Favorable economic performances, high oil revenues, immigration and the introduction of new property laws in most GCC countries are the key factors responsible for the ongoing construction boom in the region.
Quick what's the national bird of the UAE? Yes, it's the falcon, but you'd be pardoned for thinking it was the 'crane.' A cursory glance at the country's skyline will have you see a number of tower cranes working frenetically to finish off mega projects. And if you're in Dubai, well, cranes is all that you might see if you happen to be in the right locations.
According to some reports, projects planned or already under development in the region are reckoned to have crossed the $1 trillion mark, making the Gulf the biggest projects market globally on a per capita basis.
The Middle East as a whole has the second largest share of project finance worldwide.
However, soaring material and labour costs, and a cutthroat competitive environment, are increasingly threatening the industry. "[Prices of] steel, copper and cement have at least doubled, if not tripled, over the last two years. The demand for raw materials is so high; there is always a shortage. Labour accommodation [cost] has gone up four times," a leading industry professional who prefers to stay anonymous told Gulf Business.
"On an average, construction costs have more than doubled since 2002. The construction cost of a luxurious building were between Dhs160 and Dhs180 ($44 and $49) per square foot, whereas now they are more than Dhs340 ($92)," he said. The industry, especially in Dubai, has become so competitive that the contractors' only chance to survive is to generate a constant high volume of assignments.
"Most contractors now build on cost, just to increase the number of jobs and to get more revenue," he confided. In other GCC countries such as Kuwait, the problem is less severe since the market is less competitive. ''In Dubai, however, construction is a pure private sector industry without any governmental control", he said.
"Net profits are now between 2 and 5 per cent. Some jobs are profitable, some aren't. The market got very risky and speculative. It is all about getting a constant stream of new projects coming in; to keep the workers busy and give developers time to pay." He explained that it is common for developers to fall back on payments, which leads them to give further jobs to the contractor with whom they have an open account.
"Contractors are now becoming more claim-oriented, though," he said.
Abid Junaid, executive director, Ascon Group, confirmed that "the rising costs of construction material and manpower" are the biggest challenges facing the industry today. "The entire construction field is depending on labourers from South Asia. If their availability decreases, the construction boom will slow down. No other region would make sense for us to recruit from, for reasons such as language barriers and lack of the requisite skill-set," he added.
Demand Dynamics
Some 194,000 workers in the semi-skilled and unskilled categories left India for the UAE last year, according to official Indian data. BS Mubarak, the labour consulate at the Indian consulate in Dubai maintains that workers from India now earn more or less the same amount of money in their home country as here due to a boom in India's own economic growth and construction activities. "Particularly in the unskilled category, they would earn about 70 per cent of what they make here. Besides that, the cost of living is cheaper and they will not be maintaining two households."
Nigel Poole, contracts manager, Al Habtoor Engineering, says: "The demand of material and workers is so high; there is so much happening in the market. Qatar is less developed compared to Dubai in their support structure; they do not have the same stock of material as Dubai, which creates a supply problem. We bring our own workers to the jobs, so I can not talk about manpower shortages."
He denied having payment troubles with local firms. "The developers we are dealing with are mainly governments or big developers. We never had delays in our payments," he maintains.
The UAE remains the Gulf's largest construction market with $300 billion worth of active projects, according to MEED projects. Most of them are in Dubai and Abu Dhabi. "In Dubai alone, there are 25 mega projects in the pipeline. By 2012, the population will double; so they need to build the infrastructure to support these developments. Abu Dhabi is also unveiling some major ventures, such as the airport expansion. Sharjah and the Northern Emirates are further growing fast," said Ayman Razek, general manager, MEED projects.
"We see more consortiums working together in the region now, which consist of international firms that bring their expertise and local companies that have the local knowledge, especially when working on these mega projects," he added.
Kuwait, the second largest construction market in the GCC, with projects worth $211 billion, is closely followed by Saudi Arabia, with a project volume that doubled to more than $200 billion in the last 12 months.
"Saudi is developing very fast; there is a lot of investment in the infrastructure, but also in tourism developments. Kuwait is strongly developing the infrastructure, general developments and further oil and gas projects."
Qatar, which too is experiencing a construction boom with its natural gas output tripling in just a few years, has also sworn to expand its infrastructure further. "There will be no project related to infrastructure that will be postponed due to lack of funds," Qatar's finance minister Yousef Hussain Kamal told media persons.
"We will cater for any project that we deem necessary and that will increase the capacity to cope with our rate of growth."
He added: "We do not take the $60 a barrel price as our basis. We are conservative and recognise that we need to channel our expenditure into investment to support the economic growth."
Oiling a boom
Dr Ahmed Saif Belhasa, chairman of the Federation of Arab Contractors and the UAE Contractors' Association, agreed that the regional construction hype is not solely dependant on the current oil price hike.
"High oil prices only affect the construction industry to the extent that those in receipt of the increased proceeds, mostly governments, large suppliers and the oil companies themselves, make increased demands on the industry.
"It is true that demands from these sources have increased substantially, in respect of additional infrastructural spending in particular, but the demands are generally widely spread and oil price declines may not affect the industry much; it would probably depend on the extent of the decline primarily."
He concluded that statistics show that all economic sectors are performing strongly and therefore create a need for more construction developments. "The main drivers of the economic growth are many, but reflect that the UAE offers a stable and secure environment, a conveniently positioned hub location in the region, good access and a competitive environment to do business in."
Belhasa is confident of the feasibility of the projects. "Many of the developments taking place are required to be economically feasible whilst others are required to support the growth of the infrastructure. One can only conclude that, of the developments that are required to be feasible, the majority have succeeded, or the rate of development would slow down."
However, he adds a word of caution: "Of course there is always a risk of overdevelopment in any GCC state, or any other state in the world for that matter. Judging demand accurately, sector by sector, is always a difficult task when planning developments: this is one of the true tests of business acumen."
More than half of the projects in the Gulf are in the general construction sector; there are $228 billion worth of oil and gas projects, $106 billion of petrochemical projects, $70 billion of power and water projects, $44 billion of industrial projects and $15 billion of wastewater and sewerage schemes in the pipeline.
Iran and Iraq have active projects worth of some $97 billion and $27 billion, respectively. Iran has mainly government-funded projects, which are financed due to the natural wealth and big petrochemicals industry of the country. They are also heavily developing their infrastructure. Iraq, on the other hand, is facing problems in realising its projects due to political instability. Many oil and gas projects are on hold there, mainly by US contractors, who are adopting a 'wait and watch' strategy.
Major engineering, procurements and construction contracts awarded in the GCC in 2005 totalled almost $31 billion, according to MEED figures. This represents the highest annual figures for the region. The highest market share of new contracts went to Paris-based Technip with some $6 billion worth of orders, including $4 billion for Qatar's liquefied natural gas expansion programme.
The year 2006 is reckoned to be another year of highs, with more than $44 billion worth of new contracts expected to be awarded. The focus will however shift to Saudi Arabia and its oil fields. Saudi Aramco plans to award up to $18 billion worth of contracts onshore to increase output by more than 1.5 million barrels through the Khurais, Shaybah and Nuayyim field developments.
© Gulf Business 2006
