“Strong economic fundamentals to drive the growth of the GCC construction sector”

Alpen Capital’s latest GCC Construction industry report

This report conducted and written by Alpen Capital 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”, saysSameena 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,” she continues.


“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.

UAE Construction Industry outlook

The UAE residential and commercial market is still searching for equilibrium as funding has been curtailed, projects scaled back and contractor resources downsized. Developers in the UAE will continue to take a cautious approach in the short-term in view of existing oversupply.

Residential construction market

The residential construction market of the UAE is still struggling to reach its pre-debt crisis levels. In 2011, mounting debt issues in both the Eurozone and the US and fears of mature markets slipping back into a recessionary phase has made investors wary of investing in UAE realty projects, particularly in Dubai. This led to many big projects across the UAE, being kept on hold in 2011. The average prices and rentals of residential units have yet to reach their 2008 levels and continue to witness a fall in some areas.


Though the UAE residential construction market is still marked by oversupply, the market did show some signs of stability, particularly in the second half of 2011. Moreover, the real estate market of UAE (particularly Dubai) was affected positively by the recent “Arab Spring” in some parts of the Middle East, reinforcing UAE’s reputation of being a safe and stable country.


In the short term, Alpen Capital maintains a cautious outlook of the UAE residential market due to prevalent oversupply situation in the market. However, in the longer term, we maintain an optimistic view of the residential construction market of the UAE on the back of rising population and stable economic growth. The International Monetary Fund (IMF) estimates that GDP at constant price and population is expected to grow at a CAGR of 4.1% and 3% respectively between 2011 and 2016. We also believe that the UAE market will continue to enjoy a premium on rental yield as compared to mature markets of the US and Europe. This is expected to attract foreign investors for better long-term returns towards the UAE’s property market.


Though the market is expected to remain oversupplied in the near term, the residential real estate and construction market of Dubai is likely to outperform the commercial offices markets in the short-term. We believe the recovery in residential unit prices in 2012 and beyond in Dubai will be driven by economic growth, improving investor sentiment, and improving global economic scenario.


Abu Dhabi’s residential market is likely to be oversupplied over the next two years due to fresh supply in the market. We expect rentals of residential properties to trend further downward across Abu Dhabi. Further, we expect the average selling price of residential units to be under pressure as the market adjusts due to an increase in supply.


Commercial construction market

Post the subprime crisis in the US, the UAE commercial office construction market was severely affected by a slowdown in growth, an over-stretched banking sector, and fallout from the bursting of the Dubai property bubble. The region witnessed spectacular growth in commercial office construction in the last decade, which led to an oversupply of commercial office space as investors and companies were reluctant to invest in the property market post the crisis. The oversupply which subsequently led to high vacancy rates resulted in a steep decline in property prices in the UAE.


Alpen Capital expects the rental yields to be under pressure in the near-term due to declining rentals on the back of high vacancy rates. The UAE market is expected to still enjoy a premium on rental yield as compared to mature markets of the US and Europe which will help in attracting foreign investments in the sector. Although, effective rentals of commercial office properties across Dubai is likely to fall further in 2012 due to oversupply and as owners look to attract and retain new tenants, we believe any signal of stabilization in the global economy will act as a catalyst for an increase in transactions as well as rental rates across the Dubai commercial office market in the long term.


Once the global economic environment, particularly in the Eurozone, improves, Dubai, with its calm political environment, excellent infrastructure and low commercial property prices (as compared to historical prices) will lure property investors, high net worth individuals and the corporate sector to invest in commercial office space. In the longer term, Alpen Capital maintains an optimistic view of the commercial office construction market of Dubai on the back of rising population and stable economic growth.


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.



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