KUALA LUMPUR (July 6) — Malaysia's construction sector is showing stronger growth prospects in the second half of 2026 as easing geopolitical tensions, stabilising construction material costs and an expanding project pipeline improve the industry's overall outlook.
According to Hong Leong Investment Bank (HLIB), the sector has become more attractive following a period of weaker valuations triggered by concerns over the Iran conflict. As geopolitical risks subside and construction input costs return to more stable levels, contractors are expected to benefit from an improved balance between risks and potential returns.
Recovery in Market Sentiment
The construction sector experienced significant pressure earlier this year, with the KL Construction Index declining sharply during the first quarter of 2026 amid fears that escalating tensions in the Middle East would increase material costs and squeeze contractors' profit margins.
However, sentiment improved during the second quarter as prices of key construction materials, including steel, ready-mixed concrete and industrial diesel, gradually retreated towards pre-conflict levels. The easing of geopolitical uncertainty also helped reduce concerns over project costs and execution risks.
Although contractors may still experience some margin pressure during the second quarter, analysts believe the most challenging period has passed.
Stronger Construction Activity Expected
HLIB expects project awards to accelerate throughout the remainder of 2026, supported by continued demand for infrastructure and industrial developments.
Total domestic job flows had reached approximately RM16.9 billion by the second quarter, reflecting healthy contract award activity across the sector.
Among the key growth drivers are the rapid expansion of data centre developments, increasing subcontracting opportunities related to digital infrastructure projects, and the award of major public infrastructure contracts, including the Ulu Padas water supply scheme.
Residential Market Also Set to Benefit
Improving construction costs are expected to encourage property developers to launch more residential projects during the second half of the year.
Lower development costs, combined with improving consumer confidence, could help stimulate housing demand and support stronger sales activity across the property market.
As market conditions become more favourable, developers may be more willing to proceed with projects that were previously delayed due to cost uncertainties.
Infrastructure Spending Remains a Key Catalyst
Looking ahead, the construction industry is expected to receive further support from upcoming government infrastructure initiatives.
HLIB anticipates that Budget 2027 will provide greater clarity on the implementation timeline of several large-scale projects, particularly water supply, flood mitigation and transportation infrastructure.
The research house also expects the government to reaffirm its commitment to the MRT3 Circle Line project. With land acquisition activities already progressing during 2026, construction tenders are expected to gain momentum from 2027 onwards.
Preferred Construction Stocks
Given the improving outlook, HLIB maintained an "Overweight" recommendation on Malaysia's construction sector.
Its preferred picks are Sunway Construction Group Bhd (SunCon) and IJM Corp Bhd, supported by their strong order books, participation in major infrastructure projects and favourable long-term growth prospects.
Industry Insight
Malaysia's construction sector is entering a more favourable phase as stabilising material costs, easing geopolitical risks and continued investment in infrastructure improve business confidence. At the same time, the rapid growth of data centre developments is creating new opportunities for contractors, while government spending on transportation, water and flood mitigation projects is expected to sustain healthy contract flows over the coming years.
Key Takeaways
This article helped me understand how global geopolitical events can directly influence Malaysia's construction industry by affecting material prices and project costs. I learned that when prices of key construction materials such as steel, concrete and diesel decline, developers and contractors gain greater cost certainty, allowing more projects to move forward. The article also highlights that strong infrastructure spending, expanding data centre developments and government investment are important drivers of construction sector growth. Most importantly, I learned that improving market conditions can enhance investor confidence, strengthen company valuations and create more opportunities for both contractors and the broader property industry.
Yao Mu Realty, based in Kuala Lumpur, Malaysia, specializes in industrial real estate for factories and land, delivering professional and efficient solutions.
Posted by Yao Mu Realty Sdn Bhd on 6 Jul 26
Malaysia