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Strong economic fundamentals to drive the growth of the GCC construction sector, says Alpen Capital’s latest GCC Construction industry report

Muscat, 27th March, 2012

Alpen Capital today announced the publication of its GCC Construction Industry Report as a part of its Industry Research services. The report focuses on key emerging trends, fundamental growth drivers, noteworthy challenges in the industry, and profiles of six GCC nations while presenting the outlook for residential and commercial office construction sector based on a supply-side approach.

Though the construction and real estate sector has started recovering from the lows of 2008-2009, growth is still far from pre-crisis levels. The growth is also not uniform across all regions within the GCC and while some countries are leading the recovery; others continue to take a more careful approach. Prospects in the Qatari construction market are looking optimistic on the back of strong GDP growth and the successful bid for the 2022 FIFA World Cup. In Bahrain and Saudi Arabia, the focus of the residential construction sector has shifted to providing affordable homes to the low and middle income group population. UAE’s reputation as a safe and stable country amid the recent ‘Arab Spring’ is likely to have a positive impact on the construction sector despite the current oversupply and cautious approach to new investments.

GCC region continues to enjoy premium on rental yields as compared to the mature markets of the US and Europe, which will keep the overseas investor’s interest intact in the sector. Due to low number of transactions taking place in the marketplace, the determination of the price ranges is a challenging task, thereby making this a buyer’s market. We foresee continuation of this phase in near to mid-term.

“In their quest to move away from predominantly oil-based economies, the GCC nations initiated several big projects, with construction being one of their top-most priorities in the last decade”, says Sameena Ahmad, Managing Director at Alpen Capital. She continues, “The GCC construction sector saw a period of spectacular boom and was subsequently adversely affected by the global economic meltdown. Although the sector is showing signs of recovery, investors are still taking a cautious approach.” “The GCC countries have sound economic fundamentals and healthy growth forecasts. The governments of these countries are increasingly looking at developing their non-oil sectors like construction and real estate. With oil prices expected to be stable, any further increases in government spending will support investment and consumer spending, thereby having a positive effect on GDP growth, which will bode well for the overall economy in general and construction sector in particular”, says Sanjay Bhatia, Managing Director at Alpen Capital.

Oman Construction Industry outlook

Residential construction market

Oman’s construction and real estate market did not witness the same boom as exhibited by other GCC member countries mainly due to government regulations (non-GCC nationals were not allowed to acquire freehold interest in land till 2006). However, post 2006, when the government introduced a change in law, allowing foreign nationals’ ownership rights in land located in designated Integrated Tourist Complexes (ITCs), the residential construction and real estate market received a big boost. Since the construction and real estate sector was not as big as compared to other GCC member countries, the global recession in 2008 did not have as severe an impact on Oman as it did on some of its counterparts in the GCC region. With an oversupply of residential units, Oman’s residential construction and real estate market underwent a correction and average lease rates in Muscat dropped by nearly 13% between 2009 and 2010. In the last few quarters, the lease rentals have shown some signs of stabilization. An improving private sector is the primary driver for the recent growth in Oman’s economy. The number of employees in the private sector has grown by 20.7% from 2008 to 2010 leading to a surge in demand for properties. The residential prices which fell significantly from their peak in 2008 showed signs of stabilization in 2011. We expect this trend to continue in future (particularly in Muscat) on the back of a recovering economy. We expect demand for residential properties to be strong in the well developed localities of Qurum, Shatti Al Qurum, Madinat Qaboos, The Wave and Muscat Hills. Over the long-term, Alpen Capital has an optimistic outlook on residential construction markets on the back of increasing population and rising employment levels.

Commercial construction market

Oman, is currently facing a steep fall in property prices due to oversupply and muted demand. In Muscat, stock of modern commercial office space has increased drastically over the last few years on the back of economic and demographic growth, government diversification and privatization initiatives. However, Grade A buildings which meet the requirements of multi-national companies still remain in short-supply. This situation might change in the next one year with the completion of several office buildings like Al Rawaq Building in Qurum and Tilal Complex in Al Khuwair. According to Alpen Capital, the commercial office properties market will continue to be marked by oversupply in the short to medium-term as new supply enters the market. However, though the overall commercial office properties market will remain oversupplied, quality new office space in smaller modular units will be in undersupply. Prices as well as rentals will continue their downward spiral in the near-term. Due to lack of suitable office space around Muscat, many companies are looking at the option of constructing purpose built offices, which may result in further downward pressure on occupancy levels and rentals in Muscat. Over the long-term, Alpen Capital has an optimistic outlook commercial office construction markets on the back of increasing population and rising employment levels.

Key Growth Drivers

Continued growth in global oil demand and an increasing long-term trend in oil prices have given a boost to GCC’s economy. With oil prices expected to be stable, any further increases in government spending will support investment and consumer spending, thereby having a positive effect on GDP growth. Positive GDP growth forecast for the GCC region is expected to be translated into an increase in construction activities. Increasing urbanization and young & growing population base is likely to drive the construction sector across the GCC region. The GCC is also home to a large expatriate population and in a bid to drive real estate growth and investment, the governments of several GCC countries have opened up the real estate sector to foreigners, allowing them to own/lease properties. This, combined with the increasing influx of expatriate population in the region mainly due to shortage of skills among local nationals, is likely to drive housing demand in the GCC’s member countries. Most of the GCC member countries have also been pro-active in changing their existing regulations in order to attract Foreign Direct Investment (FDI) and provide better living conditions to the expatriates providing a further boost to the construction sector. Manageable inflation levels in the GCC region coupled with low property prices (as compared to historical prices) are likely to act as demand drivers for residential as well as commercial construction markets. In addition, UAE and Qatar attracting the emerging market status from MSCI will give an impetus to the growth environment within these countries, inducing increased allocation of funds in the real estate and construction sector.

Key Challenges

Oversupply remains the biggest challenge for the construction and real estate sector across the GCC. UAE remains the worst affected out of the member countries, witnessing a sharp decline in prices and rentals. Alpen Capital anticipates slower than expected recovery to further lead to project cancellations across the GCC region. Numerous large projects were cancelled across the GCC in 2010 and 2011 due to weak investor sentiment and lack of funds. Banks across the GCC regions will continue to remain cautious in extending funds to the construction and real estate sector on the back of current uncertain economic conditions and an oversupply in most markets. The GCC residential and commercial construction market is highly competitive and fragmented, marked by presence of several small and big players across the value chain. The increased competition within the sector is likely to result in competitive bidding by the players which is expected to drive down the margins of construction companies further. The margins of the players in the construction sector are highly sensitive to the prices of the building materials. The GCC residential and commercial construction market is highly competitive and fragmented, marked by presence of several small and big players across the value chain. High attrition rates among expatriate labor workforce remains a major hurdle for the GCC construction sector, as the expatriate laborers are drawn towards their home countries due to better job opportunities there.

Please click here to access the GCC Construction Industry report online.