Construction boom to ease

Blair Hagkull, managing director of Jones Lang LaSalle, MENA, discusses how the Middle East construction market will stabilise and mature, and what lies ahead for the industry.

Pundits predict that the construction boom, and as a result the property sector in the UAE, will crash soon.

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What is your opinion?

We are sitting at a point of history. The rate of growth in the Dubai and UAE market is unprecedented in the world, and the catalyst to that growth is the increase in population and inward investments. One of our predictions is that the growth that has been seen in the last five years will not be repeated, and the 20%-40% increases annually are not sustainable. But good returns will still be made.

When demand outstrips supply, people buy what is available. When there is a choice, quality counts. We see 2008 as the year when a "flight to quality" occurs in all sectors of the market. By "quality"' we mean quality of location and position, brand, finish and service.

A number of the big developers are only signing deals with major contractors who have a history of delivery and quality. Apart from the importance of flight to quality, we also see the emergence of a two-tier market.

Just because it's a new building, it does not mean it is a good building. Increasingly, we see that the developer that has good cash flow, design, builders and building managers, is the one that will have the buildings that will retain their value.

We do expect in the coming years a greater consolidation in the market. There are many people who have little experience, historically, that have gone from building warehouses to building towers and usually that evolution in other parts of the world would take a decade.

Increased regulation, particularly in respect to escrow laws so funds are not co-mingled, will ensure people who are doing development have to possess a strong balance sheet. Developers who invest and bring in strong contractors will ultimately achieve strongest sales success.

But with basic issues plaguing the construction sector being ignored, how can the industry improve in the region?

A major part of the flight to quality isn't just the quality of construction, but the quality of management, labour and working conditions.

Workers who are doing physical work should have proper accommodation, nutrition and transport, and the bigger companies are recognising this fact as well.

Groups that are better funded, managed and have a better history, will have healthier workers working in superior environment and will build better buildings. And the companies that don't have these attributes will build poor-quality buildings.

But that is a generalisation, there are exceptional small companies and there are modest big companies, at the end of the day flight to quality talks about going with groups that have a track record and history. Branded construction groups are making a higher margin as developers are willing to pay them more because of greater service.

With the UAE building at breakneck speed, is quality lost?

We are living and working in an emerging market which is maturing fast. The maturity of the real estate market is starting now with international contractors, new licensing requirements and escrow in place.

On one side there are firms that don't have the balance sheets to be able to do things. And then there are firms that are taking on significantly greater awards because they have the capacity to do so.

Apart from Dubai, what are the other regions coming up?

Abu Dhabi is being seen positively as an area of significant opportunity, as UPC is playing an important role and new laws are coming into place. We see great potential in Saudi Arabia.

As the population grows and people need new housing, the demand in the market is being fuelled by the Saudi people themselves. In the tourism sector, Oman is doing tremendously well, apart from Morocco, Egypt, Jordan and Qatar.

With developers cancelling projects in Dubai, is construction heading for a slowdown?

As part of flight to quality the big contractors will continue to outperform modest contractors. As part of consolidation, companies will look to acquire smaller niche companies to make bigger even better. It is important for large organisations to look at geographical diversity not only in terms of where they get their contracts, but in terms of labour and raw materials.

The real estate construction business is a very big business and globally there is nowhere bigger than here. People who are not committed to quality will find tough times.

Construction groups that actively embrace technology to be smarter builders will ultimately succeed in the long run.

Historically, labour has been cheap in this region, so we have had labour intensive construction work. With the introduction of better technologies and mechanisation, companies will become smarter and less dependent on labour.

What is the future of the construction sector in the Middle East?

Just as everywhere else in the region, there will be a corporatisation of the sector. The more professional groups will be able to handle large projects and more sustainable their growth will be.

The ones that are using old style systems, particularly for large projects, will progressively become less competitive.

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