A pick-up in activity in the GCC construction sector has resulted in a turnaround in construction costs.

Prices fell sharply in 2009 on the back of the regional real estate slump, led by the crash in Dubai’s property market as credit lines dried up. Appropriately, the positive sentiment in the building industry is being driven by the recovery in Dubai’s economy, which was further boosted by the emirate being named as host of the World Expo 2020 late last year. 

Apart from the UAE, all GCC countries will see an uptick in monthly spending on construction and transport schemes

Although the total investment requirement to stage the Expo is modest at best, Dubai’s successful bid has revived a beleaguered construction market. Qatar too is preparing to stage an international event, and the past year has seen an acceleration in project activity related to the Fifa 2022 World Cup. Elsewhere, Saudi Arabia is awarding contracts again after a hiatus caused by personnel changes at several key ministries and Oman is stepping up investment in tourism and transport infrastructure. Meanwhile, Kuwait, after failing to live up to its potential over the past decade, is now pushing ahead with major energy projects and a series of social infrastructure schemes.

Cost indices

Inevitably, the increased activity is impacting costs in the building industry. MEED Cost Indices produces independent input and output price indices for the GCC construction sector. The output price index (cost to the client) or Tender Price Index for the GCC market displays the average cost of construction for each of the GCC countries, and an average for all six states, called the GCC average, with a base date of 2002. 

The index shows Qatar is experiencing the fastest increase in construction prices. Since 2002, construction costs in the country have almost doubled, with the index reaching 197 in 2013. Kuwait’s construction market is in second position, with an index just shy of 170, or 70 per cent more than the 2002 cost of building. 

The Bahrain and Oman construction sectors have experienced almost exactly the same pace of change in construction costs. During the boom years of 2006 to 2008, the sultanate saw costs rise marginally quicker than Bahrain. But post-recession, both countries experienced almost exactly the same slump in construction prices.

The Tender Price Index shows that in 2013, the UAE and Saudi Arabia were well below the GCC average.

With Saudi Arabia being the largest economy and the most populous nation in the GCC, it benefits from well-established supply chains and controls cost fluctuations in basic construction materials such as steel, reinforcing bar (rebar), cement and concrete through legislative measures. Likewise in the UAE, the availability of materials and labour and strong competition for work have helped to keep prices low.

All GCC countries apart from Saudi Arabia have maintained a stable rebar rate from January 2013 to February 2014

MEED Cost Indices also produces a Contractor Cost Index through a monthly survey of regional contractors that gives an average index value for 17 items surveyed, which includes material, equipment rental prices, labour and fuel. From the index, Oman is leading the other six GCC states, with an average increase of 15 per cent over the past 14 months across the basket of items tracked. Qatar has seen a 10 per cent rise over the same period. The GCC average for the Contractor Cost Index has climbed by 9 per cent over the same time frame. 

The Saudi index has been the most volatile, with a 14 per cent jump during the first seven months of 2013, but stabilised thereafter, ending the period 6 per cent up from January 2013. The UAE had a very stable first six months of 2013, with virtually no movement at all. Since July, however, costs have started to increase slightly, with its Contractor Cost Index gaining just over 7 per cent until February this year. 

Conflicting trends

There are conflicting trends for cement and concrete. Across the GCC, the average cost of a 50-kilogramme bag of cement has increased. However, the average cost of concrete has reduced in all countries except Bahrain and Kuwait. This would suggest increased competition amongst ready-mix suppliers and, as a result, reduced margins. This trend is certainly set to change as construction activity and, ultimately, demand for concrete grow so that ready-mix suppliers will not have to offer discounts to secure new business.

Demand for materials, labour, equipment and fuel in the construction industry is directly linked to project cash flow. Using regional projects tracker MEED Projects, the forecast spend on projects in the construction and transport sectors can be compiled. The actual cash flow is not as important as the trend. A significant increase in the forecast spending will yield an increase in demand for materials, labour, equipment and fuel. After an extensive survey by MEED Projects visiting all demarcated construction sites in the UAE, it was revealed that more than $12bn-worth of schemes, which were previously on hold due to the 2008 recession, have resumed. 

Although some of these projects have gone through the entire tender process to appoint new contractors, sub-contractors and consultants, a large volume of them did not. Appointed contractors, sub-contractors and consultants have resumed the construction process and as a result, these projects do not typically appear on project trackers’ radar. However, following the MEED Projects survey, these projects’ schedules have been updated and are included in the forecast cash flow.

Apart from the UAE, all GCC countries will see an uptick in monthly expenditure on construction and transport schemes. This implies there will be an increased demand for materials, labour, equipment and fuel in these sectors, which potentially can drive up the price for these resources.

Strong correlation

At this juncture, it is important to note that there is a strong correlation between the cost of construction in the six GCC countries as they draw on the same pool of resources. Thus, a significant rise in construction activity in large markets such as Saudi Arabia and the UAE will ultimately have an impact on the neighbouring countries. This is especially evident in the skilled resources segment. For example, engineers and project managers are in high demand and will have their own preference on where they would like to live and work. This adds another driver to the cost element affecting projects.

According to the forecast cash flow for projects in the GCC construction and transport industries, the construction sector will have a very stable cash flow, with spending between $4bn and $5bn a month from 2014 to 2016. On the other hand, the transport industry will see rapid growth, with spending starting at $2bn a month, growing to peak at just shy of $5bn a month at the end of 2015 and the beginning of 2016. The main driver for this increased spending is predominantly rail work being undertaken by Qatar, Saudi Arabia and the UAE. All three of these countries have major railway, metro and light rail schemes under way.

About $6bn will be spent each month throughout 2014 on construction and transport projects currently under execution. If those currently in the tendering, design and study phases go to market and are awarded as scheduled, then the monthly spend will increase to just shy of $10bn by the second quarter of 2016. It is important to keep in mind that construction projects (represented largely by the real estate sector) are extremely sensitive to economic cycles and, subsequently, are announced at a rapid rate during prosperous periods and cancelled or placed on hold even quicker during recessions. Thus, this forecast spending could alter significantly over a short period of time.

Based on data from the London Metal Exchange, which provides spot rate data for key construction commodities such as steel, aluminium, copper and tin to name a few, it is clear that steel has seen the largest swing in price since the beginning of 2013. Surprisingly, local rebar prices in the GCC have not followed the trend. Global spot rates for steel have increased by 35 per cent since January 2013. It is therefore expected to only be a matter of time before local rebar costs will have to reflect the growth in the cost of raw materials. 

All GCC countries apart from Saudi Arabia have maintained a stable rebar rate from January 2013 to February 2014. Rebar prices in Saudi Arabia have increased by just over 8 per cent in the 14 months to February. Average rebar costs in Qatar were consistently the highest for most of 2013. Rebar prices in Kuwait were still significantly higher than the GCC average, but very consistent throughout the year. Oman saw little change during the same period. Only the UAE has seen a slight decline in the average rebar rate during the fourth quarter of 2013 and this has continued in 2014.

Unfortunately, there is not sufficient data to support the premise that the slight decrease in February rates was a result of the drop in raw material costs six months earlier. If the trend holds, it would suggest an increase in rebar prices towards the end of this year. 

Varying costs

Spot prices for copper, aluminium, tin and zinc have remained very flat from January 2013 to February this year. Despite this, the cost for electrical cable was extremely volatile during the period. As copper is the main driver for electrical cable, it is worth noting that although global copper prices have remained flat, the local rates for electrical cables have varied significantly. The UAE and Kuwait have seen the highest cost movement, with prices increasing more than 55 per cent and 40 per cent respectively. Electrical cable costs in Saudi Arabia and Oman moved in the opposite direction, with prices reducing by about 20 per cent.

With the Expo 2020 bringing an upswing in the UAE construction market and major infrastructure project awards driving markets in Qatar and Saudi Arabia, the indication is that all this activity will result in costs increasing over the short-to-medium term by about 4 per cent in 2014 and 5 per cent in 2015.