After a challenging period of subdued performance, the Gulf Cooperation Council (GCC) region's construction sector is expected to begin a steady recovery from 2020 with Saudi Arabia leading the way, a senior executive of international construction consultancy firm said.

"Long-term positive factors such as economic diversification, social reform, especially in Saudi Arabia, and general demographic demand, combined with renewed government ambition, will be the key drivers," said Ciaran McCormack, regional director for Middle East at Linesight in an email interview.

In terms of project opportunities, he said the focus is now on Saudi Arabia, which has vast infrastructure development plans.

"New forms of project procurement and finance such as public-private partnerships are gaining traction, and we are also seeing the emergence of major new construction clients such as Public Investment Fund (PIF)."

McCormack pointed out that Saudi Arabia currently holds the greatest potential for the construction sector within the GCC, with more than 5,000 capital projects worth well over $1.6 trillion in the pre-execution stage.

"However, the centre-piece of its ambitious Vision 2030 initiative, is the $500 billion, 26,500-square kilometre, Neom project, situated along 468 km of Saudi's Red Sea coast close to Egypt and Jordan. The first phase of Neom is due for completion in 2025," he said.

With these projects in mind, he said they believe the best opportunities lie in both the hospitality and entertainment sectors.

"We have been fortunate enough to have a strong portfolio in both, having been involved in many of such projects throughout the region over the last 10 years," said McCormack.

Healthy pipeline

Despite the challenging business environment in the region, the Ireland-headquartered consultancy said it has managed to maintain a healthy project pipeline to high referral rates and strong repeat business.

"At present, we have a GCC pipeline worth over $10 billion and experiencing an average annual growth of 6.6 percent, with 40 projects under construction across locations in the UAE, Saudi Arabia and Bahrain across a number of sectors including hospitality, retail, R&D and sustainable data centre facilities amongst many others," he said.

McCormack acknowledged that the challenging economic climate resulted in delayed projects and payments, increase in disputes and less favourable contract conditions.

"However, we have continued to witness significant business growth, underscored by continued works in the UAE and expansion into both Saudi Arabia and Bahrain," he said, while crediting the firm's close relationships with its clients, quality service offerings and in-depth understanding of regional markets for the success.

Linesight, which started with cost consultancy and project management services in the region, has expanded its offerings over the years to include scheduling, value engineering, cost and supply chain management.

McCormack continued: "Our clients get full transparency and visibility of the proposed project team - when we bid for work, the team that presents to the client is the team that will deliver the project. In addition, we do not outsource to overseas offices."

Even in the early stages, he explained, the company doesn't just do cost per square metre - it conceptualises quantities to provide a robust cost plan.

"This allows a document to form a firm basis for value engineering, which is not very common in the region for a cost consultancy."

He said the company has adopted a proactive approach to cost estimation, working with designers on a continual basis and utilising weekly trackers to monitor design and the associated impact on cost so as "to ensure that an economically feasible design is delivered without compromising the overall design aesthetic where possible."

"We are typically instrumental in terms of the procurement strategy and come up with innovative strategies where needed to expedite the programme," he added.

Key challenges

McCormack pointed out that fewer new project opportunities in recent years has forced contractors to lower tender bid prices to win work, eroding profit margins. At the same time, fiscal tightening by governments has led to lengthening delays in payments.

"Together, these factors are causing severe cash flow difficulties for contractors and their suppliers. Many companies have chosen to downsize and restructure their operations, and some international players have left the region," he said.

While Dubai's infrastructure build-up ahead of Expo 2020 was a major driver of construction activity during this period, the emirate's oversupplied property market has slowed down the momentum of construction cycle.

"The value of contract awards has fallen at the same time as the value of projects being completed is witnessing a rise," noted McCormack.

And while the outlook for Saudi construction market is improving, he cautioned that a significant challenge for contractors going forward would be "how to price these projects?"

He also warned that construction costs are likely to rise as the market heats up towards 2020 and beyond, which could saddle contractors with loss-making projects.

"So, we are likely to see contractors taking a much more aggressive approach to tender in order to mitigate these challenges. If their turnover is low, they will want to secure as much of the work on any one project as possible and are likely to adopt a more competitive strategy to achieve this," he said.

The region's legacy of delayed payments, he agreed, is "yet to see any significant signs of improvement" but advised that "client selection is fundamental" to protecting the company from being overly exposed.

"Majority of our clients are repeat clients whom we have worked with for many years. We firmly believe that building strong and lasting relationships, though our commitment to deliver for our clients is key to resolving many issues including those associated with payment," McCormack concluded.

(Reporting by Syed Ameen Kader; Editing by Anoop Menon)

(anoop.menon@refinitiv.com)

© ZAWYA 2019