Second phase of the construction boom

16 November 2007
As GCC construction activity continues to rise, MEED analysis reveals that only a small proportion of the $1trillion worth of projects expected are yet under way.

The Gulf’s booming projects market has grabbed many headlines in recent years. But not all is as it seems. Although there are about $1.7trillion worth of projects planned or under way in the Gulf, only a small fraction have started on site. According to Gulf project tracker MEED projects, only 16 per cent of all developments announced in the GCC are under construction, leaving more than $816bn worth still in the planning and feasibility stages.

Kuwait has the most work to do. Construction has started on only 2.5 per cent of the $200bn project portfolio. With only 10 per cent of projects on site, Saudi Arabia is in a similar position. Elsewhere in the Gulf, 32 per cent of projects have started in Bahrain, 32 per cent in Oman, 28 per cent in Qatar and 20 per cent in the UAE.

These figures lend weight to UAE Vice-President, Prime Minister and ruler of Dubai Sheikh Mohammed bin Rashid al-Maktoum’s assertion that what has been achieved so far is only 10 per cent of his vision for the emirate.

“There are three phases to the Gulf’s current growth phase” says Simon Williams, Gulf economist at HSBC. “From 2003 to 2006, there was a large increase in GDP [gross domestic product] led by net exports. The second phase - the one we are in now - is led by strengthening domestic demand, for which the catalyst is rising investment spending. The third phase begins when that tide of stimulative capital spending starts to recede and we are able to see what kind of economy has been left behind.”

Rising investment

As the region enters this second phase, GDP continues to rise and projects launched during the initial growth period enter the construction phase (see table, page 87). Demand for commercial, industrial, transport and residential facilities is also growing, and from the number and value of projects in the planning stage, it is clear that domestic infrastructure investment will rise accordingly.

According to Standard Chartered Bank, the region will continue to post strong GDP growth. This will be strongest in Qatar, where GDP is forecast to grow to $82.8bn in 2008 from $52.7bn in 2008, but all states bar Kuwait are set to experience double-digit growth. In Kuwait, GDP is expected to grow to $114.5bn in 2008 from $95.9bn in 2006.

The relationship between GDP and construction varies across the region. Construction makes the largest contribution to non-oil GDP in Qatar, where it contributed almost 15 per cent in 2006. Elsewhere in the Gulf, the number was in the 10-12 per cent band. In the UAE, its contribution was estimated at 11 per cent that year, and in Saudi Arabia and Kuwait it was about 10 per cent.

Driving growth

The exception is Oman, where construction accounted for just 5 per cent of non-oil GDP in 2006. However, the recent award of construction contracts on the $2bn Blue City and $800m Wave tourism developments should increase this percentage in 2007.

“The contribution of the construction industry to GDP does not look that high because record oil prices have supported rapid economic growth,” says Williams. “But if you look at non-oil GDP growth over the past four years, construction has played a major role, and I expect that will continue. Spending on infrastructure is stimulative. It supports non-oil economy, it generates employment and feeds into rising levels of consumption. It is an important part of the GDP growth story.”

But these figures do not tell the whole story.Some services supporting the construction industry are classified as independent sectors, so do not fall into the construction contributions. For example, equipment and material suppliers are classified as manufacturing, and project finance falls under financial services. “Construction is not just the people building real estate, ports and airports,” says Williams. “It is also the people supporting it and those who are dependent on the second-round effects of infrastructure spending.”

The fact that the drivers for growth and GDP contributions are broadly similar for all six GCC members states does not mean the Gulf is a homogeneous construction market. The reality is that each city across the region is at a different stage of development. Dubai has led the way with its first tranche of megaprojects, but other markets are catching up.

Maturing markets

“There are degrees of maturity across the region,” says Rod Stewart, regional managing director, Hyder Consulting. “There is definitely a learning curve that Dubai went through five to 10 years ago, and Abu Dhabi and Doha are going through it now, but it is at a faster pace because they have learned lessons from Dubai.”

Each government’s diversification strategy varies. Dubai has targeted tourism, finance, commerce and light industry, whereas its neighbour Abu Dhabi is focusing on creating a high-end tourism destination together with heavy industry that will leverage on its strengths in the oil and gas sector. Qatar is taking another route. Again, tourism and real estate will play a part, but it is also developing its knowledge economy with projects such as Education City.

The sleeping giant is Saudi Arabia. Like Abu Dhabi, it plans to capitalise on its hydrocarbon reserves by targeting heavy industry, but unlike its smaller neighbours, it has more pressing development concerns. The National Commercial Bank estimates the population will grow to 33.7 million by 2020 and the investment required for new housing alone will reach $300bn. “The drivers in Saudi Arabia are grounded in more traditional economic factors,” says Stewart. “They are addressing them with schemes such as the economic cities and rail projects.”

For the medium term, the kingdom has $125.4bn worth of projects in the planning stages, and a further $527.7bn set to start in the coming five years - a number that even dwarfs the $74.7bn worth of projects planned for the kingdom’s oil and gas sector. In the UAE, MEED projects predicts there are $474.2bn worth of projects yet to move into construction. In Qatar, $44.6bn worth are still in the planning stages, in Bahrain it is $14.5bn, Oman $13.1bn, and Kuwait $195.3bn.

The problem for everyone is that the market is in danger of overheating. Dubai has suffered acute shortages of almost every resource - consultants, contractors, labour, steel, cement and equipment - and the supply chain has been tested at every step. As development gathers pace elsewhere in the region, the market could buckle under its own weight, leading to delays or, in extreme cases, project cancellations.

Politics also plays a role in delaying schemes. Although conflicts of interest are present throughout the region, they are most noticeable in Kuwait, where a string of high-profile schemes have suffered delays as a result of insufficient planning and vested interests held by government officials.

Strong prospects

They include residential and tourism projects on the islands of Bubiyan and Failaka, together with a deep-sea port; the 250-square-kilometre, $86bn Madinat al-Hareer (City of Silk), which included plans for a skyscraper more than a kilometre tall; and several masterplanned new towns designed to relieve overcrowding and traffic congestion in Kuwait City.

But despite these challenges, the prospects for the construction industry remain strong for the medium term. “I expect that for the next three to five years, the market across the Gulf will be stable,” says Stewart. “The pot-ential for risk is small because there is too much momentum.”

The long-term outcome of the building boom is more difficult to predict. Some projects, such as Bahrain Financial Harbour, Dubai Media City and Qatar Science & Technology Park, have clear objectives: to create space for financial, media and technology companies, which should help drive economic growth well beyond the current construction phase. Others, such as the vast residential developments planned for most of the region’s cities, are more dependent on the success of others, because if economic growth begins to slow, demand for housing will subside.

Overall, the wealth of projects planned, coupled with strong GDP growth, should ensure the construction industry continues to enjoy healthy growth. However, the effects of this growth and their success in economic diversification cannot yet be measured.

“The outlook is strong, but until the third phase begins we will not know for sure how successful the transformation of the domestic economy has been,” says Williams.

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