Consultants addressing a weak projects pipeline in the Gulf

22 March 2010

Consultants had a poor year in 2009 as the regional real estate market collapsed and will be returning to their traditional government clients to find work this year

Consultants in the Gulf are hoping 2010 will turn out to be a better year than 2009. Last year, the region’s largest market for consultancy services collapsed as the real estate bubble in Dubai burst.

The impact was widespread; projects were cancelled and bills went unpaid and no consultancy was left unaffected by the economic downturn. There was little in the way of new work for consultants in 2009. The few projects that did go ahead and move onto site had been in the pipeline for some time and already had consultants on board.

Consultants have borne the brunt of the decisions taken by real estate developers last year, following the change in the property market. Unlike contractors, which just had work under way shelved, consultants were hit by planned projects being put on hold – and in Dubai the majority of projects in the pipeline ground to a halt.

We have had to look at our staffing levels and have made tough decisions

UK-based consultant

The scale of the problem is immense. According to regional projects tracker MEED Projects, the value of work on hold in Dubai alone is $285bn, with just $133bn-worth being executed on site. The shelved projects include some of the world’s most ambitious real estate developments, such as the 140 square kilo-metre Dubai Waterfront and the 79km Arabian Canal, with its extensive waterfront communities. Together, these projects would have created homes for three million people, almost double the current population of the emirate.

Projects scaled back

But it was not only large-scale projects that were halted. Consultants were also affected as smaller, private developers shelved plans for individual tower blocks and villa compounds.

As the economic downturn worsened, government-backed infrastructure projects were also scaled back. Dubai’s Roads & Transport Authority – the emirate’s largest government client in recent years – stopped launching new projects and consultants working on schemes such as the Purple Line for Dubai Metro were stood down.

With proposed infrastructure projects also slowing down, all consultancy disciplines have been affected. Clients no longer need as many architects to design their buildings, nor engineers to provide their infrastructure.

“Our real estate business has been the hardest hit,” says a UK-based consultant. “But the downturn has had an impact on everything.”

Halted work is only one half of the problem consultants have faced. The other is delays to payments, with some companies not being paid at all for work they have completed. All firms with exposure to construction projects in Dubai privately admit that payment remains a major problem moving into 2010.

“We still have payment problems with our Dubai clients,” says one UK-based consultant. “We are talking and there is a willingness to pay; but there just isn’t the money around at the moment.”

One consultancy that has gone public with its problems is UK-based Mouchel. At the end of 2009, the firm said it intended to close operations in Dubai because it had £10m ($16m) in payments outstanding from clients in the emirate. Mouchel said that, while it had successfully negotiated and received some payments in 2009, it was no longer confident it would be able to recover the remainder.

Although the sums of money owed to consultants is small compared with the hundreds of millions of dollars that some contracting companies are owed, it is a major problem for consultants, because they tend not have large cash flows or cash reserves to absorb hold-ups with payments.

The combination of unpaid bills and no new work coming in has forced consultants to cut costs, and most have had to shed jobs.

A visit to the larger consultancy firms in Dubai reveals the extent of the problem. Offices that were full in 2008 now have rows of vacant desks.

“We have had to look at our staffing levels and we have made some tough decisions,” says the UK-based consultant. “Does that mean we won’t look at the head count again? I would like to think so, but the truth of the matter is we don’t really know. It all depends on how the trading environment develops.”

Collapse in prices

How the future shapes up will depend in large part on the broader region. Dubai has been especially badly hit but projects have been shelved in the rest of the Gulf. Some $205bn-worth are on hold elsewhere in the region.

The underlying reasons for the collapse in real estate prices in Dubai apply equally in markets such as Abu Dhabi and Qatar, where speculation had also driven up prices, giving developers the confidence to build projects in the absence of real demand.

Developers in Abu Dhabi have scrambled since 2005 to develop large-scale Dubai-style waterfront projects, such as Al-Raha Beach and Yas Island, which rely heavily on third-party investors. But these have lost interest in a market that no longer offers guaranteed returns.

Property prices in the UAE capital were flat during the second half of last year after falling by 23 per cent in early 2009. Consultants predict the market will be oversupplied in 2010 as new projects are completed in Abu Dhabi.

Doha finds itself in a similar situation. New tower blocks have been built in the West Bay area of the city and these, together with the offshore development The Pearl-Qatar have tipped the emirate’s previously undersupplied residential real estate sector into oversupply.

Rents in Doha fell by 20-25 per cent in 2009, and new areas, such as the West Bay development, are experiencing vacancy rates of up to 25 per cent, according to US property consultant Jones Lang LaSalle.

The UK-based consultant agrees. “Qatar has the potential to be the region’s worst-performing real estate market,” he says. “A lot of new supply is being delivered but the demand is limited. It is not like Dubai, which can rely on regional demand and tourism to prevent the market from completely collapsing.”

Oversupply is a major problem for consultants because, without demand, developers will not build new projects. An exception are governments, however. In 2009 the majority of real estate projects that moved forward were backed either by a government or by government-related clients. In Abu Dhabi, private developers such as Aldar Properties and Sorouh Real Estate, which launched the most projects in the emirate from 2005-2008, made way for the Tourism Development & Investment Company (TDIC) and Mubadala Development Company, which are closely related to the government and public funds.

In Doha, two developers, Qatari Diar Real Estate Investment Company and Barwa Real Estate, which are both partly government-owned, accounted for the majority of the real estate project activity in 2009, with major awards made on the Barwa Commercial Centre and Qatari Diar’s Doha Convention Centre.

The one Gulf market in which oversupply is not yet a major issue is Saudi Arabia. With a young and expanding population of 29 million, the kingdom needs a lot of new housing.

“Developers are much more confident in Saudi Arabia,” says a regional consultant. “There is long-term demand and they need to build projects so that everyone has a home. A lot of it is government-driven, but the private sector is also playing a major role.”

Construction delays

But, even with strong underlying fundamentals, the kingdom’s real estate sector is heading towards oversupply in some cities, most notably Jeddah. The price of high-end residential properties there declined by 6-10 per cent during the first half of 2009 as the supply of new units grew faster than demand, according to research from Jones Lang LaSalle. However, a combination of construction delays and cancelled projects has so far prevented the situation from developing into an acute problem.

The market has returned to what it was before the boom… we are back working for government clients

US-based consultant

UK bank HSBC has forecast a weakening of the property sector in Saudi Arabia. In mid-2009 it said rents in the kingdom would soften by 15 per cent that year, before starting to recover slowly in 2010. If prices do recover in 2010, the dip in the Saudi real estate sector will have been a short-term problem brought on by the credit crisis rather than a long-term shift in the balance of supply and demand, and so developers will start building once again.

 Many projects are already planned. There are six economic cities in the pipeline, together with other masterplanned communities such as Jeddah’s Kingdom City, which if built, will feature the world’s first kilometre-tall tower.

While some consultants are already working on these Saudi schemes, many more will be needed as these planned projects move from conceptual design stage to construction. Consultants’ workload will be bolstered by government-led projects, such as the 450-km Haramain railway between Mecca and Medina, the cross-kingdom Landbridge rail project and multi-billion dollar university projects, together with the roads, hospitals and school schemes that consultants are already working on in the kingdom.

Publicly funded infrastructure is also where most of the opportunities lie in the rest of the Gulf. Qatar is moving ahead with a major new port and the Qatar-Bahrain causeway and it is starting to line up consultants for its planned railway network.

In Abu Dhabi and the wider UAE, rail projects loom largest in consultants’ prospects for work. An inter-emirates rail network is being planned and consultants are bidding for new metro and tram systems, in addition to a 327km highway, sewage tunnels and smaller infrastructure schemes backed by traditional clients such as the Public Works Ministry.

“In some ways, the market has returned to what it was before the real estate boom,” says a US-based consultant. “I remember our firm never used to work with private developers, because we didn’t think we would get paid. So we just worked with the government clients. That all changed with companies such as [Dubai developer] Nakheel, and for five years we were busy working for them, but now we are back working for government clients.”

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