Throughout modern history, Hong Kong has continually reshaped and reinvented itself, evident by the perpetual construction works across the city. Today, it stands as one of the world’s most costly construction markets according to the
International Construction Market Survey (ICMS) 2024 report. Yet behind the skyscrapers and cranes that grace the city’s skyline, is a major financing challenge.
A growing working capital gap running into hundreds of millions of dollars burdens construction contractors and subcontractors alike. Delays, back-to-back payments, and escalating expenses have created a complex web of challenges, squeezing profit margins
and straining liquidity. Working capital financing options have been slim pickings as construction is often poorly understood, resulting in slow approvals, directors putting up their homes as collateral, or turning to high-rate money lenders. While these challenges
have always existed, soaring costs and high interest rates have recently brought them into sharper focus. At the same time, this presents an interesting blue ocean opportunity for fintech and financial institutions, not just in Hong Kong, but globally.
We’re in an era where data is king and fintech and financial services companies can leverage this data to underwrite products and assess risk. In the alternative financing space, the low-hanging fruit has naturally gravitated towards digital-native industries
such as eCommerce or digital media. Asset-Backed Securitisation deals in their hundreds of millions have been secured here in Hong Kong to serve the cross-border eCommerce segment alone. This makes sense given eCommerce generates masses of structured data
that are highly organised and readily interpretable data by machine learning algorithms.
On the other hand, the traditional nature of the construction means it remains largely paper-based, resulting in significantly less structured data, although projects still generate substantial unstructured data. The challenge with unstructured data, which
encompasses information lacking predefined structure and semantic models, is the difficulty to organise and analyse. On a construction site, field data might include text, mobile activity, blueprints, schedules, photos and videos.
Yet with the right approach, fintech providers in the alternative lending space can potentially capitalise upon a significant opportunity. In Hong Kong alone, we estimate that over US$6.9 billion remains locked in the construction supply chain annually,
hindered by paper-based processes and a lack of insightful data readily available to subcontractors and suppliers. The financing gap in U.S. construction is as much as US$100 billion, while in Europe, this is as much as €200 billion (US$210 billion) annually.
When we first embarked on our journey in this space and developed our core risk model, we found that having intricate knowledge of the industry’s operations and processes was essential. Construction involves many unique processes, scope changes, and complex
workflows related to cash flow that we had to account for. This exercise allowed us to begin mapping in great depth what type of data might be useful for the underwriting, understanding how to build our risk model, as well as the types of products to offer.
We focused on critical barriers to accessing affordable working capital loans – one of which is the inefficiencies of manual paper-based procedures that lead to significant delays in invoice approvals and thus financing. In an ideal world, a digital platform
can simply streamline these processes. However, in reality, we were dealing with a traditional industry with lots of unstructured data sitting in silos. It was not simply a matter of offering different APIs for our customers to connect to; we had to rethink
our digital and physical workflows to integrate field data into our model.
Interestingly, one of the biggest challenges we faced when entering the market was not technical nor financial – It was the fact that we were dealing with a very traditional industry with little exposure to digital platforms. Getting their buy-in was essential
to getting them onboard and thus allowing us to capture their data. On this front, in-person education and engagement are proved crucial, helping them understand that their challenges were not the norm and could be solved by unlocking the value of the data
they are sitting on.
As a result, we developed an innovative cash advance product that offers subcontractors a lifeline by purchasing invoices and providing immediate cash advances of up to 90%, with approval times as swift as 48 hours. For many subcontractors, this short-term
relief is the difference between growth and outright paralysis.
The front-end processing was digital and straightforward. While at the backend, we can process vast amounts of unstructured data and achieve well below industry average delinquency rates. Today, we support over 1,200 subcontractors and suppliers and secured
a deal with asset manager Arta TechFin to launch a US$51 million open-end fund earlier this year.
Overall, it has been a win-win, with subcontractors being able to meet their financial obligations to their staff and suppliers, while we were able to provide exposure to a new asset class with a reasonable return to investors. Given the potential size of
the market globally, US$51 million is a drop in the ocean. As we look to expand our operations into 2025, numerous opportunities await fintech companies in this space. In fact, we would love to see more players, as it would mean a stronger, more resilient
construction industry, which for many markets form a crucial pillar in our economy and society.
As we look ahead, our team will be exploring how we can create an ecosystem to automatically link to and verify information using the blockchain, as well as how our experience in Hong Kong could be applied in other markets.
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