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MENA - $726 billion construction and public works underway

Global Arab Network - The Middle East Association

Thursday, 24 June 2010 18:54

With an estimated $726 billion of projects expected to be underway in 2010, the MENA region’s construction industry is still making progress. Alan Mackie reports

The inauguration of the world’s tallest building in Dubai on 4 January, the $1.5 billion, 828-metre-high Khalifa Tower, took place amid the debris of the property crash – a half-built $20 billion real estate development scheme for Downtown Dubai, which may now take many years to complete. It is in the nature of such booms and busts that pioneering projects such as the Khalifa Tower take time to come into their own. And already its pre-eminence is being challenged by Saudi Arabia’s plans – for the present on hold – to build a taller tower near Jeddah.

The Dubai real estate crash has forced the construction industry to change its modus operandi. Many companies are nursing substantial losses on unfinished or abandoned projects and have cut back sharply. The leading Athens-based contractor Consolidated Contractors Company (CCC), for example, anticipates a 20-25 per cent fall in revenues in the first quarter of 2010. At the height of the boom in mid-2008, it chalked up annual sales of $5 billion and employed 170,000 people worldwide, predominantly in the Middle East and North Africa (MENA) region.

Samer Khoury, CCC’s executive vice president, sees some bright spots in government-financed social and physical infrastructure projects. Despite the downturn, airport projects are expected to proceed. CCC is involved in airport expansions in Tripoli, Doha and Muscat and foresees major expansions in Saudi Arabia, Sudan and Abu Dhabi. The company also predicts that population pressures will ensure water and power utilities projects move forward rapidly, but many privately financed projects could run into delays because of funding problems.

It points to the key role that government spending will play in the fortunes of the construction industry. MEED estimates that some $726 billion of projects will be under implementation in the MENA region in 2010, broadly broken down into two-thirds in the Middle East, with Saudi Arabia and the UAE accounting for around $213 billion each, and a third in North Africa. These figures may prove optimistic as the sharp fall in building materials and construction costs arising from the global slump have led to contracts being renegotiated, which will inevitably result in some projects being added to the growing list already delayed.

Nevertheless, the scale of spending is unprecedented. Overall expenditure on public works in Saudi Arabia and the UAE is expected to rise 16 per cent in 2010. Quite apart from the four new mega conurbations planned for the Kingdom, Riyadh is having a $33 billion makeover, which will include the building of a brand new financial district.

The story is even more positive in Qatar, the new star in the Gulf Cooperation Council firmament that has $34 billion of projects scheduled to start in 2010, including the first phase of the Heart of Doha urban development project and the Hamad Medical City.

Prestige projects, such as the 510-metre Qatar National Bank headquarters, which have state backing, will be tendered later in 2010 as planned but strictly commercial real estate development is hamstrung by project delays and late payments. Nevertheless, the Pearl Island project, Qatar’s answer to the benighted Nakheel scheme, and the Lusail waterfront development, are rare examples of Gulf real estate projects still in business.

Qatar and its educational foundations have attracted top-notch international universities to open facilities in Doha, such as the Carnegie Millennium University. This long-term educational programme is in its infancy; many other projects will follow.

New medical facilities feature large in the MENA region’s development plans. Saudi Arabia intends spending $21 billion on hospitals and the UAE $18 billion. The UAE is embarked on a major expansion of its educational and medical facilities. Abu Dhabi in particular has a large number of projects planned, including the Cleveland Clinic.

Libya, an important new market for Western contractors, plans to spend $8.7 billion on new hospitals as it begins to make up for a generation of lost development. It is also investing heavily in educational infrastructure. Tripoli’s Al Fateh University, for instance, is to be expanded at a cost of $3.2 billion.

The country is also spending heavily on urban development. Housing and infrastructure take the biggest slice – $7.4 billion – of the $19.3 billion project budget for 2010. A shortage of high-income housing fuelled a real estate boom in Tripoli, which has fallen foul of the Dubai property crash, forcing Dubai’s Emaar Properties to put its self-contained tourist/business city near Tripoli on hold.

Nevertheless, some high-end construction work continues. Keen to promote foreign participation in the downtown development of Tripoli, where six or more tower blocks are planned, the authorities are offering up to 65 per cent equity in real estate joint ventures. Meanwhile, the advent of the major international hotel chains in Libya has prompted a flurry of construction of five-star hotels.

Major urban development is also taking place in Benghazi and other cities. A new community of 29,000 homes plus a five-star hotel is planned for petrochemical and industrial hubs being built around the oil export terminal at Marsa al-Brega in the Gulf of Sirte. In all, dozens of contracts have been signed with Asian, Turkish and North African construction companies for more than 60,000 low- to medium-income housing units. Libya offers a particularly promising opportunity for small- to medium-sized construction companies with the right entrée to win big-ticket contracts, but they must have the stamina and need to protect their payment terms, says one consultant.

The provision of low-cost housing is an urgent priority in most Arab countries. Egypt, Algeria and Morocco have long had state-run schemes promoting affordable housing – Egypt in developing a string of new cities around Cairo. A recent USAID study identified a cumulative deficit of 4.5 million low-income homes in Egypt – in contrast to the high-end residential property market that is now oversupplied – and an annual demand of 150,000 units. It recommended incentivising investment in low- and middle-income housing through tax breaks.

Such incentives have to be carefully managed, however. In Morocco, which for some years has offered such incentives, a change in the tax regime led to the number of low-income homes constructed in 2009 plunging to 35,000, compared with 129,000 in 2008.

Algeria has a chronic housing shortage, thanks to high rates of urbanisation and population growth. One study estimated that even with an average of 220,000 new homes being added to the housing stock each year there would still be a cumulative deficit of 2 million units by 2015.

Most of these contracts are awarded to local, regional or Asian companies, but they offer a market opportunity for the provision of building supplies and prefabricated housing. Vefa Group, the Turkish prefabricated construction company with offices in Libya, Algeria and Dubai, has been relatively unaffected by the market downturn.

Prefabricated constructors may have lost out at the top end of the market, in the supply of office and worker accommodation for prestige developments, when the real estate market crashed. However, they have benefited from the upturn in government project spending, in supplying accommodation facilities for large public works and infrastructure projects and also in supplying prefabricated units for state-funded low-cost housing programmes.

While the high-end of the market undergoes a painful restructuring, state-funded construction projects are keeping the industry alive – and in some sectors prospering.

Global Arab Network

Alan Mackie is editor of Middle East Business Focus 2010. This article is published in partnership with the Middle East Association, and was published by News desk Media in the Middle East Business Focus 2010 on behalf of the Middle East Association.

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