Focus shifts from Dubai to Saudi Arabia and Qatar for facilities management

25 January 2011

The facilities management sector is witnessing a resurgence after the financial crisis put a brake on Dubai’s construction boom. Saudi Arabia and Qatar are emerging as top markets


$3bn: Projected value of the Saudi facilities management market by 2013

15-20 per cent: Profit margin for work in Abu Dhabi for facility management firms

5 per cent: Current margins in the Dubai market

Sources: Frost & Sullivan; MEED

In the heady days of the Dubai-led construction boom, little attention was paid to how much the magnificent structures that were being thrown up might cost to operate once they were built.

But since the property market crash triggered by the global financial crisis of 2008-10, the cost of service charges has been pushed to the forefront of tenants’ concerns. With long-term tenancies rare, property developers and owners have faced a mass exodus of clients if they have been unable to find cost-effective ways of managing their assets.

The facilities management firms we are talking to in the region are reporting orderbook growth

Suganya Rajan, Frost & Sullivan

“More and more buildings of modern and sophisticated design have come on-stream over the past few years,” says Mike Cairney, an Abu Dhabi-based partner at UK cost consultant EC Harris. “When they were being built, rent and service charges were secondary considerations: many tenants simply said ‘we must have an office in Dubai’ and didn’t worry about the cost of operation. Neither did developers.”

Renewed focus on facilities management

But today’s high vacancy rates in the office and residential real-estate sectors are making developers, as well as potential tenants and buyers, focus more attention on the operation and maintenance of property in the post-construction phase. Environmental concerns, championed by initiatives such Abu Dhabi’s Estidama green buildings rating system, are also forcing developers to focus on the management of buildings. As a result, more facilities management consultants and contractors are being involved at the design stage of new projects.

“That’s generating quite a strong market for people who understand sophisticated facilities management, whether that be in consulting or on the service-supply side,” says Cairney.

Many clients not only want to bring down costs, but they also want to protect investments. “There’s a growing appreciation that the value in the asset is actually an important matter, that the asset is worth maintaining well,” he says.

Value of Middle East facilities management market
Source: Frost & Sullivan

Consequently, the Middle East’s outsourced facilities management market is experiencing renewed growth after stagnating in 2008-09. In 2010, the region’s facilities management market was estimated to be worth $4.2bn by UK consultants Frost & Sullivan. The value of the sector is forecast to grow to $8bn in 2013.

“The facilities management firms we are talking to in the region are reporting orderbook growth and strong project pipelines,” says Suganya Rajan, research analyst at Frost & Sullivan.

Increased orders, however, do not necessarily translate into facility management firms making more money. Frost & Sullivan says that a competitive pricing environment, combined with long-term contracts and high inflation in the region, poses a significant risk to profit margins.

The facilities management market is also expanding geographically. The UAE, led by Dubai, has long been the centre of gravity of the regional facilities management market, representing 47 per cent of the sector’s value in 2009.

The focus is now shifting to Qatar and Saudi Arabia, where the real-estate sector has reached a sufficient level of maturity and offers attractive growth potential for facilities management firms.

Dubai slowdown in facility management

“Five years ago, Dubai had four to five facilities management companies at the most,” says Mick Dalton, managing director of Saudi Arabia-based Musanadah FM.

“Now there are 95 facilities management companies. There are too many firms and not enough work. In Saudi Arabia, on the other hand, there are only eight companies, mostly local. The market potential is massive: [the kingdom] is predicted to turn into a $3bn market in the next five years. You will see an exodus of firms from Dubai to Saudi Arabia. Qatar will also be a strong market, with all the work for the [2022] World Cup.”

There is massive opportunity [in Saudi Arabia] for major players, but it is very difficult to get started

Mick Dalton, Musanadah FM

It is not just increased competition in Dubai that is forcing facilities management firms to explore the huge potential that immature markets such as Saudi Arabia offer. New legislation introduced in the emirate, designed to protect property owners, is also playing a major role.

The jointly owned property law now makes it difficult to run a successful facilities management business in Dubai, he says.

In May 2010, the emirate’s Land Department issued directions under Law No 27 of 2007 concerning jointly owned property. The new legislation, which came into effect from October 2010, means that homeowner associations can now select companies to undertake the upkeep of facilities such as lifts, foyers, swimming pools and gardens. The law takes the decision out of the hands of developers, potentially reducing residents’ costs.

“Dubai is a dying professional facilities management market,” says Dalton. “The jointly owned property law is forcing all the buildings to go for lowest cost, and there is no idea about things such as lifecycle funds and capital replacement.

“For the past five years, developers in Dubai have ripped off owners on service charges, but the legislation that has been brought in to protect owners has come in about three years too late. The owners have come in to handle the management of properties and don’t understand what is required.”

As a result of the new legislation, the revenues made by facilities management firms in the emirate have fallen dramatically.

“In Abu Dhabi, you can charge cost plus 15-20 per cent,” says Dalton. “But in Dubai you’re looking at a margin of 5 per cent. Who can run a company on 5 per cent? You can do it in the UK, but in Dubai you don’t have the volume of work to do that. Over the next few years, Dubai’s buildings will decay into what they used to be like, and into what some buildings in Abu Dhabi and Deira are currently like.”

Saudi potential for facility management

The outlook for the UAE’s facilities management market is not entirely gloomy. Abu Dhabi is predicted to take up some of Dubai’s slack. Illustrating this, Cairney’s firm EC Harris recently relocated from Dubai to the UAE’s capital.

However, the opportunities in Abu Dhabi are dwarfed by the potential of Saudi Arabia, where the government is executing huge spending plans, which includes major investment in housing.

“There’s massive opportunity in Saudi Arabia, mostly for facilities management consulting at this stage as a lot of the projects aren’t opening for another three or four years,” says Dalton.

“I picked up two more contracts for consultancy work just today. Over the next five years a facilities management firm could make a lot of money here.”

But as is often the case with Saudi Arabia, the key challenge is for new players to gain access to the market.

“There is massive opportunity here for major international players, but it is very difficult to get started,” says Dalton. “You can’t get visas for staff until you have a contract signed, and you can’t get a visa to do business unless you have a local partner.

“And now in Saudi Arabia you can’t get a visa unless you are an engineer. You have to have a 75 per cent Saudi workforce, but the problem is that the locals don’t want to be electricians or gardeners. They want my job; they want the glamour jobs.”

Dalton says greater awareness of facilities management is needed for Abu Dhabi, Saudi Arabia and Qatar to fullfil their market potential.

“The concept of facilities management for most property owners goes little beyond security and cleaning,” he says.

“You go in to any building and more than likely the fire alarm and extinguishers have never been tested, stairways are blocked. They don’t understand the lifecycle of assets and sinking funds.”

In recognition of the growing need for greater understanding of facilities management in the region, Dubai’s Real Estate Regulatory Authority in 2009 launched the Middle East Facilities Management Association (Mefma). Its objectives are to promote best practice and the benchmarking of facilities management across the region.

Mefma president Jamal Abdulla Lootah says the crash has forced everyone involved in Middle East construction sector to re-examine the environmental and economic efficiency of buildings during their operational life.

“The Middle East certainly felt the shock waves, yet the correction of what was an overheated construction boom gave us the chance to step back and take breath,” says Lootah.

Long-term sustainability

“Developers, building owners and end-users realised the asset value of real estate – the importance of maintenance, service and operational efficiencies. An association for facility management professionals has been much needed for a long time but, in my opinion, the economic circumstances made everybody look at the bottom line and acted as a catalyst for Mefma’s formation.

“And that bottom line is all about attaining efficiencies. Sustainable construction and operational initiatives save money and lessen the impact on the environment.”

To raise awareness of facilities management, Mefma has begun a rolling programme of conferences, the first took place in November 2010 in Doha.

“Engaging with professionals and governments across not just the GCC, but the Middle East as a whole is crucial,” says Lootah.

“Collaboration and understanding of regionality through transparent dialogue and education is imperative in delivering our sustainable objectives. Education, training and knowledge sharing form the backbone of Mefma policy.”

It will be that education, whether supplied by Mefma or by consultants that will be key to determining whether that the regional facilities management market reaches its potential of doubling revenues to $8bn over the next three years.

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