Construction in the Gulf is starting to feel the pinch, but many firms remain bullish about the next two years.
The global economic slowdown has finally pricked the bubble of the Middle East’s previously unstoppable construction and property boom. Cleary nowhere in the world is immune from the global credit crunch. Yet there is still a sense of disbelief that the heart of the Gulf’s growth engine might have missed a beat.
Witness the positive noises coming from delegates and speakers at last week’s Arabian World Construction Summit (AWCS) in Abu Dhabi. Most were predicting construction revenues to grow in 2009 and more than 70% said growth would continue in 2010. And with forecasters predicting a short, sharp, shock to the economy – a V-shaped dip rather than a U-shaped one – the feeling was that this is a storm that must and can simply be weathered.
But make no mistake, storm clouds are forming in the usually blue skies of the Gulf. Next week NCE’s Dubai-based sister title Middle East Economic Digest publishes its first ever CEO Forum quarterly business attitude survey. The findings are unlikely to pull any punches. Clearly the collapse of Dubai’s property market has brought with it the biggest problems.
Over the last two decades the emirate has generated spiralling economic growth based on commerce and property. An abrupt end to this has arrived without question and the fear is that the repercussions are only just starting to be felt. To many, the dramatic crash simply represents a long overdue correction to an inflated market. But, to those with businesses based on the Dubai construction economy, it is a severe blow which at best could continue to hit profitability and at worst could be fatal.
With $1.9 trillion (1.33 trillion) worth of construction projects suspended across the region since last October, hardly anywhere in the region seems immune from the downturn. Property developers across the region are suddenly struggling to find buyers and banks are suddenly unwilling to advance funds, so cashflow is a major issue.
Late payment is now at epic proportions with 85% of AWCS delegates reporting increased payment delays of up to six months over the last year. “The business as usual approach is not possible,” explains cost consultant EC Harris area manager Mark Prior. “Liquidity is tightening and that is reflected in people’s ability to pay.”
Consultants and particularly contractors are having to dig very deep to cover their outgoings. And with six months of billing on major contracts possibly adding up to hundreds of millions of dollars, it is unsurprising that people are raising the previously unheard of possibility of going to court to secure payments. “Plenty of people are seeking advice but so far are still reluctant to go to the next stage,” says law firm Trowers & Hamlins partner Andrew Greaves. “But is there going to be a tipping point? That is inevitable. Once one or two push the nuclear button others will follow.”
In an environment in which good client relationships are vital, going to court over late payment is a scary prospect and not something that anyone will push ahead with lightly. But in an environment where many contractors and consultants fear that cashflow will only get worse, litigation is starting to look like the least bad option.
Another concern also threatens to destabilise relationships between construction firms and their clients in the Gulf. Consultants and contractors are seeing an increase in the number of clients abandoning contracts or seeking to renegotiate them. The argument for contract renegotiation is usually justified by the fact that materials and labour prices have fallen dramatically in the last six to 12 months. Construction inflation was, after all, rampant at between 8% and 15% in 2008, so the big challenge for clients and suppliers was delivering to price and finding resources to meet schedules.
Yet contractors argue that, since price escalator clauses are not allowed in their contracts, they have either lost out massively due to inflation or have had to pre-order and tie up cash in securing stock. So clients trying to renegotiate or abandon contracts as prices fall are considered unethical by some and downright unlawful by others. This again raises the prospect of legal action.
Another fear is that many state backed property developers in the region are trading while technically insolvent. There is a fear that, should the global financial situation worsen, governments might allow these operations to go under. Hearts say perhaps that this is unlikely to happen for fear of undermining confidence in the region. But heads must surely recognise the costs and losses currently tied up in some of the larger and more ambitious property developments.
Meanwhile, there is an underlying optimism surrounding the fact that this region has built up a very effective construction industry over the last couple of decades. There can be no doubt that it has achieved a phenomenal amount and working in the everything is possible culture has pushed back boundaries in so many areas. On top of this is the realisation that there is still work to do, particularly in infrastructure. “Now it is the role of the government to stimulate the economy,” Al Jaber Group chief operating officer Fatima Obaid Al Jaber told ACWS delegates. “Government needs to stimulate the construction economy through investment in infrastructure projects.”
Aldar Properties chief operating officer Sami Asad agreed that public investment in infrastructure was the solution and in particular pointed to the huge demand for affordable housing. “Government should invest in long term sustainability – that is infrastructure,” he said. “That means in the good years investing a major share of your profits in your own back yard. Investment in infrastructure underpins all real estate development.”
Delegates at the summit agreed, with 79% saying that governments should be doing more to ease the crisis and 36% saying that investment in infrastructure was the solution. Burooj Properties managing director Adel Ahmed Al Zarouni, added that public infrastructure spending would drive recovery. “The United Arab Emirates and the Gulf Cooperation Council states are least affected by the downturn because government spending will be the key to taking us out of the this problem,” he said. “We are continuing with all our projects. The market will rebound – 2010 will be better than 2009.”
Of delegates polled at the summit, 37% expected power, water and wastewater projects to attract investment cash, while 27% said that public spending on schools and hospitals would command the lion’s share. Another 14% backed public investment in roads and bridges. Despite these hopes, Dutco Balfour Beatty managing director Grahame McCaig said that there was a need for businesses to scale back following the recent period of excess. “We need to restructure our businesses,” he said. “This year is the beginning of the reality check. Quality and capability are the key and this market gives us the opportunity to reorganise.”