A full-page advertisement in the 8 December edition of MEED provides an illuminating sidelight on the growing demands of a construction boom that is entering its fifth year. In the notice, Abu Dhabi-based developer Aldar and UK main contractor Laing O'Rourke call for local and specialist subcontractors to join them in forming integrated delivery teams' to carry out a 10-12-year rolling programme of construction works on the $14,700 million Al-Raha Beach development in Abu Dhabi. It is the first time supply chain partnering opportunities have been openly advertised in the region and follows the signing in late November of a landmark joint venture agreement of Aldar and Laing established to deliver the Al-Raha Beach scheme. Partnering agreements between clients and suppliers is a trend that is gathering momentum in the Gulf and represents a radical change of direction for the traditionally adversarial regional construction market. Faced with a shortage of experienced contractors and rising costs, major construction clients such as Aldar, Dubai's Emaar Properties and Bahrain's Arcapita are seeking ways to secure resources. For the big contracting companies, it allows them to step away from the traditional cut-throat lowest-price-wins tendering process that eats up profit margins. 'Partnering is now happening in the region,' says Steve Coates, Gulf partner of UK-based cost consultant Davis Langdon. 'The market is extremely busy and people with big construction programmes, such as Aldar, need to do this to ensure they get the levels of quality they want. We are seeing it in the UAE with Aldar and Emaar, and in Bahrain with Arcapita. I expect to see it appearing elsewhere in the region.'

Slower growth

Construction activity in the Gulf has continued to boom in 2006 on the back of oil prices that have averaged about $60 a barrel so far this year. According to the latest data from Gulf projects tracker MEED projects, the total value of projects planned or under way in the GCC in late December was about $1.2 trillion (see Databank), an 88 per cent increase on the corresponding period last year. With sustained high oil prices expected to deliver a combined aggregate budget surplus for the six GCC states of about $500,000 million over the coming five years, construction activity is set to remain strong for several years more.

However, it has been a year of two distinct halves. According to the MEED projects data, the total value of projects planned or under way in the GCC surged by some 57 per cent in the first six months of the year. This compares with a mere' 20 per cent rise in the second half of the year. There is likely to be a pick-up in activity in early 2007. 'People are sitting on tenders in the run-up to the Christmas and Eid periods, but once those are past I expect to see a flurry of new tenders in the Gulf in January and February,' says Coates. The split performance partly reflects the impact of a slowdownin activity in the summer and during Ramadan, which both fell in the second half of the year. More significantly, however, it reflects growing capacity bottlenecks in the projects market. 'We still see a lot of projects on the horizon, but feel that the implementation of these projects is being delayed because of the shortage of every resource relevant to a project,' says a senior engineering, procurement and construction (EPC) contractor based in the region. 'Some are delayed because of the lack of funds to cover soaring costs, some are delayed because of the delay in upstream development caused by the shortage of drilling rigs and some are delayed due to the lack of participating tenders. A lack of any tiny element of the project cycle could now derail its implementation.' There are also signs that the Gulf construction boom may have peaked in 2006 and that these capacity constraints are placing a cap on growth. Quarterly figures from MEED projects show a significant fall in the rate of growth of project activity in the GCC in the third and fourth quarters of 2006 compared with the same periods in 2005. Project growth in the final quarter of 2006 was about 12 per cent, against 35.4 the year before, while third-quarter growth in 2006 was about 8.4 per cent, compared with 21.5 per cent for Q3 2005 (see table 1). Materials and labour shortages are also driving up the cost of projects across the Gulf. 'We estimate that the cost of projects in the Gulf has risen by about 8 per cent in the first nine months of the year so far,' says Coates. 'We expect double-digit growth in project costs by the end of the year. This compares to increases of about 15 per cent in 2005 and 10-15 per cent in 2004.' According to research carried out for MEED by Davis Langdon, the UAE, Saudi Arabia, Bahrain and Qatar have seen increases of up to 45 per cent in the cost of cement, ready-mix concrete and steel reinforcement bar (rebar) in 2006 (see table 4). Saudi Arabia has had the biggest price hikes, with cement prices reaching record highs in September at $6 a bag, a 50 per cent rise on the start of the year. Concrete also reached record highs of about $67 a tonne in September, up 20 per cent for the year, while rebar prices in the kingdom have climbed by about 10 per cent since January. The UAE, Qatar and Bahrain have also seen big rises in these key materials throughout the year.

Treading water

The half-year shift in project activity in the Gulf is reflected by a similar change in construction materials prices, with little movement in prices in the final quarter.

'There was certainly a marked increase in costs in the first half of this year,' says a Dubai-based contractor. 'In the second half costs have levelled somewhat, rebar has dropped back a bit but that doesn't mean general costs have not fallen back, general inflation is still running at about 8 per cent for the year.' The rapidly rising cost of living combined with a shortage of key skills has been behind steep increases in labour and professional costs in the UAE and Qatar over the past few years. The rises in those markets levelled off in the middle of 2006, partly because contractors are finding new sources of workers but also because of the slowdown in growth in construction activity in the middle of the year. The cost of expatriate engineers and project managers climbed again in the UAE in Q4 (see table 3). 'Accommodation distorts things,' says the Dubai contractor. 'Rents have increased by at least 15 per cent this year and that accounts for about 25 per cent of our staff costs. Labour costs are also affected as rents for labour camps, like luxury apartments, are going through the roof.'

Kingdom boom

With far lower levels of inflation and a strong indigenous construction sector, Saudi Arabia did not face the same inflationary pressures as Dubai and Qatar. Consequently, construction salaries rose only gradually in the kingdom in 2004 and 2005. Things have changed in 2006, however. Construction salaries spiked in the first nine months of the year, bringing Saudi wages to similar levels found elsewhere in the Gulf. Over the past three years, construction wages in Saudi Arabia have risen by up to 250 per cent, compared with maximum increases of about 100 per cent elsewhere in the Gulf. The biggest increases have been for expatriate engineers and project managers as well as skilled tradesmen and foremen.

The giant Saudi construction market will be a key driver of future construction activity in the Gulf. In January, Riyadh unveiled plans to invest $623,000 million on infrastructure projects over the coming decade. This figure has already been revised upwards to over $1 trillion. The kingdom is also enjoying a wave of private sector investments in real estate, covering tourism, retail and residential projects. The UAE will continue to be an engine of construction growth in the region, with Abu Dhabi joining Dubai as a regional hotspot for property and infrastructure investment. Qatar, too, will continue to see strong growth as Doha continues to invest in the proceeds from its enormous gas reserves. However, with the rate of growth in project activity likely to level off in the coming year, price increases are likely to ease. 'I think we saw the overheating of the construction industry this year, and things will start to cool down in 2007,' says the Dubai contractor. 'I expect general cost inflation to be lower in 2007, maybe around 6 per cent. All the information I have so far suggests that rebar prices will stabilise, and I hope rents begin to level as new apartments come onto the market.' Richard Thompson