Construction sector optimism could be dampened by financing concerns

03 February 2014

Survey finds that the cost of capital is still expensive

The growing optimism in the GCC’s construction sector could be dampened by ongoing financing concerns, says a survey by law firm Pinsent Masons.

The improvement in sentiment has been driven by contract awards. According to regional project tracker MEED Projects, there were $89bn of construction and infrastructure contract awards in 2013 across the GCC, making it the busiest year on record for contract awards - surpassing the pre-global financial crisis total of $76bn recorded in 2008.

The Pinsent Masons survey suggests the increased project activity and growing confidence could be undermined if action is not taken to address finance concerns, which continue to affect the sector.

The survey found that 90 per cent of companies perceived there to be greater optimism in the market, with 77 per cent reporting a larger order book for the next 12 months when compared to 2013.

“The GCC construction sector is clearly very positive about the outlook for the coming year,” says Sachin Kerur, head of Gulf Region at Pinsent Masons. “The broad base recovery in the construction market sets a solid foundation for growth to continue in 2014, but it remains crucial we capitalise on the potential of this sector at this critical juncture.  A number of major projects on the immediate horizon, such as Expo 2020 and the Qatar World Cup, have added a real sense of momentum.”

According to the survey, construction projects in the transport sector are expected to offer the greatest opportunities in 2014, followed by real estate, which 50 per cent of the respondents expect to provide opportunities.

Public-private partnerships (PPP) are another potential source of new opportunities. “It is interesting that the proportion of respondents to our survey who expect to be involved in public-private partnerships has doubled relative to the previous year’s results, reflecting an increasing recognition that this will be an important part of the mix in years ahead,” says Kerur. “We recently advised on the first-ever social housing PPP in Bahrain, and in several of the markets in which we operate we have seen renewed appetite for the sharing of risk and reward between sovereign states and private investors.

Despite the optimism, financing concerns remain. “…it is important to address the issues surrounding finance,” says Kerur. “Companies are reporting that the cost of capital is more expensive, and that accessing finance for projects more generally is a concern. They also tell us that their margins are being squeezed due to rising production costs and inflationary pressures.”

Cash flow was another concern, with 62 per cent of companies complaining of longer payment periods, although the situation appears to have improved slightly from the previous year when 78 per cent of the companies surveyed expressed concern over the issue.

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