Recovery is perhaps too strong a word to describe the prospects for the region’s real estate and construction sectors in 2010, but the market is at least unlikely to get any worse. From contractors to developers, and from property analysts to bankers, professionals in the sector believe the bottom has been reached.

However, they say that any improvements in 2010 are likely to be limited and the effects of the downturn will continue to reverberate through most of the next 12 months, especially in Dubai.

The effects of the global real estate crisis have been felt to varying degrees across the region. In Dubai, contractors and developers have gone out of business, projects have been shelved and prices have fallen steeply. In Saudi Arabia, the government has rescued projects when international private finance has failed to materialise. And in Egypt, commercial projects have stalled as demand for low-cost office space has dropped off.

Falling demand is a region-wide side-effect of slowing economic growth and means that, in places such as Dubai, where developers have been racing to meet speculative demand from investors, an oversupply of both residential and commercial space is a reality.

“Given the current oversupplied positions across most markets, activity levels in the real estate industry are expected to remain low for the foreseeable future,” says JP Grobelaar, director of research and advisory services at US-based property consultant Colliers International. “Growth and activity will only be stimulated by increased levels of demand.

“Economists remain cautious and reserved in their views on economic growth for 2010. With limited economic growth, the prospects for increased activity in the real estate industry are tenuous.”

Construction

  • $725.9bn – Value of projects under way across Mena region in 2010
  • $552.2bn – Value of projects under way in the six GCC markets in 2010
  • $37.5bn – Value of projects under way in Algeria in 2010

But some places are expected to perform better than others. Grobelaar is optimistic about Qatar and Saudi Arabia. “In Qatar, large expansion and development projects in the gas and petroleum sectors, together with increased government spending and development of the tourism, healthcare and transportation sectors, should support demand for office space and residential accommodation throughout 2010,” he says.

According to Gulf projects tracker MEED Projects, there will be $33.8bn worth of real estate and construction projects under way in Qatar in 2010. Contracts due to be awarded include packages on Entertainment City in Lusail, the first main construction contract for the $5.5bn Heart of Doha regeneration project, the Doha Crossing, and Hamad Medical City’s new ear, nose and throat hospital.

Projects under way in 2010
Country Value ($bn) % of total across region
UAE 212.9 29.3
Saudi Arabia 214.5 29.5
Bahrain 29.3 4
Oman 12.8 1.8
Kuwait 48.9 6.7
Qatar 33.8 4.7
Egypt 26.0 3.6
Syria 20.6 2.8
Jordan 16.6 2.3
Iran 6.7 0.9
Iraq 22.3 3.1
Yemen 2.2 0.3
Algeria 37.5 5.2
Tunisia 35.1 4.8
Morocco 5.0 0.7
Libya 0.7 0.1
Lebanon 1.0 0.1
Source: MEED Projects  

Unlike many Middle East cities, Doha is not yet experiencing an oversupply of residential accommodation but some buyers have been burned by project delays. “I expected my apartment on The Pearl at the end of 2008,” one investor tells MEED, referring to the real estate development on reclaimed land to the north of Doha. “But even now it is not ready and there has been very little information available about why. All the time I am paying interest on my mortgage and rent for my current accommodation. The government should have stepped in.”

“Delays have affected consumer confidence and I would expect that there will be legislative review in Qatar,” says Edd Brookes, head of the Qatar office for UK property consultant DTZ. “Without doubt, these are prime waterside living spaces but delays have affected the formation of a secondary market.”

In neighbouring Saudi Arabia, market analysts say, demand for commercial, residential and industrial developments will remain strong in 2010.

“The Saudi market has traditionally been undersupplied in both the residential and office sectors, and sustained demand in these sectors should underpin activity levels in the real estate sector during 2010,” says Grobelaar.

“The property market will benefit from its large and growing indigenous population, coupled with numerous government-funded industrial projects.”

But the reduction in global liquidity has affected the kingdom, forcing the government to step in on some major projects such as the $7bn Landbridge rail scheme to link the country’s Red Sea and Gulf coasts. In August 2009, Riyadh announced it would finance the project itself, after the Saudi Railways Organisation failed to convince banks to back a 50-year build-operate-transfer agreement with private developers and banks.

“Activity levels in the real estate industry are expected to remain low for the foreseeable future”

JP Grobelaar, Colliers International

In the coming 12 months, MEED estimates that contracts worth $214.5bn will be under way in the kingdom, making Saudi Arabia the largest real estate and construction market in 2010. In total, it will account for 29.5 per cent of all construction work across the Middle East and North Africa, compared with 29.3 per cent in the UAE, 6.7 per cent in Kuwait and 5.2 per cent in Algeria (see table, page 20).

To deliver these projects, contractors and developers alike will have to overcome a variety of challenges in 2010, including a lack of international contractors bidding for projects.

“An issue for 2010 is that of international contractors operating in the region,” says Issa al-Mohannadi, chief executive officer of Dohaland, the subsidiary of the Qatar Foundation for Education, Science & Community Development that is responsible for the Heart of Doha scheme.

“We have seen a phenomenon where many have run away from the local markets. Why is this? Is it the local regulations, the international economic situation, or have their businesses gone bad? There is a similar issue with consultants. They may start on a project and then say ‘I have to leave’.”

The issue is an important one for Al-Mohannadi as his organisation hopes to agree $5.5bn worth of contracts over the next five years and wants the best contractors available, whether they are local or international.

Contractors themselves say a range of factors are at work.

“The time it takes to prepare and finalise a tender costs a lot,” says Didier Bosredon, deputy project director at contractor Six Construct, a subsidiary of Belgium’s Besix. “Firms that have cash flow problems are forced to reduce their expenses for tenders. In Europe, if a company does not win a project, it is compensated for part of its work, but that does not happen here. In some locations, a huge amount of work is required to apply for a tender.”

In an increasingly competitive environment, contractors are more selective and will only bid for schemes they feel they are likely to win, and that have clients with proven track records to ensure payments will be made.

This is another issue highlighted by international contractors working in the region. Payment terms tend to be as long as 90 days in the Gulf, compared with 45 days in Europe and the US. When cash is tight, this longer payment time can make a major difference. “We are paid late every month,” one senior contractor tells MEED. “We then pay our subcontractors late and site morale is very low.”

At the same time, suppliers of materials and equipment are demanding to be paid in advance to ensure contractors do not default on payments.

But banks in the region are beginning to show signs that they will lend again, albeit with much tighter restrictions, which could ease cash constraints for some. “The indications are that the liquidity position of banks and mortgage lenders should ease further in 2010,” says Grobelaar. 

“New, unknown developers will experience greater difficulty in getting funding approved”

Developer based in the region

“However, while funding for property acquisition and development should be more readily available, it is believed banks are going to be a lot more circumspect in selecting the properties they lend against. They are going to consider the saleability of properties they fund and what the longer-term demand for that property will be.”

Grobelaar says banks will be more cautious about a loan applicant’s ability to service the debt. This means developers will be compelled to align their projects much more carefully to what the market wants.

Securing finance will be most challenging for new developers who do not have a track record in the market. “Banks are cautious about lending to developers and new, unknown developers will experience greater difficulty in getting funding approved,” says one developer in the region. “Securing finance will come at a greater cost and more stringent due diligences will be performed.”

Property developers also face the challenge of convincing purchasers of the integrity of their projects, and may have to develop new marketing strategies to keep existing purchasers from defecting regardless of the cancellation charges they would have to pay.

Developers will have to get used to a market that is far more conservative. The biggest opportunities now lie away from real estate, in areas such as publicly funded infrastructure schemes, whether it is railways in Jordan, airports in Oman, roads in Abu Dhabi, ports in Egypt or hospitals in Dubai.

It is here that contractors and consultants see the most scope for winning work in the year ahead. But doing so will be harder than ever and only the strongest projects will continue to move forward.