Construction contractors look for fresh opportunities in the Gulf

26 June 2009

Having invested heavily in staff and equipment over the past five years, the collapse in the Gulf real estate market has left regional construction firms struggling to secure enough work. But infrastructure projects offer cause for optimism.

No one saw the crash coming. The first nine months of 2008 were record months for the Middle East’s real estate sector. Property prices continued to soar, developers dared to launch projects that were even bigger than those they started in 2006 and 2007, and the construction industry scrambled to keep up with all the work that was available.

For contractors, the place to be was the rapidly growing cities of Dubai, Abu Dhabi and Doha, where multi-billion-dollar construction deals on projects such as Dubai Marina, Al-Raha Beach and The Pearl in Qatar were signed almost every week. There was no need to look for work in less glamorous markets such as Saudi Arabia and North Africa.

But that all started to change in September 2008 when, for the first time, investors began to doubt the region’s real estate dreams.

The region’s stock markets were the first to be hit and any company involved in real estate was punished. By October, developers realised that for the first time they could not sell all their properties, and by the start of November, projects began to be put on hold.

In just two months, the region’s real estate market had gone from the greatest success story in the world to an industry staring over the edge of the abyss.

The crisis was felt most in Dubai, where the volume of planned projects meant that something had to give.

By the end of the year, Dubai’s largest government-backed real estate developer, Nakheel, had cancelled projects such as the $790m Trump Tower on the Palm Jumeirah and laid off more than 500 staff.

Dubai’s market began to go into freefall as investor confidence dropped off with the admission that property was no longer guaranteed to make returns. By the end of 2008, property prices were down by 8 per cent from their peak; five months later in late May, they were down by 50-60 per cent.

The contagion has spread quickly to other markets. Property prices across the region have followed Dubai’s lead and slumped. In Kuwait, prices are down 50 per cent from their highs, and even in markets such as Qatar and Abu Dhabi, which were thought to be more robust, prices are down by 30 per cent.

Scaling back

Developers across the Gulf are now facing the same problem that Nakheel grappled with in October, and are starting to scale back or delay the rollout of their new projects.

The crucial difference between the new projects being cancelled and those put on hold in Dubai is that the new ones do not have contractors working on them, which makes it much easier to quietly shelve them. Plans for the Doha Convention Centre Tower have been delayed for a year, Kuwait’s City of Silk remains stuck in planning, and in Abu Dhabi, the emirate’s largest developer, Aldar Properties, has admitted that it is reviewing its future plans because it does not expect to sell any new property until the end of 2009.

Aldar is not the only real estate firm in Abu Dhabi being forced into a rethink. “We cannot sell property,” says one Abu Dhabi-based developer. “We have done everything we can to stimulate sales, we have dropped prices below AED1,000 [$272] a square foot and still we cannot sell. Our only option is to scale back plans and only build what we have sold already. Other-wise we will just be losing money.”

A hamstrung real estate market is bad news for the construction industry. The boom in real estate projects had allowed contractors to fill their order books and expand. Without those projects, there is an imbalance between the amount of work available and the amount of contracting and construction resources in place across the Gulf.

In markets such as Dubai, where the real estate bubble was most inflated, there is surplus capacity. Terminated contracts, such as Trump Tower and a $1.25bn racecourse grandstand planned by the local Meydan, have had an immediate impact on construction companies, but the much larger concern is the lack of new projects coming through the pipeline.

The big contractors now have a monster to feed. Rapid growth over the past three years has allowed contracting companies to double their turnover every other year, and required heavy investment in staffing and equipment.

In Dubai, work has simply dried up. In the first five months of this year, just $4.1bn of new contracts were awarded and the figure for the first half of the year is expected to come in well below the $23bn that was awarded in the same period last year.

Although the majority of the work that has been shelved is on real estate projects, infrastructure has also slowed as the government reins in spending and utility providers realise that some planned infrastructure expansions might no longer be needed.

The Roads & Transport Authority (RTA) has shelved many of the transport links it was planning because the housing developments they would have served may not be built and, as population numbers start to fall, other infrastructure projects planned by Dubai Electricity & Water Authority (Dewa), the Department of Civil Aviation (DCA) and Dubai Municipality may not be needed.

“The market in Dubai is completely flat,” says one Dubai-based contractor. “We always planned to expand into new markets. The difference now is we have to do that to survive.”

But the imbalance in Dubai is offset by markets elsewhere in the region where there is still demand for contractors. Despite falling property prices, Abu Dhabi remains one of the prime targets. The emirate is currently tendering $7bn worth of major projects and, for contractors that were doing the bulk of their work in Dubai, it is the obvious place to search.

Although many of the residential building projects where construction work was scheduled to start this year have been delayed, a lot of tenders are still being issued, especially for hotels, as the Abu Dhabi Tourism Authority pushes ahead with its plans to more than double the number of hotel rooms in the emirate to 25,000 by 2012.

“We are looking closely at Abu Dhabi, and there is undoubtedly a lot going on as far as tendering is concerned,” says one international contractor working in the UAE. “But so far there has not been much awarded as clients play around with tenders and negotiations. I would be more bullish on the prospects if more projects started to be awarded.”

Construction companies are more optimistic about infrastructure projects, which with government backing are expected to go ahead. “There are a lot of projects in Abu Dhabi that might not happen,” says one UK-based consultant. “But projects such as the deep sewer scheme [planned by Abu Dhabi Sewerage Services Company] will go ahead. The government is backing it and it is ultimately something that the city of Abu Dhabi needs.”

Abu Dhabi has several other major infrastructure schemes planned. It is tendering a 350-kilometre-long highway to the border with Saudi Arabia, and is in the early planning stages of a metro system.

In Qatar, real estate activity may have slowed, but the government still plans to use its wealth by investing in the New Doha Port project in the Mesaieed area and other major infrastructure schemes such as the Qatar-Bahrain Causeway. The new port is one of the largest such projects in the world, and one of only a few major new ports that will be built in the coming years.

Saudi Arabia has even more potential. The government has a budget of $130bn for 2009, which includes generous spending on infrastructure projects for its population of 23 million, including schools, universities, hospitals, roads, railways and airports, all of which will keep contractors busy. And unlike Abu Dhabi, where work is held up in the tendering process, large volumes of work have already been awarded.

Combined, the deals in Saudi Arabia make up the largest construction contract awards in the Gulf this year, and although they are not for record-breaking skyscrapers or expensive reclaimed islands, the projects will go ahead. They include more than $8.2bn worth of work at Princess Noura bint Abdulrahman University for Women in Riyadh, $1.9bn worth of contracts on the Haramain high-speed rail network linking Mecca and Medina, and deals worth $2.1bn on a security fence covering most of the country’s borders.

Stalled developments

Infrastructure is also the focus outside the Gulf, particularly in North Africa. Up until a year ago, a Gulf-style construction boom was expected along the southern Mediterranean coast, as developers from Dubai, Abu Dhabi, Bahrain and Qatar all launched projects aimed at tapping into both the Arab and European tourism markets.

But like the ambitious tourism schemes in the Gulf, many of these projects have been mothballed as developers from Dubai run out of funds, and the number of tourists arriving  from Europe falls.

Even here, though, there are some opportunities for contractors, particularly those working on infrastructure projects in Algeria and Libya, where the governments are just starting to use their oil wealth to develop infrastructure, and in Egypt, where the country’s existing  infrastructure struggles to keep pace with a large and growing population.

“North Africa is definitely on our radar,” says one regional contractor. “We were originally expecting to go into markets there with Gulf-based developers that we already work with, but our strategy has changed. We will have to build the market. We will go in and help develop infrastructure, and when the market for high-end buildings returns, we will already have a presence on the ground.”

By broadening their horizons to include new markets and more sectors, contractors hope they will avoid the worst of the downturn.

If this strategy is successful and turnover lost in Dubai and other slowing Gulf markets is recovered in places like Algeria, then 2009 may prove to be a transition year rather than one when the market simply disappears, as some have feared.

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