Understanding the Middle East construction market

Jonathan Brufal.

Jonathan Brufal analyses the results of a survey by Norton Rose on the construction market in the Middle East.

Between April 30 and May 28 this year, Norton Rose Middle East conducted a survey of the construction market in the Middle East.

Those who contributed to this survey ranged from employers and contractors to consultants and banks. The combined turnover of the companies totals an estimated US $11.7 billion (AED43 billion).

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The purpose of the survey was to determine the actual current state of the region’s construction market, in order to judge if the extent of the hype surrounding the downturn in that market, was justified.

Although there definitely has been a reduction in the number of construction projects ongoing in the Middle East, the survey’s respondents were not as gloomy as some commentators.

A total of 55% of those interviewed expected the effects of the economic slump to fade within a year with the construction sector staging a recovery in 2010.

The region’s recovery was expected to be driven by Saudi Arabia, Abu Dhabi, Qatar and, to a lesser extent, Bahrain. Eighty-two percent of respondents viewed these regions as their primary markets at present. However, only 5% of companies interviewed saw Dubai as a
key market.

It is fair to say that these Gulf nations were comparatively conservative during the construction boom of recent years and have suffered less from the economic downturn than Dubai. Another factor, which has certainly assisted Saudi Arabia and Abu Dhabi, is the immense wealth that such markets derive from oil and gas.

One of the respondents even deigned to remark that “Saudi Arabia is the king of the property market. It is recession proof.” Respondents also pointed to the fact that, despite the downturn, the Middle East remains one of the most active construction markets in the world.

As one respondent commented: “there is still more construction going on here than anywhere else.” Other than in Saudi Arabia, where there remains a strong demand for middle income housing, the vast majority of respondents viewed investment in infrastructure as being the driver for the construction sector in the near future, with transport, power and water cited as being the sectors most likely to attract investment.

Many still regard the Middle East as out of date by western standards and in need of sophisticated infrastructure that will support its economic ambitions. It was no surprise to find that Fidic was by far the most used form of contract, despite its lack of popularity amongst the respondents.

It is clear that in the boom time parties were signing up to contracts without the usual levels of due diligence, and this is leading to problems now where there are insufficient contractual mechanisms to deal with variations to projects and the like.

A less frenetic market, and the results that some have seen from failing to review their contracts properly before entering into them, is expected to lead to a greater focus on the forms of contracts used, their terms and the risk allocation within them. Whether this will end Fidic’s stranglehold on the region remains to be seen. There is a lot to be said for familiarity, but as we all know, that can breed contempt.

Finally, it was interesting to note that none of the respondents were formally involved in any disputes. This reflects Norton Rose’s experience as we have a number of instructions related to disputes but none are currently in formal arbitration.

That said, the DIFC LCIA Arbitration Centre (whose arbitration law Norton Rose (Middle East) helped to draft) is apparently receiving requests for arbitration at a rate of one or two per month and this number is likely to go up rather than down over the next few months.

Who is Jonathan Brufal?
Jonathan Brufal is a partner based in the Abu Dhabi office of law firm Norton Rose (Middle East). He specialises in advising on major infrastructure and construction projects. His extensive experience encompasses projects around the world including the Middle East, UK, Africa, Asia and Europe.