Price crunch

The GCC currently enjoys relatively modest construction costs, but will this stability be rocked by the drop in oil prices?

Building costs are likely to keep rising, driven by strong demand in the sector
Building costs are likely to keep rising, driven by strong demand in the sector

On a global scale, construction costs in the GCC currently are relatively low, with supply keeping up with demand despite considerable investment in infrastructure, such as the $200bn earmarked for rail and metro projects across the GCC, and building work to accommodate international events such as the 2022 Qatar World Cup.

A study by built asset consultancy EC Harris, part of the Arcadis group, looked at 13 types of buildings in 43 countries to explain how relative construction costs – production and transaction – are affected by commodity prices, currency fluctuations and demand for certain types of development.

Of the three Gulf countries studied, Qatar came out as the most expensive country for construction, followed by the United Arab Emirates (UAE) then Saudi Arabia, which ranked 16th, 19th and 20th respectively on the index.

Although price increases around the world were relatively subdued over the past 12 months – largely as a result of lower commodity prices and plentiful material supplies, there have been a number of factors pushing up construction spending in the Middle East.

“Investment on social infrastructure, economic diversification investment and event-driven construction are three key trends positively influencing construction spend in the region,” said Christopher Seymour, partner and head of UAE property at EC Harris.

Preparations for major events such as Dubai’s Expo 2020 have underpinned recent spending, the report said, adding that this is expected to be “a trend that will only strengthen over the next few years”.

Qatar, UAE and Saudi Arabia all have a dollar peg on currencies meaning they are less impacted than others on exchange rate movements, but inflation has been driven more by market constraints and price movements, according to the firm.

That being said, the recent drop in oil prices to $50 per barrel leaves a question mark over capital spending priorities, which may come under review in 2015. Saudi Arabia is already showing signs of a slowdown, with its Q4 GDP rate dropping to just 2%.

But despite increasing instability in the Middle East, the desperate need for social infrastructure to accommodate a growing population, and ambitions plans for transport investment could help the market to weather this potential storm.

At present, of the OPEC (Organisation of Petroleum Exporting Countries) members, Abu Dhabi, Qatar and Saudi Arabia are considered to be among the best-placed to be able to continue to fund budget commitments, in spite of public spending pressures.

“The drop in oil prices will have a varied effect on the various industries within the GCC construction markets,” asserts Rob Edgecombe, director at building cost consultancy firm, Rider Levett Bucknall.

“This will be particularly significant in the oil and gas industries, where we have already seen some major projects being cancelled in Qatar,” he continues, adding that he forecasts a slowdown in the construction of oil and gas projects over the coming years while oil firms sit out a period of lower prices.

However, Edgecombe believes that any negative consequences the drop has on building and infrastructure markets will be outweighed by positive ones.

“The primary one will be that any rises in construction material prices due to the booming markets in some of the GCC countries will certainly be curtailed by the lower oil prices, which will affect manufacturing, transport, operations, and numerous other components of the industry,” he explained.

“The UAE and Qatar construction markets have not been affected in recent years by the oil prices, whether they have increased or decreased, so we don’t predict that there will be any particular change in the amount of work.”
If the oil price triggers a change in behaviour, Edgecombe says it would likely be for the better.

“With lower prices, developers may proceed at a quicker pace to benefit economically,” he explained.

“We have not seen any recent significant increase in construction costs on major projects in the UAE and Qatar, despite the large amount of work currently being undertaken. This lower oil price will assist in combatting any proposed increases.”

Rider Levett Bucknall has not “experienced a fall-off in workload or seen any concerns being expressed by developers or clients in the last few months”.

“Enquiries are still coming in and some of the projects tendered in 2014 are showing positive signs. We are quite bullish about the market,” added Edgecombe.

Spencer Wylie, Saudi Arabia country director at project and programme management company Faithful+Gould, says the fall in oil prices will leave Saudi Arabia with its first budget deficit since 2011 but the treasury’s reserve of nearly $750bn means there’s no immediate pressure.

“Strategically important projects and programmes, including social infrastructure such as schools and hospitals, should be largely unaffected even if the oil price remains low for some time,” he said.

Rupert Booth, chief economist at Faithful+Gould, says this is the case for the majority of the GCC countries and that in Dubai, “the Expo 2020 event will ensure a continuing demand for construction”.

“The low oil price will affect the GCC states in different ways,” he said.

“Regarding capital programs, Oman and Bahrain will face the greatest pressure arising from revenue reduction.
Qatar and Kuwait have already asserted that their programmes will remain unaffected and their low production cost and large sovereign wealth funds will allow a few years of low prices to be brushed aside.

“The UAE economy is already substantially diversified. Dubai’s private sector service economy will feel only an indirect effect of the oil price reduction.”

Switzerland, Denmark and Hong Kong are the first, second and third most expensive nations in which to build, although the cost of building in central London is higher than Switzerland. India, Vietnam and Taiwan are the cheapest.

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