Contractors working in the Gulf are to focus on government-backed projects amid concerns over the viability of smaller real estate projects in the wake of the global financial crisis.
Difficulties in raising finance and diminishing confidence in the real estate sector are the two main reasons for the shift in focus, industry sources tell MEED.
Banks are now reluctant to lend money to real estate developers, and in Dubai there are growing concerns about residential supply outstripping demand.
“Project finance will become a problem,” says a Dubai-based contractor.
“There is a hesitancy to put money into the market. Part of that is to do with finance, but there is also an element of mistrust [in the real estate sector].”
The solution for contractors is to become more selective and target state-backed projects that will go ahead regardless of the problems on the world’s financial markets.
“We began to focus on the larger clients a while back,” says the contractor. “Even if the credit crunch starts to affect this region, the big projects will still happen.”
Banks do not have the liquidity to fund marginal projects, and most already have heavy exposure to the real estate sector.
“Contractors that have a lot of work with the smaller private developers are the ones that should be worrying,” says one Abu Dhabi-based contractor.
“The developers with one or two projects are an unknown quantity, and the banks will not finance them.
Companies that are working for government clients and the larger private developers should not have any problems as those projects will still go ahead.”
With real estate projects perceived as the most fragile element of the construction industry, some contractors that are heavily exposed to the market are now seeking to diversify by securing work on infrastructure projects, such as roads, bridges, ports, airports, railways, sewage treatment plants and the oil and gas sector.
“Look at all the government-funded infrastructure and oil and gas projects still in the planning stages – they will all go ahead,” says the Abu Dhabi contractor. “So I do not see the market drying up.”
Contractors also expect that there will be a time-lag before events on the world’s financial markets begin to affect the region’s construction industry.
“Usually, when there is a slowdown in the construction market, it follows the real estate market by about two years,” says the Abu Dhabi-based contractor.
“So we have at least 18 months before things might get bad.
“Having said that, I do not think it will be a major issue. Some areas will slow down, but others will pick up.”
Another potential area of concern for contractors is the availability of bid and performance bonds from banks.
“It has been quite easy to get bonds from the banks over the past three years,” says another Dubai-based contractor.
“I expect they will start to ask more questions in the future to make sure that the project is viable and the client is solvent. But that is normal. It will just go back to the way it used to be.”
Despite the possibility of a slowdown, contractors remain confident that the market will avoid a complete collapse and there will continue to be opportunities for new work.
“I think that this is just a temporary problem, and it will pass,” says the contractor. “The economy is still healthy.”