Construction sector eyes rebound as post-Ditwah rebuild gathers pace

• Construction PMI has remained above the 50 expansion threshold since October 2024, with new orders signalling demand traction
• Lower interest rates easing cost of capital, supporting a revival in private real estate and commercial development
• Cement volumes still around 50% of pre-crisis levels, indicating execution upside as activity normalises

ICC Chairman Harsha De Saram	HNB Stockbrokers Manager Research Cheran De La Harpe

The construction sector is positioning for a year of renewed execution momentum in 2026, supported by post-Cyclone Ditwah reconstruction, the restart of stalled public projects, and improving private-sector conditions, ICC Ltd. Chairman Harsha De Saram said.

Speaking at the HNB Investment Bank ‘Economic Outlook and Investment Strategy 2026’ forum themed ‘Recovery to Resilience’ last week De Saram said the sector had entered the year expecting a meaningful pickup in activity following substantial infrastructure allocations in the national Budget, before Cyclone Ditwah reshaped priorities and execution dynamics.

He said infrastructure spending planned for 2026, together with reconstruction needs arising from the cyclone, was likely to lift capital expenditure, even if some previously allocated funding was redirected. However, rebuilding would require a fundamental rethink of construction practices.

“You cannot rebuild the way we normally do,” De Saram said, noting that housing, roads, and embankments would need to be designed for more extreme weather patterns and intense rainfall events. This shift would raise costs and extend timelines but was necessary to avoid a repeat of the infrastructure failures seen during the cyclone.

Despite these constraints, De Saram said the industry was better placed to respond than in recent years, with equipment and resources that had remained idle during the downturn now being redeployed. 

He pointed to ongoing housing developments in the Western Province, early momentum in Port City projects, the expected mid-year restart of major road projects, and delayed ADB-funded irrigation schemes returning to execution.

He also highlighted emerging export opportunities, particularly in design services for European, Australian, and US markets, allowing Sri Lankan professionals to earn foreign currency while remaining based locally. In addition, climate-adaptive construction projects in the Maldives, including modular and floating infrastructure fabricated in Sri Lanka for export, were opening new avenues for the industry.

Data presented by HNB Investment Bank reinforced the improving backdrop. Construction PMI has remained above the 50 expansion threshold since October 2024, with new orders confirming demand traction. It said the restart of large-scale public projects, combined with post-Ditwah reconstruction and the drawdown of unutilised 2025 allocations, could materially lift execution in 2026.

Lower interest rates are compressing the cost of capital, supporting a revival in private real estate and commercial development. At the same time, HNB Investment Bank noted that cement volumes remain at around 50% of pre-crisis levels, pointing to both the depth of the earlier contraction and the headroom for recovery as project activity normalises.

While construction activity has rebounded, its contribution to real GDP remains below pre-crisis levels, creating scope for an execution-led acceleration in billings. 

HNB Stockbrokers Ltd. Manager Research Cheran De La Harpe said: “From a macro perspective, the resumption of large-scale projects, specifically major expansions and additional capacity, would tend to create demand for the construction sector overall,” De La Harpe said, adding that reconstruction incentives following recent disruptions were likely to accelerate activity.

He said the key shift underway is the transition from deferred capital expenditure to actual deployment. “The main benefit here is that the reconstruction initiative triggers a need to utilise capex rather than keeping approved capex budgets unutilised,” he said, noting that this creates an incentive for the Government to spend “a bit more than what we are used to,” which he described as positive for the sector.

On the private side, De La Harpe said the interest rate cycle is becoming increasingly supportive. “The lower interest rate environment is going to stimulate demand for both real estate and commercial properties,” he said, adding that this would bode well for material suppliers and downstream segments linked to building activity.

He characterised the current industry setup as one where subdued volumes are masking latent earnings potential. “The gap in the construction industry is effectively that volume deficit leads to execution upside,” De La Harpe said, explaining that many construction and construction-material companies invested in capacity through the downturn.

“With the pickup in activity, that capacity will now be utilised,” he said. “Rising utilisation drives operating leverage and unit-cost compression, which feeds directly into earnings.”

In real estate, De La Harpe said developers with existing inventory are positioned to benefit from pricing dynamics. “Condominium prices have increased and replacement costs are high, so unsold units tend to carry better margins,” he said, adding that this would support earnings as sales resume.

From an investor perspective, he said opportunities are likely to be selective rather than broad-based. 

“The resumption of major projects will tend to favour construction conglomerates and material suppliers such as Proteus Cement,” he said, while investments in the electrical grid are expected to support cable manufacturers, and pipe-network upgrades could benefit pipe producers. He added that rising demand for commercial and private property would also filter through to residential-oriented segments, including tiles and wood coatings, as construction activity normalises.

Earlier this month, Government officials acknowledged that the construction was facing a severe labour shortage.

Housing, Construction and Water Supply Ministry Secretary Kumudu Lal Bogahawatta said the construction sector is facing binding supply-side constraints that could temper the pace of execution, with around 20,000 vacancies currently available for immediate employment and a widening mismatch between skilled and unskilled labour as project pipelines expand. 

He said several major contractors have repeatedly requested Government approval to recruit at least 7,500 foreign workers, noting that firms are already relying on labour from India, Nepal and Bangladesh, even as the outflow of around 1,400 Sri Lankan engineers overseas has deepened skills shortages. 

He also flagged material-side pressures, particularly elevated river sand prices of around Rs. 33,000 per cube, saying a Cabinet paper has been submitted to permit the wider use of fine aggregate such as quarry dust in estimates, alongside plans to establish dedicated brick manufacturing zones to stabilise supply as construction activity scales up.

- Pix by Lasantha Kumara