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Way ahead: 2015 construction trends

What are the trends likely to emerge from the GCC's construction market in 2015? Yamurai Zendera finds out.

GCC construction industry could feel  the effects of a fall in the price of oil
GCC construction industry could feel the effects of a fall in the price of oil

Recent global events have caused a level of uncertainty in the construction industry about the future direction of GCC economies.

Construction Week has been canvassing the opinions of the industry to discover what trends we can expect to see in 2015. It so happens that this process occured at a time of falling oil prices to levels not seen since 2009, the terrorists attacks in Paris which caused concern about regional security, and the death of Saudi Arabia’s King Abdullah bin Abdulaziz just last week.

The general sentiment among analysts of oil dropping to around $50 a barrel appears to be that GCC states should, in the short-term, be able to weather any negative effects, with Kuwait and Qatar the most resilient, given their very low fiscal and external break-even oil prices, and large reserve buffers. The sovereign wealth funds of the UAE and Saudi Arabia, by the same token, can cover multiple years of government expenditures; however, Bahrain and Omans cannot.

Saudi Arabia and Oman are to run budget deficits this year – of $38.57bn and $6.5bn respectively, or 10% and 8% of their GDP.

The direct aftermath of King Abdullah’s death saw oil prices spike due to uncertainty about Saudi Arabia in the market. World leaders flocked to the Kingdon to pay their respects to the late King and to take in the measure of his successor.

Analysts such as Capital Economics believe prices will remain steady under King Salman’s reign, who in his first address indicated he would follow the policies of his predecessor.

“In any case, the oil ministry is largely headed by technocrats and so it is relatively shielded from changes in the Kingdom’s political environment,” says Middle East economist Jason Tuvey. “Accordingly, we suspect that oil minister Ali Al-Naimi will continue to take a sanguine view of the fall in oil prices and will resist pressure from other OPEC members to cut oil output in order to shore up prices.”

The rush of recent events has hardly allowed firms pause for thought on what it all means for them. Assurances from governments that capital projects will continue unhindered is fine, however, it would be remiss to just assume it’s going to be business as usual.

Indeed, Oliver Cornock, regional editor of market analyst Oxford Business Group, believes the oil price is still “the elephant in the room” for the regional construction and real estate industry.

“Infrastructure has been dominated by government sector spending on the back of these diversification plans.
That’s relatively straightforward to do when receipts are significant. When they are reduced, of course, some questions need to be asked,” says Cornock. “I suspect those questions will also be asked in boardrooms of construction and real estate companies.”

In December, the International Monetary Fund’s (IMF) head of mission for the UAE, Harald Finger, called on GCC states to reign in their spending as oil prices fall.

“The current model where growth in government spending tends to drive the expansion in the non-oil economy is not going to be sustainable with low oil prices,” he told the UAE Economic Outlook Forum. However, at the very same event, UAE Minister of Economy Sultan Bin Saeed Al Mansouri suggested the country would run a surplus until at least 2019.

“While we don’t necessarily see the extreme impact some of the analysts are forecasting, we equally don’t agree with government comments that there will be no impact,” says Keith Levers, head of special initiatives at Larsen & Toubro.

“We foresee projects slowing where there is no critical deadline to meet, for example, Expo 2020 [in Dubai] and the World Cup in Qatar; however, there will be continued investment in infrastructure – roads, rail, metros, airports, healthcare and education.

“We see continued investment in other trophy projects that have already commenced, but we believe new trophy projects are likely to suffer until the price of oil increases and reaches above $85 a barrel.”

Levers believes that for infrastructure schemes in particular there will be a move for contractors to generate project funding in a variety of forms, but perhaps most likely through Export Credit Agencies.

David Clifton, Faithful+Gould’s regional development director for the Middle East, agrees with Levers that there will be a slowdown in new awards for contractors and consultants alike this year, but this will mainly be related to projects that were struggling for feasibility in the first place.

“2015 really is a focus on delivery. Huge programmes such as the Riyadh Metro and Doha Metro, for which Faithful+Gould is providing project controls and cost management, are ramping up to peak loads. Even with a slowdown in new awards, the current workloads will be placing huge demands on the supply chains as competing schemes look to utilise the same resources,” says Clifton. “Subsequently, inflation pressures can be expected within manpower, commodities and equipment.”

However, Ahmed Alhatti, chairman and president of Saudi-based developer Cayan, is more bullish. He says these are “exciting times” for the region’s construction industry as new and stalled projects get released.

“As such, trends to emerge will lean towards the types of construction development happening this year and the move towards implementing more green practices,” he says.

“Significant investments are now also being made in rail and transport infrastructure across the region, which will prove to be a huge boost to the sector. The increased construction activity has covered the mode for new retail construction projects, as retailers become more confident in the improving economy.

In 2015, we expect the construction activity to carry over in a big way. These trends will continue to grow at a rapid pace in order to keep up with innovation in the construction processes and technologies.”

Like Levers and Alhatti, Markos Apostolides, UAE vice president/managing director at Louis Berger, says he sees no slowdown in the rail and retail/hospitality sectors – in the former, the firm is involved on Doha Metro in Qatar and the North-South Railway in Saudi Arabia.

“While I expect current positive spending patterns for both the private and public sectors to remain as bullish as they are, the industry needs to watch for the price of oil,” says Apostolides. “The time it takes for the oil price to recover to somewhere between $80 and $100 will affect the amount of investments and contracts to be executed.”

Michael O’Reilly, a Dubai-based partner and head of international construction at law firm Trowers & Hamlins, says a consequence of the current oil price could be the effect it has on procurement. For example, how parties try to protect themselves against the fluctuating prices of materials arising as a result of the price drop.

“Employers and contractors may want certainty as regards price and opt for the traditional fixed price, lump sum. The more adventurous may seek to look at options to share the pain/gain of key materials prices by adopting a set of indices into their contract which track those materials and adjusts the contract sum accordingly,” he says.
“Contractors who already have a strong order book for 2015 may want to place early orders to take advantage of price drops.”

Others like Patrick McKinney, area manager, BAM International, believe 2015 will see new procurement methods being explored, with a move from fixed-price, lump sum contracts. He suggests two stage tenders like design and build, cost plus, construction management, and management contracting will gain in popularity.

“As the complexity of projects increases and delivery dates are squeezed, the risks facing contractors are becoming unacceptable and alternative procurement routes must be explored,” he says.

This is a view shared by others including Terry Bain, regional operations director (MENA) at Sweett Group, who says “we expect to see non-traditional procurement routes such as design and build becoming more established and understood as a very viable option for fast track and straightforward projects, and we are expecting the number of design-build projects we handle to at least double in 2015.”

Steve Yazdabadi, regional managing director of Wates Construction, says the firm is already undertaking design and build projects in Abu Dhabi.

“The benefits from alternative funding ensures that the funds are visible to the contractor but not accessible until proper performance has been made,” he says. “This protects both the contractor’s shareholders and importantly the client.”

He also expects to see wage and salary inflation as accommodation costs steady at higher levels than two years ago. Indeed, nearly half of respondents in a constructionweekonline.com salary survey published in December said they had received a pay rise in the last 12 months, and just over 60% said they expected a pay rise within the next two years.

“To mitigate against wage/salary inflation, the simple answer is to make some pricing provisions within tenders, the more complex and better value answer is to re-engineer elements of design to ensure there is a greater element of offsite production, thus fixing a cost at an earlier stage,” says Yazdabadi.

Economic outlook
GCC countries are expected to see average economic growth of 4.2% in 2014 and 4.1% in 2015 on the back of robust non-hydrocarbon activities and large budget surpluses, according to a new report.

Credit insurance company The Coface Group predicts that Qatar will see the strongest growth in the region over the next two years, with its economy expanding by 5.9% last year and 6.7% in 2015.

It added that the UAE is expected to grow by 4.3% and 4.2%, Saudi Arabia by 4.2% and 3.8% , Bahrain by 3.9% and 3%, Kuwait by 2.2% and 2.5% and Oman by 3.8% and 4%.

Trend spotter

Christopher Seymour, partner and UAE head of property, EC Harris
The key trend forecasted for the construction industry is more sophistication in terms of procurement – with an increasing number of projects being run as design and build, evidence of two stage processes is becoming more prevalent. This will benefit the industry generally. Contracting firms will be able to differentiate in terms of their experience of the different types of procurement and clients will be able to extract the best economic efficiencies on offer. Project finance will become more complex, as more diverse sources of funding are required for many schemes, particularly in the UAE. This will create greater demands on the consulting teams, while also drive better value from their relationships with their clients.

Terry Bain, regional operations director (MENA), Sweett Group
In respect of specific sectors, we anticipate refurbishment-type projects will continue to grow in number as assets built in the early-to-mid 2000s begin to need an overhaul to keep on a competitive par with new buildings being released onto the market. Consultants and contractors, especially those with an international background, will need to tap back into skills and experience learned outside the UAE to take a share of this growing market.

Michael O’Reilly, head of international construction, Trowers & Hamlins
A number of the early IPP/ IWPPs, particularly in Oman and Abu Dhabi are approaching the end of their original 20-plus years concession terms and government authorities are turning their minds on what is the right model going forward particularly as power and water are still in short supply in most GCC countries. We understand in Oman OPWP will create a merchant market, in Abu Dhabi the picture of what the model going forward after expiry of the initial term will be is unclear.

Hamed Madani, head of business intelligence, Aecom Middle East
One impact is that forward-looking organisations will seek to efficiently capture, store and analyse inter-functional data (design, cost, construction, operation and market), not by exception but as standard operating practice. While technology (such as integrated BIM and asset management systems) may be the conduit for this, it can be argued the true driver is a rethink of standard operating models, greater openness towards informed analytics and changes to cultures and behaviours.

Harmen De Jong, partner – development consultancy and research, Knight Frank
The majority of the GCC states have ambitious strategic tourism plans in place, of which some are supported by airlines that are looking to substantially expand their networks over the next few years. Consequently, destinations such as Dubai, Abu Dhabi and Qatar will continue to see substantial growth. From a hotel performance perspective, it revolves around to what extent the market will be able to absorb the pipeline of new hotel rooms that are currently being constructed and planned.

Jason Hird, senior technical development manager, Gyproc
Gaining some momentum over the last couple of years, we will see a big increase in the use of Building Information Modelling (BIM) through 2015. BIM is able to bring about some of the greatest changes seen in construction industry working practices for decades, offering new levels of cohesive working, helping to provide those greater efficiencies that sustainable construction is all about, and more understood than ever. It looks like the days of throwing up projects in a short as time possible are thankfully on their way out and ‘responsibility’ is in.

Steven Miller, managing director/CEO, Simem Middle East and Africa
I see more interest in modular construction. Modular construction can be anything from full completed steel containers to knock down systems to Pods, to concrete forming systems like the new Nextwall system from Italy, to the old standby of precast panels and slabs. The reason is time, quality, and reduction of labour hours on sites. The intensity of projects in the region require this thinking on all projects from developers, architects, engineers, and contractors with their subcontractors.

Mat Green, head of research and consultancy, UAE, CBRE Middle East
2015 is likely to be another good year for Abu Dhabi with an improving picture across all sectors. Even the office sector, which has seen a relatively flat year, is expected to see a return to rental growth for prime properties with occupier demand for high quality accommodation on the rise as the market experiences a sustained flight to quality. Strong performances are also expected for the residential, retail and hospitality sectors with some interesting new developments set for completion.

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