|New report from MEED analyses the opportunities and challenges for contractors, consultants and suppliers across the region’s six construction markets over the next two years. Download sample pages here|
After two decades of expansion, the GCC construction industry is at a turning point in its development. Last year, about $63.4bn of construction and transport project contracts were awarded in the GCC, the worst year since 2012. Awards were 8.4 per cent down on 2017, and far below the $111.8bn of awards in 2014, the best year on record.
Cutbacks in capital spending by government and private sector project sponsors on the back of lower oil prices since 2014 have triggered a four-year slump in project activity in the Gulf construction sector that has shown little sign of recovery in 2019. Despite the expectation at the beginning of the year that 2019 would mark the start of a recovery, these hopes have not been realised in the first half of the year, with a total of about $22.4bn of construction and transport project contracts awarded in the GCC in the six months up to 30 June 2019.
The pickup in oil prices since the middle of 2017 as a result of the agreement between Opec and non-Opec oil-producing countries to place a cap on oil production has had a positive impact on the region’s economic outlook and eased the pressure on government finances. But while this will lead to an increase in government spending on infrastructure, and support a return to growth in real estate investment, it is likely to be 2020 before contractors can start to look forward with renewed optimism.
Cash flow crisis
The lack of new project opportunities over the past four years has forced contractors to lower tender bid prices to win work, eroding profit margins. At the same time, fiscal tightening by governments has led to lengthening delays in contract payments. Together, these factors are causing severe cash flow difficulties for contractors and their suppliers. Many companies have chosen to downsize and restructure their operations, and some international players have left the region.
Over this period, Dubai has been the primary driver of construction activity in the Gulf, boosted by infrastructure spending in advance of Expo 2020. While the first half of 2019 has seen a slowdown in awards, the UAE has maintained its top spot as the best-performing construction market, with about $10.9bn of awards in the first six months of the year. However, faced with an oversupply in the property market, momentum in Dubai’s construction cycle has slowed. The value of contract awards has fallen at the same time as the value of projects being completed is rising.
The focus now is Saudi Arabia, which has huge infrastructure development plans. But Riyadh’s aim of delivering these plans through the private sector is only beginning to build momentum. In the short term, the best prospects lie in the oil and gas sector, where investment is accelerating, or in the power and water sector, where private finance is more forthcoming.
Despite the expectation of a return to spending in Saudi Arabia, construction and transport project spending looks set to fall again in the GCC in 2019. Nevertheless, there is a huge pipeline of projects planned in the GCC. As of 30 June 2019, there were about $1.2tn of known construction and transport projects planned or under construction in the GCC.
Pipeline analysis of Gulf construction
Breaking the figures down, at the mid-point of 2019 there were about $578bn of construction and transport projects in execution and about $597bn of known projects were planned. Of this, about $123bn of construction and transport projects were at some stage of tendering or procurement. About $235bn of construction and transport projects were in design, while a further $239bn of projects were under study.
A further $1.1bn of planned developments have been promised through megaprojects such as Saudi Arabia’s $500bn Neom City, although projects have yet to be defined on large parts of these masterplans.
New forms of project procurement and finance such as public-private partnerships are gaining traction, and we are also seeing the emergence of major new construction clients such as Riyadh’s Public Investment Fund. With all these changes taking place, companies must think more strategically about their next moves in the GCC construction industry.
• Gain an immediate insight on the GCC construction market
• Identify new business development opportunities
• Discover the current and planned client activities across the region
• Identify top contractors, clients and competitors
• Asses specific challenges and drivers behind each sub-sector