MORE THAN BRICKS AND STONES
WITH PREPARATIONS FOR THE 2022 FIFA WORLD CUP IN FULL SWING, THE CONSTRUCTION SECTOR HAS BEEN WITNESSING A LOT OF ACTIVITY, WITH DOHA LOOKING LIKE A GIANT WORK-IN-PROGRESS.
With preparations for the 2022 FIFA World Cup in full swing, the construction sector has been witnessing a lot of activity, with Doha looking like a giant work-in-progress.
Qatar's projects market saw a growth of 26%, with the projects awarded increasing by 21% between 2012 and 2013. According to MEED, from 2008 to 2013, Qatar's project market accounted for 12% (QR349.44 billion) of the total projects awarded in the GCC.
The construction sector's contribution to the economy has also grown since 2013. As we can see from the graph in the next page, the sector is poised to contribute 12.1% in 2014 as compared to 10.5% in 2013.
This comes as no surprise, as in anticipation of the FIFA World Cup Qatar plans to invest QR509.6 billion in the next five years to build its transportation system. Attention is also being paid to building affordable housing in the run-up to the event.
Sheikh Mohamed bin Faisal Al Thani, Vice Chairman of the Aamal Group, speaks about the growth in the manufacturing sector, which has fed into the construction sector boom. He attributes this growth to the concentrated efforts of the government and its vision.
“In the decade up to 2013 the value of Qatar's manufacturing output rose from QR12.4 billion to QR32.9 billion (in constant 2004 prices). During those years, the variety of industrial manufacturing enterprises also increased considerably. Products such as ready mix concrete, cables and pipes – all essential to the country's development – either began to be made in Qatar or saw their production rise,” he says.
He adds that manufacturing companies in Qatar expect that the burst of infrastructure work over the next five to eight years will boost profits and justify their shareholders' investment. “Cement output will go up from 6 million tons per year in 2010 to 10 million tons per year between 2015 and 2018. About 15% of infrastructure spending over the next five years will be on pipes alone, ranging from water and sewerage pipes to massive pipes for the metro and railway. Therefore, we believe the industrial manufacturing sector offers attractive investment opportunities.”
“Cement output will go up from 6 million tons per year in 2010 to 10 million tons per year between 2015 and 2018. About 15% of infrastructure spending over the next five years will be on pipes alone, ranging from water and sewerage pipes to massive pipes for the metro and railway. Therefore, we believe the industrial manufacturing sector offers attractive investment opportunities.” SHEIKH MOHAMED BIN FAISAL AL THANI Vice Chairman Aamal Group
“Since the transition to power of Heir Apparent HE Sheikh Tamim bin Hamad Al Thani, and the subsequent appointment of HE Abdulla bin Nasser bin Khalifa Al Thani as the Prime Minister a year ago, we have seen many changes in key positions and a willingness to take important decisions to drive progress.” CHRIS SCUDAMORE Advisory Partner Pricewaterhouse Coopers
According to reports, Qatar's project market in 2014 will witness significant activity with infrastructure and transport contract awards expected to peak at QR87.36 billion.
Talking about the buoyant atmosphere in Qatar, Chris Scudamore, Advisory Partner, Pricewaterhouse Coopers, says: “The value of contract awards has increased significantly in 2014 compared with the previous year, driven by the rail and road projects in particular. Since the transition to power of Heir Apparent HE Sheikh Tamim bin Hamad Al Thani, and the subsequent appointment of HE Abdulla bin Nasser bin Khalifa Al Thani as the Prime Minister a year ago, we have seen many changes in key positions and a willingness to take important decisions to drive progress.”
Robert Kidd, Managing Director of Muehlhan Qatar, a German company involved in major projects, echoes the same sentiment about the boom in Qatar's economy and attributes it to the construction sector. However, he is quick to add a word of caution and says that Qatar needs to be careful and learn its lessons from countries such as the UAE and Malaysia, which faced challenges because of this sudden growth.
Farouk Soussa, Head of Middle East – Economics at Citibank, holds a different viewpoint. “The construction sector will be a strong source of non-oil economic growth in the coming years, but could also result in imbalances in the non-oil econo- my as the risk of oversupply in housing, office and leisure property is very real. These imbalances could cause significant volatility in the real estate sector, which will have a negative impact on the economy through its effect on construction and also on the banking sector, which will become increasingly exposed to property,” he says.
The work log
Doha alone has a considerable backlog of work to execute between 2014 and 2019, with associated contractor and third party opportunities valued at QR327.6 billion, including QR145.6 billion worth of roads, ports and rail work as well as QR69.16 billion in construction projects.
In addition, the Qatar Tourism Authority plans to invest close to QR72.8 billion on infrastructure, since the number of tourist arrivals is projected to reach 3.7 million by 2022.
A number of projects, such as those by Lusail Real Estate Development Company have been launched, which will increase the number of residential units. With The Pearl already offering a capacity of close to 20,000 such units, the question is will it all lead to an oversupply?
Dr Tarek Coury, Senior Economist at Silatech, doesn't seem very worried about it. According to him, the population of Qatar is rising, and this includes the higher end of the society as well and to fill these 20,000 units would only require about
50,000-60,000 people, which is possible. He adds that if more projects such as Lusail came up, then there might be an oversupply of such projects and cause potential risk to The Pearl.
Besides completing the required stadia, infrastructure and hospitality facilities for the FIFA World Cup, Qatar is pursuing massive urban development projects with around QR1.27 trillion projects currently in the planning or construction phase and another QR618.8 billion worth of projects expected to be awarded over the next few years.
The challenges are many
However, as always, the road to growth is never an easy one and it is no different in Qatar. There are numerous challenges in terms of competition for material and labour, both skilled and unskilled. Inflation is another cause for concern. According to a report by EC Harris, Qatar must take action to avoid construction inflation in the country from reaching 18% a year from 2016 to 2019.
The demand for materials is increasing steadily, leading to an increase in price. This could lead to a delay in projects. There is also the issue of meeting the increasing demand for water and electricity for all these projects.
According to industry experts, there is a need to streamline the supply chain and encourage local providers and international businesses to work together.
Dr Coury elaborates on this point and says that it's not only the cost of raw material which is a cause of concern. For a real estate developer, a major cause of concern is the high price of land, which will have a negative impact on them.
“Land price can be as much as 50% of the gross development value (GDV) in Qatar. Therefore, this inflation of land price can be burdensome for real estate developers, especially those who are catering to mid-level clients. From a local company's perspective the main challenge is the inability to cover the market needs and match the rapid pace of developments,” Dr Coury says.
Haytham Sadeq, General Manager of Seero Engineering Consulting, says: “We are focusing on traffic engineering requirements for the new projects but we are also receiving more demand from current buildings to help them improve their traffic operations.”
He also adds that they need more flexibility from the government in attracting skilled human resources to work in Qatar.
So how does the future look? While the view is one of optimism, it comes with a note of caution.
Scudamore points out that they are seeing a strategic focus on the development of the Qatar economy, rather than overseas investments.
“We are also seeing government's willingness to improve the business environment for foreign firms wanting to start their offices in Qatar.” The construction sector will continue to grow and reach its likely peak in 2016-17 based on current spending plans, he adds.
Farouk Soussa echoes the same sentiment and says that there will be more visible signs in the coming months that Qatar is adapting to attract foreign investment.
He further adds that the one possibility that Qatar should be prepared for is the inevitability of a "sudden stop" – when all is built and ready, and the future pipeline dries up. At this point, the construction sector collapses and an exodus of professionals in that and related industry would exacerbate over supply concerns.
To conclude, Qatar will witness an exponential increase in construction activity in the next three years. While this offers businesses, both foreign and local, tremendous investment opportunities, what needs to be seen is whether Qatar can keep up with the challenge of maintaining a steady supply chain of raw materials and keep inflation in check
“Qatar needs to be careful and learn its lessons from countries such as the UAE and Malaysia, which faced challenges because of this sudden growth. We are focusing on traffic engineering requirements for the new projects but we are also receiving more demand from current buildings to help them improve their traffic operations.” HAYTHAM SADEQ General Manager Seero Engineering Consulting “Land price can be as much as 50% of the gross development value (GDV) in Qatar. Therefore, this inflation of land price can be burdensome for real estate developers, especially those who are catering to midlevel clients. From a local company's perspective the main challenge is the inability to cover the market needs and match the rapid pace of developments.” DR TAREK COURY Senior Economist Silatech