Construction finance concerns keep growing market optimism in the Gulf in check, survey finds

Out-Law News | 03 Feb 2014 | 3:50 pm | 2 min. read

Construction companies operating in the Gulf region are optimistic about the year ahead, although the cost of obtaining finance for projects remains a significant concern, according to an industry survey by Pinsent Masons, the law firm behind Out-Law.com.

The majority of respondents to the firm's sixth annual Gulf Cooperation Council (GCC) construction survey reported that the cost of capital for projects was either as expensive as or more expensive than it was in 2012. Only 4% thought that the cost of capital was beginning to fall, against 53% that thought it was more expensive and 43% that thought there had been no change, the firm said.

However, 90% of those surveyed said that there seemed to be greater optimism in the market going into 2014, while 77% reported healthier order books for the next 12 months as opposed to the previous year. Pinsent Masons surveyed a number of large contractors, developers, consultants and other market stakeholders operating in the GCC; the economic area which incorporates Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE).

"The GCC construction sector is clearly very positive about the outlook for the coming year," said Dubai-based construction expert Sachin Kerur of Pinsent Masons. "The broad base recovery in the construction market sets a solid foundation for growth to continue in 2014, but it remains crucial we capitalise on the potential of this sector at this critical juncture. A number of major projects on the immediate horizon, such as Expo 2020 and the Qatar World Cup, have added a real sense of momentum."

"However, it is important to address the issues surrounding finance. Companies are reporting that the cost of capital is more expensive, and that accessing finance for projects more generally is a concern. They also tell us that their margins are being squeezed due to rising production costs and inflationary pressures," he said.

Kerur said that although access to traditional forms of bank finance remained constricted, the present market conditions could lead to a "real opportunity" for investors as construction firms bypassed the banks in favour of bond issuance and similar forms of financing.

"In some senses the state has little room to influence that, but could consider adopting standard payment terms to improve cash flow and reduce delays in payment," he said.

Longer payment periods and cash flow concerns emerged as the second most common issue highlighted by respondents to the Pinsent Masons survey. However, the number of companies complaining of this fell from 78% in the previous year's survey to 62% in the current survey. 50% of respondents also cited the lack of skilled workers in the region as impacting on growth in the sector.

"A business is nothing without its people and organisations need to invest in their internal development programmes ensuring they are more closely aligned to their businesses' specific needs in the region; which will enable them to deliver on their strategy, drive innovation and ultimately achieve growth," said Kerur. "There is also a need for the GCC's educational institutions to do more to meet the skills requirements of the industry."

Survey respondents highlighted the transportation sector as most likely to offer work opportunities in 2014, and ranked real estate as the second most promising. The UAE was considered by the vast majority of firms as the easiest market in which to do business in the region, although 73% of respondents said that the pace of market growth in Abu Dhabi in particular had disappointed in 2013. Despite highly-publicised infrastructure opportunities in Qatar, 70% of respondents said that the market had also disappointed over the last year.

"Qatar continues to attract major investment due to the wealth of opportunities ahead of the 2022 World Cup and several major infrastructure projects to be procured as part of the Qatar National Vision 2030," said James Elwen, a Qatar-based infrastructure expert at Pinsent Masons.

"This gives rise to a continuing debate on whether the construction industry could 'overheat' as more projects gather momentum – making the cost of delivering Qatar's vision increase as labour and materials become more expensive. However, the feedback from our survey suggests that industry players are not convinced this will be an issue," he said.