How can GCC construction strengthen its immunity?
As global geopolitical and economic crises mount, reprioritisation and diversification will hold the key to success for construction firms in the Middle East next year
How has 2015 been for your company so far? At face value, the year has been a mixed bag for all construction outfits operating in the Middle East, driven primarily by the topsy-turvy performance of the oil market, and its impact on state funding.
The UAE has already cut fuel subsidies as a first step to what is likely a long-term consolidation of resources amidst turbulent economic conditions, and is likely to amplify its efforts through taxation policies next year.
Unpopular as they might be with some residents of the country, the UAE’s measures will be necessary if OPEC-countries continue with the relentless over-production which has pummelled crude values and left little room for oil-price correction.
Worryingly, the situation is unlikely to change in 2016, given the geopolitical picture of the Middle East at the moment. Conflicts in Syria, Yemen, and Iraq are likely to strain local budgets, besides crippling the security of investments in the region. Equally bleak are the permutations on the international landscape, as Europe struggles to keep up with the ongoing migrant crisis, economic meltdown, and military activity in Ukraine.
All these factors are crucial to development in the Middle East, which has matured into a key regional market for corporate giants from around the world, even amidst challenging economic and political conditions as these.
An understanding of this can be provided by equipment manufacturer Caterpillar, where officials have started to restructure the company’s business model to meet the requirements of an uncertain global market.
On 24 September, 2015, Caterpillar announced it will cut 10,000 jobs by the year 2018 in a bid to consolidate its position against the swinging fortunes of sectors such as mining and energy.
Caterpillar spokesperson, Erik De Leye, told Construction Week in our news analysis for the week (page 18) that this plan – while applicable across all its regions and activities – do not include dealers and distributors.
Undoubtedly, then, it will be interesting to see how Caterpillar’s cautious worldwide strategy pans out in the Middle East over the next three years, especially since its existing operations in the Middle East imply the company is committed to investing in the region.
Caterpillar has poured $7m into a regional training centre for the Middle East. The facility is currently under construction in the UAE’s Jebel Ali area, and is due to open in April 2016.
That Caterpillar has chosen to pool its resources in the UAE also reflects on the general sentiment of the country’s construction market at present, which, despite challenging economic conditions, appears intent to continue with its expansion plans. This is best exemplified by Union Properties, the real estate development firm headquartered in the UAE.
The Dubai-based firm reported a 93% year-over-year drop in its net profit for the first half of 2015, and a 96% slump in its second quarter net profit for the year as well.
Understandably, the UAE’s construction market was surprised – and concerned – after these figures surfaced, but as Ahmad Al Marri, the company’s general manager, tells us in this issue’s face-to-face section (page 24), for now, Union Properties is “financially good”, and has little to worry about.
Al Marri claims the firm’s “profits will definitely [appear low]”, since it hasn’t collected a huge volume of revenues over the years. Union Properties’ balance sheet is also burdened by the number of projects the company began development work on this year, further impacting its profit margins.
Shrouded by the commotion regarding the sizeable profit reductions are figures that paint a more balanced picture of Union Properties’ well-being: The company’s total assets increased, even if only slightly, to $2.28bn (AED8.4bn) in H1 2015, vis-à-vis $2.23bn (AED8.2bn) in the corresponding period last year. Additionally, its gain on the valuation of properties during the second quarter of 2015 was a respectable figure of $33m (AED121.4m).
Union Properties announced in July 2015 that it will invest $544.5m (AED2bn) in the UAE over the next six years, and the company also plans to extend its operations into Saudi Arabia. Theoretically, the idea seems extremely optimistic given current economic conditions.
Realistically, however, expanding across its tried and tested home turf, and into the Kingdom’s untapped residential sector, is a smart diversification tactic by a firm vying for immunity ahead of a challenging new year. So, how’s 2016 going to be for your company?