Confidence returns to construction market

While frustrations remain, MEED’s survey of industry executives reveals growing optimism in the sector

With tower cranes once again sprouting up across Dubai’s skyline and Doha and Riyadh making huge investments in infrastructure, there are a growing number of indicators that suggest the region’s construction industry has not only recovered from the contraction in project spending that followed the 2009 real estate crash, but is set to boom once again.

MEED’s Gulf Projects Index shows that almost $3 trillion-worth of major projects are currently planned or under way across the region, and the award last week of $5.4bn of contracts on Qatar’s Doha metro – some of the biggest infrastructure construction contracts ever awarded in the region – are further indications that confidence has been restored to the market.

Market outlook
At this year’s Arabian World Construction Summit, held in Abu Dhabi in mid-May, MEED surveyed a select group of senior construction industry executives to gauge their views on the health of the region’s construction industry and the opportunities and challenges it faces.

The primary conclusion from the MEED Construction CEO Forum 2013 suggests that while there is a broadly positive view about the outlook for construction activity in the Middle East, the industry is more fragmented than it has ever been, with some very hot markets in the oil-producing GCC, such as Qatar and Saudi Arabia, promising a new boom, while others are stagnating, or even shrinking, as the ramifications of the 2011 Arab Uprisings and the impact of the global slowdown continue to be felt.

The forum, which involved 35 senior construction executives in a closed-door session, also showed that the issues facing the industry are considerably more complex and nuanced than the headlines suggest. The region is struggling to get to grips with a wide range of issues such as the ongoing reliance of public sector clients on lowest-price-wins contracting models, to huge changes in the labour market as governments step up their drive to encourage employment of locals.

At a macro level, the CEO forum revealed that there is universal optimism about the prospects for construction in the region in 2013, with about 80 per cent of those surveyed saying they believe the Middle East’s construction market would expand in the coming 12 months. About 15 per cent believe the market will grow by more than 10 per cent in the year ahead.

Unsurprisingly, Qatar and Saudi Arabia came out as the region’s hottest markets, with everybody who had an interest in those countries saying the markets would grow strongly in 2013 and nearly half the respondents forecasting growth in construction above 10 per cent in both. The only other market to receive a 100 per cent vote of confidence in its growth prospects for the year ahead was Iraq, although a smaller percentage (35 per cent) believe growth will be in double figures.

For most other markets in the region, a significant percentage of those surveyed, somewhere between a quarter and a third, felt there would be no significant growth in the coming year. About 10 per cent of the forum members felt that the Bahrain, Morocco and Jordan construction markets would shrink in 2013.

Commercial environment
The contrast with the views of the construction markets beyond the Middle East and North Africa region was stark, with three quarters of the forum saying construction would stagnate outside the region.

Assessing the construction opportunities in the coming year by sector showed some intriguing variations in sector activity across the region. Government-backed social infrastructure projects, such as schools, hospitals and housing, together with power schemes, are seen as offering the best prospects for construction companies across the region in the year ahead, with markets outside the GCC having greater potential.

Inside the GCC, however, there is a very clear sense that many of the best opportunities are centred on the development of transport infrastructure, with rail and airports construction in particular standing out as a GCC growth trend.

Despite the uncertainty in the sector over the past two years and the widespread disappointment that key opportunity markets such as Saudi Arabia, Qatar and Abu Dhabi had failed to deliver on promises to push ahead with big construction programmes, over half of the companies represented at the forum (58 per cent) said that their current order book was bigger than it was a year ago. About a quarter of the firms say their order books have expanded more than 10 per cent year-on-year.

A similar number, however, report no change, while 16 per cent say the value of orders has declined over the past year.

Despite the broad levels of optimism about a rise in construction opportunities, forum members describe increasing competition as a major challenge in the market. Opinion is divided on the impact of this, with about 40 per cent of the forum saying it will push down tender bid prices and put pressure on contractors’ profit margins. About 25 per cent anticipate that overheating of some markets will push up construction contract pricing in the coming year.

One of the biggest challenges construction firms face centres on the changing labour market and, in particular, the impact of government drives to increase localisation quotas.

Forum members reported that the increasing enforcement of localisation policies, particularly in Saudi Arabia, as a result of the Arab uprisings of 2011, was increasing the level of red tape companies have to deal with and making it harder to get work visas for expatriate staff.

In addition, the forum members say the requirement to employ higher numbers of locals, while politically correct, will increase labour costs and cause shortages in key skills. They felt that the renewed focus on local employment quotas needed to be conducted in tandem with extra investment in skills and training if it was to deliver long-term benefits for all.

Despite optimism around project opportunities, almost 40 per cent of respondents foresee a reduction in staff numbers in the coming year, while only 27 per cent anticipate an increase in employees over the same period.

While the majority of forum members (73 per cent) do not foresee a significant increase in headcount, 71 per cent predict a marked rise in labour costs in the coming year, indicating higher salaries for construction workers.

Construction costs
Most forum members also anticipate a rise in plant and materials costs in the next year, although there was no sense of an impending spike in costs, with the survey reflecting a fairly even split between ‘no change’ and ‘growth between 0-9 per cent’ in both plant and materials costs.

The overarching sentiment from the MEED Construction CEO Forum 2013 was of broad optimism that there will be strong growth in construction opportunities in the region in the coming year, but also of ongoing frustration at the primacy given to price in construction tenders by government clients.

In particular, the forum members felt that governments could better achieve key policy targets around sustainability and local employment by broadening the parameters of contract procurement processes to encourage greater focus on these areas.

By Richard Thompson, 5 June 2013