State of the Union - is the recovery underway?
Cathal McElroy takes a look at the MEP market in the UAE
Cathal McElroy takes a look at the MEP market in the UAE to gauge the real prospect for construction recovery. He talks to top contractors and discovers that, while there is optimism, there will still be casualties.
It is safe to say that it has been a tough few years for the MEP industry in the UAE. Since 2009, the abiding theme of those operating in the Emirates market has largely been one of survival and fortitude, if not politely repressed doom and gloom.
Many companies have struggled admirably to remain going concerns during this bleak and testing period, while others have succumbed – some with more dignity than others.
Refuge has been sought by many in the healthier GCC markets, and with some success. With this seemingly phased exodus to more promising lands it has been tempting to conclude that the future of the regional industry lies in these guaranteed growth markets alone, that the UAE MEP boom was fun while it lasted, but it is time to move on.
But how sound is this rationale? Where does the MEP industry in the Emirates find itself at this point, and where is it going?
In terms of the hard figures facing the MEP industry in the UAE, the 2012 market was valued at close to $7bn, according to Kumar Ramesh, industry manager for environment and building technologies practice at business consulting firm, Frost and Sullivan.
The figure was based on projects executed and planned throughout the year, attributing 25% of project cost to MEP works.
“The market is expected to grow at a CAGR (compound annual growth rate) of close to 7% for the next three to five years,” says Ramesh.
“It was growing at a much higher rate in the years 2008 to 2009 but, in the years directly after, growth rates were pulled to around 1-2% and in even negative in a few cases.”
This return to growth is borne out by the experience of those in the industry, with a general sense that, while firm gains may be some way off, the market is beginning to move again.
Anil Menon, director at CKR Consulting Engineers, says that there are definite signs of progress ahead: “I think there is a lot of activity in terms of the RFPs (requests for proposals). The retail economy seems to be bouncing back. The market is showing more signs of maturity as we are not talking about unrealistic projects anymore but realistic ones.”
With projects seemingly imminent, consultants are sure to be the first onboard. But while this prospect of future business is welcomed by all in the industry, for contractors there is a sense that the MEP market is in a pre-growth phase which is requiring quite a bit of tendering, but also a lot of patience.
“Although there are more projects on offer than previously, the decision time is as slow,”says Burak Kizilhan, business development manager at AE Arma-Elektropanc. “We are working very hard at the tender stage but we have to wait far too long to have the clients’ decisions.”
S.S. Murali, acting managing director at Al-Futtaim Engineering, recognises this bid-intensive climate. “In 2012, and even into 2013, the tender log has been much busier than what it was between 2009 and 2011.”
Contractors, however, are describing a market which is incredibly difficult as numerous firms scramble for the available work, some employing pricing methods which are believed to be unsustainable. “It is extremely competitive,” says Murali.
“In some jobs we see that we can’t offer a lower price because it is already lower than our cost.”
For Kizilhan and his team at AE Arma-Elektropanc, this undercutting prompted some investigative work: “Our tendering and procurement team spent time finding out how these guys can sign the projects with these prices, but we still don’t have any clue.”
Nasser Ezzedin, general manager of Commodore Contracting-MEP, says that this situation cannot last and there will be consequences for those pursuing such an aggressive approach.
“With these low margins it is not a secret that there is a cashflow problem for contractors. Only sustainable and strong companies will be left at the end which, in the long-term will be healthy.”
As contractors continue in what appears to be a fight to the death for some, there is a nuanced response among suppliers regarding the current state of the MEP industry.
Some, such as Stefan Schmied, managing director and head of Gulf region at Geberit, are confident enough to debate expansion.
“We are upbeat and excited about the announcements and the current activities. For Geberit, as an already strong player, the main challenge is how we are going to manage our resources and investments here in the UAE. Is it already time to further expand and how much do you want to invest in further expansion?”
While this optimism is shared by Eng Khalid Al Khatib, CEO of NAFFCO, he also acknowledges that competition is still strong as new entrants continue to join the market.
“There are signs of project movements so it is positive for the supplier at the moment. However, there has been an increase in the number of suppliers which has resulted in major competition. The downturn has not stopped external players from entering the market.”
Jarmo Heikkinen, general manager of metering firm Kamstrup, says that some of these fresh-faced companies may struggle to find sufficient business in the UAE.
“Many organisations in the UAE are sized for bigger volumes than exist at the moment. For that reason, everyone is very eagerly pursing orders, sometimes not always on a healthy basis. Some companies have had to leave the UAE after discovering this.”
With the UAE’s recent troubles, consultants have faced specific challenges of their own. Lee Hall, design director at Atkins, says that demands are even greater to produce quality work and this has led to changes to conventional company structures coming as a result.”
Further changes have come in the UAE MEP consultancy market as smaller companies unable to cope with the economic challenges of the last few years have been swallowed up by larger multidisciplinary firms which, according to Anil Menon, has actually benefited the specialist MEP consultancies remaining.
“After the crisis set in and, with the global acquisitions of quite a few MEP consultants, what remained was probably only a handful of true full-bodied MEP companies.”
Another significant shift in the UAE MEP market has been in its geography. Dubai is no longer the centre of attention for MEP-related companies.
“Growth in the MEP market has shifted towards Abu Dhabi,” according to Frost and Sullivan’s Kumar Ramesh, “with 50% of the UAE MEP market now there, followed by 35% in Dubai. Another 3-5% is in Sharjah, while the other emirates contributing 9%.”
There are some differences between the emirates regulations and codes which affect the MEP industry, and there seems to be a consensus that it would benefit from a unified system.
“One thing I think would benefit the industry in the UAE is a uniform set of regulations and standards for MEP installations in terms of fire, life and safety, green building,and electrical regulations ,” says S.S. Murali.
“Another issue face by the industry in the UAE is the licensing of contractors which, Nasser Ezzedin of Commodore Contracting-MEP says, would improve standards, especially with regards to safety.
“A licence would avoid a lot of substandard MEP companies doing work which is if poor quality. Safety is something that should not be compromised.”
For now there is a general sense of optimism that the worst is over and more certain days of steady growth are to come. In particular, the multi-billion dollar plans announced by Sheikh Mohammed last November for Mohammed Bin Rashid City have provided a psychological boost to the construction industry as a whole.
“Recent developments in the industry are encouraging, as is news of further major projects and committed spend in the emirates,” says Lee Hall. “The fortunes of MEP consultants look a lot more promising than they have done for a long time.”
While Nasser Ezzedin shares this optimism, he is prepared for some trying times before a position of comfort is reached. “It will be tough but there will be a filtration of contractors that will leave only sustainable, strong companies.”
Anil Menon takes a longer outlook to the situation and says that the UAE MEP industry should have a bright future, as all indicators point to a country that will continue to develop.
“The country has the infrastructure in place and we’re now seeing more realistic projects and sustainable projects. In the Middle East, the UAE has an enviable portfolio which will serve it well for a couple of decades to come. It’s a young country but I think it can see growth for another 40 to 50 years.”
- $7bn Size of UAE MEP market in 2012.
- 35% Dubai’s share of the UAE MEP market.
- 50% Abu Dhabi’s share of the UAE MEP market.