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. “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.
Alpen Capital has an optimistic outlook on the Qatari residential as well as commercial office construction market on the back of healthy growth in population and increasing economic activity.
The residential construction and real estate market of Qatar witnessed a period of high growth between 2001 and 2009, mainly on account of high natural gas production and increased public infrastructure spending which led to a robust economic growth. However, the global economic slowdown materially affected the residential construction market of Qatar in 2010 and 2011, mainly due to a contraction in demand. This led to a sharp decline in property prices in Qatar.
Qatar witnessed increase in rentals before the economic recession with changes in ownership law allowing foreigners to buy property in designated areas of Qatar. The increase in rentals resulted in yields of around 12% in 2008. . However, the global economic slowdown materially affected the residential construction market of Qatar in 2010 and 2011, mainly due to a contraction in demand .The recession had a profound effect on selling price and rentals. This led to a decline in average rental yields across Qatar as a fall in rentals was more when compared to a fall in property prices. Currently, gross rental yields in Qatar stands at around 10%.
The residential construction and real estate market in Qatar has showed signs of stabilizing, particularly post announcement of the FIFA World Cup 2022.
The Qatar market is faced with an oversupply situation which has led to a decline in prices of apartments and villas in recent past. We expect that average selling prices of the residential units will bottom out in the near term, which will result in increasing number of sales transactions across the region.
Alpen Capital has an optimistic outlook on the Qatari residential market on the back of healthy growth in population and increasing economic activity. The population of Qatar, according to IMF’s estimates, is expected to grow at a CAGR of 4.7% between 2011 and 2016 due to an influx of expatriates. This is likely to translate into higher demand for properties between 2012 and 2016. Massive construction plans in preparation for the FIFA 2022 World Cup is also likely to fuel demand for the residential market in Qatar. Alpen Capital also anticipates no further fall in residential unit prices in the short as well as long-term. Further, it is expected that the rental rates of residential properties will increase in 2012, resulting in increase in rental yields.
Commercial construction market After significant activity in the last decade, the Qatari commercial office construction market is also facing a problem of oversupply. Substantial increase in stock and subdued demand for office space has put pressure on property prices as well as rentals in key business locations of Qatar.
Average office prices in Q4 2011 remained stable at QAR14,000 per square meter as compared to Q3 2011. However, new supplies in 2012 are expected to lead to a readjustment in prices over the medium-term.
Alpen Capital expects the commercial office market to be oversupplied in the near-term, with several new developments nearing completion in the near future.
For the longer term, Alpen Capital has an optimistic outlook on the Qatari commercial office market on the back of healthy growth in population and increasing economic activity. Massive construction plans in preparation for the FIFA 2022 World Cup is also likely bode well for the office properties market in Qatar. It is also expected that the rental rates of commercial offices properties will increase from current yields of 10%.
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.
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.