Projects market reaches a turning point

16 December 2008

After 10 months of record growth, the Gulf projects market came to a virtual standstill in the final quarter of the year as the impact of the global credit crunch forced clients to scale back their plans.

This year marked a watershed for the Gulf projects market. Record growth in the first 10 months of the year was replaced in the final two months by unprecedented uncertainty, as the impact of the global credit crisis finally hit home. With clients delaying or putting on hold final investment decisions, the projects market is set to experience a sharp slowdown in 2009.

It was all so different in the first three-quarters of the year, with oil prices soaring to record highs of $147 a barrel in July and confidence in the GCC sky high. Despite the troubles on Wall Street, there seemed to be no end in sight to the Gulf projects gold rush.

The MEED Projects Index, which monitors on a weekly basis the total value of projects planned and under way in eight Gulf states, started off the year at $1.8 trillion. By March, it had crossed the $2 trillion mark, and by the end of October, it had reached $2.9 trillion.

As has been the case ever since the index was launched in late 2003, the construction sector in general, and real estate in particular, was the main driver of growth in 2008. The value of construction projects totalled $1.9 trillion in late October 2008, representing two-thirds of all schemes tracked. By comparison, the next largest sector was oil and gas, with $524bn worth of projects (see table).

Projects growth

By virtue of having the region’s largest real estate sector, the UAE consolidated its position as the Gulf’s biggest market in 2008. Over the first 10 months of the year, its portfolio of projects jumped in value by 72 per cent to $1.2 trillion, almost twice the size of the next largest market, Saudi Arabia, and four times greater than Kuwait’s project portfolio.

The federation’s elevated status has largely been due to its tendency to launch massive masterplanned developments. Even as late as October, when the first signs of a real estate correction were emerging, Dubai was rolling out its latest offerings: the $95bn Jumeira Gardens development and the $38bn Nakheel Harbour & Tower project.

It was, however, the Gulf’s two smallest markets where the highest project growth was recorded. Oman’s project portfolio surged by 112 per cent to $106bn, while Bahrain’s was up by 106 per cent at $58bn. Again, real estate projects were the catalyst for growth.

The rapid increase in new projects was accompanied by a more modest rise in contract awards. The first 10 months of 2008 yielded $184bn worth of awards, just short of the total for the whole of 2007. The busiest period of the year was the second quarter, when $72bn worth of contracts - a quarterly record for MEED Projects - were placed.

Construction boom

Once again, the construction sector accounted for the biggest share of awards, delivering $107bn. The power and water sectors also recorded strong growth, reflecting the high rates of demand. In contrast, contract awards in the petrochemicals sector plummeted by 95 per cent over the 2007 volume, as limited feedstock allocations, coupled with the soaring cost of building capacity, deterred clients from proceeding with their plans.

It may well turn out to be a similar story in the oil and gas sector too. For if the $10bn worth of awards placed on Kuwait’s fourth refinery - and now subject to a parliamentary inquiry - fail to proceed, the actual volume of oil and gas awards in 2008 will fall by 20 per cent compared with 2007 (see table, page 10).

The fourth refinery packages were the primary reason why Kuwait registered a doubling in contract awards - to $20bn - in the first 10 months of 2008. Iraq achieved similar growth, albeit from a low base, reflecting the improved security situation in the country and rising construction activity in the northern Kurdish region. In Iran on the other hand, contract awards dropped by a half, due to a combination of sanctions, bureaucracy and a lack of finance.

One of the striking features of the Gulf projects market over the past five years has been the relatively low ratio of awards to the overall projects total: as of late October, just a quarter of all projects on the database had entered the construction phase (see table). The lengthy backlog of work, combined with healthy government reserves, had led many to believe that even if the oil price collapsed and the world economy went into recession, activity in the Gulf projects market would remain high for at least another three years.

By the autumn, it was becoming increasingly clear that that was not going to be the case. The regional power, water and wastewater sector was the first to be hit by the global credit crunch, with a handful of private schemes stalled by the collapse in the project finance market.

Much more damaging was the September failure of US investment bank Lehman Brothers, which sent shockwaves throughout the entire regional banking sector and led most institutions to simply stop lending to the real estate market. Hefty falls in regional stock markets, coupled with the first drop in UAE rents for years, and the oil price slump, only compounded the situation.

By early November, the flow of major contract awards had virtually dried up. The real estate market was hit particularly hard, with a growing number of planned projects being placed on hold and others already under way, including Dubai’s flagship Palm Deira and The Waterfront schemes, being scaled back. Lengthy delays in tendering were also announced on a handful of major refinery projects, including Saudi Arabia’s export refinery programme and Oman’s planned Duqm scheme.

Price collapse

The meltdown in the project finance market was blamed for the refinery delays, although another factor also played its part. Well aware that commodity and raw material prices had collapsed since their mid-2008 record highs, many clients opted to delay or retender project work in the belief that new bids would come in well under original pricing levels.

Saudi Aramco went even further, asking contractors and suppliers already working on the $11bn Manifa project to revise their original prices.

The uncertainty over commodity prices and the finance markets is expected to cast a long shadow over the Gulf projects market well into 2009. In key sectors such as upstream gas, power, water and infrastructure, new projects will still go ahead, with governments stepping in where necessary to provide the finance.

In contrast, the prospects for the real estate sector are bleak, with Dubai in particular forecast to experience a significant slowdown in new projects as villa and apartment prices slump, investor confidence wanes and developers rein in their exposure.

The next 12 months are set to be a reality check for the Gulf’s projects market. The days of sky-high bid prices and contractors calling the shots are over.

Instead, established clients are set to regain the upper hand as the dozens of contractors and consultants drawn into the region over the past five years battle it out for work in a contracting market.

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