source: Rencana Strategis Kementerian PU 2010-2014, pg. 160

 

Figure 11. Prediction of GDP and Public Works’ Infrastructure and Housing Development Investment 2010-2014

 

Figure 12. Public Works’ Investment Share in GDP Prediction

 

CONCLUSION

There are so many factors influencing the construction demand. These factors can be divided according to four types of construction output, i.e. housing, social type construction, industrial and commercial building, and repair and maintenance. These four types of construction output need different analysis depending on their functions and necessities. Some of these factors are demographic (population, health, productive age, etc), current price of housing, distribution of income, cost of renting, economic-social-political situations, business confidence, workers productivity, location, technology development, environmental issues, government budget, and government policies and regulations. As for Indonesia case, they have so many factors which can activate their construction activity. The prediction of government budget for construction investment is very important in order to boost the nation’s economy. The recent trend shows that Indonesia construction industry will grow even more steadily in the future.

 

REFERENCES

Ahmad, Khairani, 2009. Construction Economics. Selangor: Prentice Hall.

BPS, 2011. Laporan Bulanan Data Sosial Ekonomi Januari 2011. Jakarta: BPS.

BPS, 2011. Berita Resmi Statistik: Pertumbuhan Ekonomi Indonesia Triwulan III-2011. Jakarta: BPS.

J. Ive, Graham and L. Gruneberg, Stephen, 2000. The Economics of the Modern Construction Sector. Great Britain: Macmillan Press Ltd.

Malaysia Productivity Corporation, 2011. Malaysia Productivity Report 2010/2011. Petaling Jaya: Malaysia Productivity Corporation.

Myers, D., 2004. Construction Economics: A New Approach. New York: Spon Press.

Ofori, G., 1990. The Construction Industry: Aspects of Its Economics and Management. Singapore: Singapore University Press.

PU, 2010. Rencana Strategis Kementerian PU 2010-2014. Jakarta: Kementerian PU.

Soemardi, B.W., n.d. Strategi Pemasara: Suatu Tinjauan Terhadap Perusahaan Kontraktor Indonesia. Civil and Environmental Engineering Faculty. Bandung Institute of Technology.

Stone, P.A., 1976. Building Economy. Oxford: Pergamon.

Sutjipto, A., n.d. Peran Industri Konstruksi Dalam Pemulihan Ekonomi. Master. Indonesia University.

Turner & Townsend, 2009. Lowest Cost Isn’t Always The Best Value, Global Construction Costs, [online]. Available at: www.turnerandtownsend.com [Accessed 24 December 2011].

World Bank, 2011. Indonesia Economic Quarterly: Current Challenges, Future Potentials June 2011. Jakarta: The World Bank.

World Bank, 2011. Indonesia Economic Quarterly: Enhancing Preparedness, Ensuring Resilience December 2011. Jakarta: The World Bank.

 

BIBLIOGRAPHIES

APO, 2010. APO Productivity Databook 2010. Tokyo: Asian Productivity Organization.

 

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