Contractors typically complain that construction is a thankless industry with low margins and high risks. Those gripes have done little to dissuade regional investment vehicles from acquiring stakes in construction companies.

The most recent transaction came in June, when Saudi Arabia’s Public Investment Fund (PIF) signed a $1.1bn deal to acquire a 38 per cent stake in South Korea’s Posco Engineering & Construction (E&C). The deal involves parent company Posco selling a 26 per cent stake to the PIF, and the remaining 12 per cent will come from the issue of new shares. Posco will remain the majority shareholder, with a 52.8 per cent stake.

Posco, which has a large steel-making business, is unloading assets to focus on its core business and cope with the steel and commodities market downturn. Posco E&C had net assets of $2.7bn at the end of 2014, which means the PIF acquired a stake at just above book value due to the company’s high debt burden.

The valuation of the company was driven down further by corruption allegations at Posco E&C. Prosecutors investigated Posco and several subsidiaries including Posco E&C over alleged $9bn slush funds and political corruption earlier in 2015, according to local press.

Joint venture

Despite the low valuation, the PIF’s strategy has not been revealed. It has been reported in South Korea that the fund and Posco plan to establish a joint venture to carry out infrastructure projects in Saudi Arabia with a focus on rail and hotel projects.

Another South Korean subsidiary of Posco, Daewoo International, is reported in talks with Saudi National Automobiles Manufacturing (SNAM) to establish a $1bn car manufacturing plant, with investment from the PIF. SNAM will hold a 50 per cent stake, the PIF 35 per cent, and Daewoo a 15 per cent stake in the scheme.

Still in South Korea, construction company Ssangyong E&C has sold a stake to a Gulf investor. In February this year, the Investment Corporation of Dubai (ICD) bought a controlling stake in the company for about $181m.

Like the PIF/Posco deal, ICD’s strategy for the company has not been disclosed, but the company’s behaviour in recent months suggests it will be deployed to deliver projects in Dubai.

Dubai projects

Since the acquisition, Ssangyong has restarted bidding for work in Dubai after a lengthy hiatus. One of the largest tenders the firm is participating in is the $1.4bn expansion of the Atlantis resort on the Palm Jumeirah, for which ICD is the project owner. For that scheme, Ssangyong is part of a joint venture with the local/Belgian Bel Hasa Six Construct.

Ssangyong is also understood to be preparing to bid for the yet-to-be-tendered One Zabeel project that, like the Atlantis scheme, is being developed by ICD, and it is also bidding for the Palm Gateway towers for Dubai developer Nakheel.

Contractors being used to develop projects for their investors in Dubai is not a new phenomenon. Aabar Investments, which is owned by Abu Dhabi investment vehicle International Petroleum Investment Company (Ipic) is a major shareholder in Dubai-listed Arabtec Holding with a 34.9 per cent stake in the company.

Largest contract

In 2014, Aabar signed an agreement with Arabtec for a AED22bn ($6bn) contract for the design-and-build of 37 towers across Dubai and Abu Dhabi, marking the largest construction contract ever awarded in the UAE.  In Abu Dhabi, the towers include: nine mixed-use buildings at the City of Lights development on Reem Island; 14 other towers in various locations in Abu Dhabi; and a Hard Rock Hotel on Abu Dhabi corniche. In Dubai, the contract involves building six hotel and service apartment buildings together with two staff accommodation blocks in the Jadaf area close to the Culture Village development on the banks of the creek.

In the case of Qatar, the investments appear to have secured resources from… international construction companies

Although the signing of the agreement drove up Arabtec’s share price, there has been little progress on the schemes since then.

Another Dubai-based contractor that has sold a stake to an investor is Dubai Contracting Company (DCC). In 2008, Dubai-based holding company Bright Start purchased a stake in DCC from private equity firm Amwal AlKhaleej.

In 2012, Bright Start awarded DCC the estimated $108.9m contract to build the new Four Seasons resort in Dubai that was built on Jumeirah Beach Road.

Qatar trend

In Qatar, the trend has different, with big state-controlled investment and development companies acquiring stakes in large European construction companies. In 2010, Qatar Holding bought a 9.1 per cent stake in Germany’s Hochtief, and in the same year Qatari Diar Real Estate Investment Company took control of 5.78 per cent of France’s Vinci.

Hochtief has worked on several large-scale projects in Qatar, such as Barwa Commercial Avenue, and was part of the joint venture that was planning the Qatar-Bahrain Causeway. Qatari Diar and Vinci have formed a joint venture contracting company in Qatar known as QDVC, which has worked extensively on the Lusail development and is now engaged on the Red Line South of the Doha Metro scheme.

The investments by Gulf investors show how very different strategies can be deployed. In the case of Qatar, the investments appear to have secured resources from top-tier international construction companies for projects. That is very different to Aabar’s investment in Arabtec, which was intended to capitalise on the company’s growth.

It is not yet clear which path the last two transactions involving South Korean construction companies could take. Both the Saudi and Dubai investors have plenty of projects for the contractors to work on. At the same time, both could be used to make money on the stock markets in Seoul.