Analysis: New Year cheer
The construction industry expects good growth in 2014
The region’s construction sector is entering 2014 in a more positive frame of mind with regards to future workloads and volumes than in recent years, according to law firm Pinsent Masons.
The firm presented the results of its annual 2013 survey at an event in December, where it held a panel debate with a number of industry insiders to discuss market conditions for 2014 as well as the likely impact of Dubai’s Expo 2020 win.
Contractors made up the biggest group of survey respondents (41.7%), followed by consultants (30.3%), developers (10%) and other industry professionals.
The survey found that nine out of ten (90.3%) firms were looking towards an improvement in the Gulf’s construction market at the end of 2013, compared with 70.2% in 2012.
Presenting the results, the head of Pinsent Masons’ Gulf region, said: “Without a shadow of a doubt, the optimism is there. Order books look healthier as well.”
Although 6.9% of those surveyed expect a drop in order books of up to 10% over the next year, and just over 4% anticipate smaller decreases in workload during 2014, over 26% feel project pipelines will increase by 6-10% and over 40% believe order books will increase by over 10%.
When looking at the sectors that are expected to provide the best opportunities for construction in 2014, transport remains the key area. It was cited by 65.3% of respondents, compared to 72.3% in 2012.
However, the real change is in real estate. Only 19.1% saw strong opportunities in the property markets at the end of 2012, but this figure increased to 50% in the latest survey. The other major climber was public building projects as governments in Abu Dhabi, Qatar and Saudi Arabia all announced major public infrastructure schemes in the year.
The property recovery in the UAE has also meant that the country has once again become a greater focus for construction professionals. When asked which MENA market will deliver the strongest growth in 2014, 30.6% of respondents cited the UAE – more than double the 15% recorded in Pinsents Mason’s 2012 survey.
Saudi Arabia remained the market that offered the strongest growth prospects, although the proportion of respondents stating this fell to 41.7% from 47% in 2012. Qatar also fell to 15.3% from 22% last year, while the worsening security situation in Iraq meant that only 2.8% cited it as the key growth market (2012: 6%).
When asked about the likely impact of the Expo 2020 win on the sector (the survey was undertaken before the positive outcome was known), more than two-thirds of respondents (68.1%) were cautiously optimistic, expecting “some positive upswing” in work as a result of the announcement.
Over a quarter (26.4%) believed there would be a “dramatic upswing”, and 5.6% felt the impact would be negligible.
The popular view was reflected by the panel of experts, which included Khansaheb Civil Engineering’s group business development manager, Jonathan Eveleigh.
“I think cautious optimism is exactly the right way to view things,” he said.
“Inevitably, there is optimism now as a result of the decision. As a contractor, we are hopeful that it will lead to work.”
However, he added that much of the projects likely to emerge as a result of the 2020 decision will be infrastructure-related.
“The buildings part of it may be a little more limited than many people were thinking. A lot of the exhibition space is effectively modular and to a certain extent temporary,” Eveleigh added.
“There will, of course, be a lot of associated work around it in terms of hospitality, perhaps some retail and some residential.”
He also pointed out that although the masterplan has already been created, work on the detailed design for the Expo site itself is still ongoing, which means that any project work emanating from it is unlikely to start on site until 2015.
“People will be starting to position themselves over the next 12 months or so. It’s still very early days,” he said.
DTZ’s Dubai-based head of valuations Antony Schober argued that the impact of the Expo 2020 win on the property market will also be muted, which he says is thanks in part to regulations put in place by Dubai’s government to prevent speculation.
“In the short term, if we were asking this question five or six years ago what I’d expect is that people would be sitting at a developer’s office with chequebooks, buying and flipping real estate. That’s what the market was doing. It was really sentiment-driven.
“Now we’re starting to see the market moving more on fundamentals.
“It’s a more mature market forming in the UAE, which is testament to what we’ve been seeing pre- and post-decision. We’re not seeing a huge amount (of price increases) in the residential sector.”
The UAE also came out as the dominant market when people were asked to name which are the easiest territories in which to do business, cited by 95.8% of survey respondents. This was way ahead of Oman in second place (cited by 41.8%) and Qatar (37.5%) in third. Saudi Arabia was cited by only 10.6% of respondents, and Libya and Iraq only 2.8% each.
In terms of sources of new work, despite the award of major packages for the Doha Metro during 2013, 69.4% of respondents said that the Qatar market continued to disappoint in 2013.
The cost of capital also continued to rise, with 52.8% of respondents stating that raising money was more expensive than in 2012 and only 4.2% arguing that it was less expensive.
“There’s still a degree of concern that things are still quite expensive out there,” Kerur said.
Jesdev Saggar, a director in Deloitte’s Capital Projects advisory team, argued that he “can’t see a tremendous uptick in sources of finance” during 2014 - particularly as significant chunks of debt incurred by companies linked to Dubai’s government are due to mature this year. These will need to be renegotiated, meaning that liquidity for new ventures could remain in short supply.
Saggar also pointed to the forecasts made by EC Harris and others predicting potential double-digit inflation in infrastructure costs as the expected wave of metro and other mega-projects across the GCC place a burden on materials costs and salaries.
Eveleigh said Khansaheb Civil Engineering was forecasting cost increases by “by somewhere between 7-9%” during 2014, which it hopes to be able to pass onto clients as margins gradually recover in a strengthening market.
Moreover, in terms of payment schedules to contractors from clients, the forecast “seems to be getting progressively better”, according to Kerur.
“We asked whether payment periods were getting longer or shorter when compared to the previous year,” he said.
“Although 61% said they were longer, that’s a drop from 78% so things are looking more positive.”
When asked what changes could be made to improve the industry’s fortunes, Eveleigh said that he would like to see improvements to health and safety regimes across the GCC.
Schober said that he would like to see more measures to curb property ‘flipping’, by restricting ownership until a project is completed, for instance, while Saggar said that he would like to see greater consumer protection for buyers.
Ramboll’s director of transport planning, Arman Farahmand-Razavi, argued that a system that would allow consultants and contractors who had pre-qualified to work in one Emirate to be cleared to work on projects in others would remove a significant “regulatory hurdle”.