Analysis: Counting the costs
Middle East faces challenges in controlling construction costs
Qatar ranks as the most costly Middle East location to build in, according to EC Harris’ ninth annual ‘International Constructions Costs’ report. The rankings were based on comparison of average costs in Euros of 21 building types, relative to the UK.
The FIFA World Cup 2022 hosts were 15th on a list 47 countries, bookended by Hong Kong in first place and India in last place. Regionally, it was followed by the UAE (20) and Saudi Arabia (21).
The report predicts that real GDP in 2014 in Qatar and Saudi Arabia, unlike the UAE, will be slightly down on last year at 5% and 4.3% respectively. The UAE is expected to rise from around 3% in 2013 to 3.7% in 2014.
EC Harris says that in the medium term, global construction is expected to show substantial growth in most markets, which will create continuing challenges around resource allocation and certainty of delivery.
It puts the GCC alongside the likes of the United States and parts of Europe that have started the process of recovery after the 2008 crash; however the global economy is still vulnerable to slowdowns in emerging economies such as China and India, and the West and Japan are still highly dependent on high levels of stimulus.
In any case, the volume of global construction output is predicted to grow by 70% in real terms to $15tn by 2025, the report says.
As for the GCC itself, there are increasing signs of a more general recovery of construction markets but challenges in controlling costs loom large.
Qatar’s construction market, although traditionally very small, is about to change with a set of major programmes linked to the 2030 National Plan and Fifa World Cup 2022; while investments have already been seen in social infrastructure, transport and energy infrastructure to support economic diversification, population growth and major global events.
For instance, contracts have now been awarded for phase one of the flagship Doha Metro project, which encompasses - Red Line North (RLN), Red Line South (RLS), the Green Line (GRN) and the Major Stations - Msheireb and Education City.
EC Harris says Qatar’s resource and cost challenge will be related to the speed of proposed developments, and more so when you consider that Kuwait Financial Centre Markaz estimates that 30 highway projects are going to be awarded to build adequate roads for hosting the World Cup. EC Harris points to the challenge of procuring skilled construction professionals and some imported minerals mainly due to the current state of transport infrastructure.
At Construction Week’s Leaders in Construction UAE summit in September, it was noted among panelists that construction costs in Qatar have the potential to ramp up quickly if procurement is not accelerated and additional capacity built over the next couple of years.
The EC Harris report says that for now, prices remain stable – despite Qatar’s lofty position in its construction cost index. It adds that that there is currently enough capacity in local supply chains.
As for Saudi Arabia, the report says that from a resources perspective it suffers from high levels of unemployment, so consequently labour supply shouldn’t be a problem. However it notes that measures to reduce the use of expat labour – such as the SR2,400 ($640) Nitaqat levy per expat worker employed over a certain level, and the recent visa crackdown –may create constraints in the short term as local labour is more widely used.
Indeed, Sekip Senturk, of contractor Saudi Arabian Baytur, has previously stated that some smaller companies in the supply chain are struggling to cope after seeing a significant portion of their labour force withdraw from the country. And local contractor Al Khodari & Sons blamed increased costs associated with implementing Saudization policies for a near-halving of profits during the nine months to September 30 this year.
So far around 180,000 expats have left the country as a result of the levy law, says EC Harris.
In addition, it says that “patchy distribution” could affect the delivery of some projects and hence overall cost, but there is at least a good supply of materials due to investment in local industry. Inflation in the country has invariably run at around 5% per annum over the last 4-5 years.
As for the UAE, the report states that although it “may have been turned a corner”, with houses prices, aviation volumes and hotel occupancies all pointing to positive growth, it is still too early to conclude a full recovery.
But with it being a well-established construction market, access to diverse resources and a skilled expat labour force isn’t an issue. Some experts have concluded that the danger for the UAE, if it does stage a recovery, could come from competing with both Saudi Arabia and Qatar for resources. The report notes that wages are increasing at around 4% per annum, and materials should be plentiful until at least the end next year.