The right fit-out: Inside the boom in Gulf interior contracting
The GCC market for interior contracting and fit-outs hit an estimated $7 billion last year
The GCC market for interior contracting and fit-outs, based on the approximate number of projects completed in 2015, is estimated to have been a massive $7.06 billion last year. And the market is expected to grow 25.62% to $8.87 billion by the end of 2016, based on the projects expected to be completed by the end of this year.
These figures from the January 2016 edition of the GCC Building, Construction and Interiors Market review by Ventures are indicative of the growing importance of fit-out contracting as a market segment in the construction industry.
With budgets belts tightening in the region as oil prices continue to remain in a lull, developers and owners are increasingly looking to get more bang for their buck. There is a renewed emphasis on refurbishment as owners look to retool existing structures to serve new needs and demands, while the introduction of green building ratings and codes has forced a change in mind-sets across the industry.
Nowhere is this more evident than in the fit-out and interiors contracting market. Long considered the step-children of the construction world, fit-out contractors are now asserting their dominance and vitality in a market increasingly in need of their services.
As so often in the Middle East, Dubai is a barometer for this change in perception, with Expo 2020 sparking a surge in development, particularly in the hospitality and retail markets. However, this growth is not limited to Dubai and the UAE, with markets like Saudi Arabia and Qatar also showing significant increases in market share between 2015 and 2016. In fact, the Kingdom, with its heavy investment and social infrastructure programmes, has the largest market share of the big three in the GCC, followed by the UAE and Qatar. Kuwait is also slowly catching up with Qatar in terms of interiors and fit-out spend.
“Clearly the growth rate for the interior fit-out market was maintained and even accelerated in 2016,” says Ravikumar KS, executive director – International Operations at S&T Interiors and Contracting. “At S&T, we’re anticipating good opportunities in primary markets like Oman, Dubai, Abu Dhabi and Qatar (in view of 2020 and 2022 respectively). Our projects reflect this trend, as we’re executing work at hotels in Oman, along with retail packages and wooden panelling and doors for Muscat International Airport. So far, 2016-2017 has been positive.”
He adds that the hospitality market is expected to pick up pace, with three- and four-star hotels likely to compete with a saturated luxury hotel segment. This will offer increased opportunities to fit-out contractors in the region, given the need for budget and business hotels to have high-quality finishes and interiors, at reasonable prices.
Dimitri Papakonstantinou, managing director of Plafond, a multi-disciplinary firm that specialises in fit-out, adds that while the fit-out industry faced some uncertainty in 2016, this reflected a wider trend in the construction market.
Citing oil prices and the slowdown of the world’s major economies as major contributing factors to this uncertainty, Papakonstantinou says that contractors in the GCC should consider themselves fortunate to be positioned in a region that is still very active compared to many other parts of the world.
“During the preparation of our budget for the financial year 2016-2017, we did anticipate the effect the global uncertainty would have on growth. Although we did still budget to grow during this financial year, our growth was slightly slower than the two preceding years. To date we have been achieving our budgeted turnover and profit month-on-month, so I am pleased that we are on target to achieve a growth of around 17%,” he says.
“Regionally, we have seen the most activity in the Dubai market, which is where the majority of our works are currently carried out.”
This market outlook is reflected by the likes of Laurent Farge, general manager of ALEC Fit-Out, and Marcos Bish, managing director of Summertown Interiors. They both tell Big Project ME that while conditions in the market are challenging, there is considerable scope for optimism, particularly in Dubai.
“If we look at 2016, it’s very similar to 2015. I think you can look at it in from the point of view of being a cycle. We’re currently at the bottom of the cycle, I feel. I’m expecting, and hoping, that towards the end of 2016 we’ll get out of that dip and things will start to pick up again. This is something we’ve been anticipating over the last two years, in fact,” says Bish.
“This year is not much different to last year, however, in that we see a lot of activity in the market. Our estimation team is very busy all the time. But the only thing we don’t see is projects being awarded quickly. If we go back to two or three years ago, you could price a project and usually within one or two months, you either won it or lost it.”
Bish puts this down to the decision-making process becoming more considered at the client level. Given the emphasis of value for money, decisions are now often made by committee, with sign-off eventually coming from the board or managing director. Quite often, tenders submitted get rejected as they don’t meet the approved budgets, which means the contract goes up for another round of bidding, or contractors are asked to value engineer their bids.
Complicating matters even further is that developers may decide to put projects on hold, or cancel them entirely, until market conditions are more favourable. This creates issues for fit-out contractors, as their estimating teams are very busy but projects are quite slow to drop.
Laurent Farge explains that with the market becoming very price-sensitive, fit-out contractors must be able to differentiate between offering value and being the lowest bidder, if they want to be successful and competitive.
“I believe that they [developers and clients] have found that fit-out contractors can bring alternatives to the table. At the moment, what we see is that when we price a project as per specification, most of the time we’ll have to reduce the price. Let’s say that we go into a tender and price a job as per specification. Usually we’ll have to go down by about 20% or 25%, meaning that we’d be higher by about 25% of the client’s budget.
“This is what is happening. A client will give a budget to an interior designer, then the interior designer will work it out, and then, most of the time, they’ll achieve the look, but not the money that the client wants to pay. So then this is where we start to offer alternatives, such as value engineering and all that.”
Papakonstantinou adds that one of the other major challenges facing fit-out contractors in the current market is a lack of time spent detailing the design and understanding the costs involved. This inevitably leads to delays during the execution of the work, which only serves to exacerbate the problems.
“In general, I believe that contractors are required to take extensive risks during tight estimation timeframes, with sometimes incomplete documentation. Combined with sometimes extensive changes that the client requests during the construction of the project, this can lead to delays in completion, works carried out of sequence and additional costs – often to the contractor.”
In order to combat these issues, Farge says ALEC Fit-Out has made a point of selecting and targeting the right projects, and urges other contractors to follow suit.
“Doing due diligence on clients, as well as understanding the consultant team working on the project, are key considerations for us prior to bidding for work. We believe that we’re one of the best in the market, but we don’t want to be the cheapest. We want to offer our clients a value-for-money proposition, a fair price that the client is happy with.
“Obviously, we need to be much more aggressive from a procurement point of view, and we all need to make sure that we spend the right amount of resources on a project. What we expect now is that sometimes a project manager will have to do more than what he used to do. We try to put in the right management for a project, and we try to make sure that we’re competitive. Compared to other companies, we’re quite expensive, so we need to make sure that our guys do more than what others do,” he asserts.
This sort of attitude fosters repeat business; Marcos Bish believes establishing a relationship with repeat customers is crucial to the success of any fit-out contractor in the market today. He estimates that 50% of Summertown Interior’s business comes from repeat business, which highlights the importance he places on having happy customers.
“We always have business going from our clients,” he says. “The other 50% that we’re looking at is basically business development, where we need to get new projects. When we combine that with the environmental trends that we see, we also see that 50% of our business is green these days.”
“So for us, a growing market is the green fit-out. I would say that we always have 50% of repeat business, and that we couple that with our growing green market.”
Sustainability is indeed a rapidly growing segment in the GCC’s fit-out contracting market, especially in the wake of the introduction of green building codes and rating systems, such as the one recently introduced by Dubai Municipality.
“We see two types of green projects. One is the green projects that are designed and executed to be green, but have no certification. And then the other green business is where the client actually wants a certificate. 99% of the time, that is LEED certification.”
Ravikumar KS agrees, pointing out that sustainable solutions are gaining momentum in the market as the understanding around environmentally-responsible projects grows.
“We have successfully completed a number of projects across the region with the directive to obtain sustainability accreditation through LEED. Al Alila Jabal Akhdar Hotel, Oman is one of the key projects where we have helped our client achieve LEED. It is constructed according to LEED principles, and is the first hotel in the Sultanate of Oman to gain LEED Silver Certification.”
Bish says he quite often encounters clients who seem almost afraid of embracing sustainability, because they lack a complete understanding of what it entails.
“Sometimes it’s confusing and clients can be scared of going green, because it’s new and it sounds complicated. This is where we can come in. We can actually say, ‘No, it’s not more expensive. It is not complicated and you’re not the ones who have to do it. We are the ones who will drive it and deliver it to you,’” he explains.
“That is very important for the client to understand – that it’s the contractor who has to deliver a green project. Maybe in cooperation with other parties around the table, but even if nobody else cooperates, it’s still the contractor’s responsibility.
“I think, first of all, you have to make the client comfortable with that. Secondly, everybody always says that green is more expensive – this is again where we come in and say, ‘No. Not necessarily.’ If you start to put in water desalination systems in your backyard, if you go for solar energy which has a long payback period, then yes, it will cost money. But normal decent fit-out, by default – in our opinion – should already be green, without any additional costs.”
Another emerging trend Papakonstantinou has noticed is the increased use of BIM on projects. As a keen advocate of the technology, he hopes it will continue to spread through the region.
“At the moment some major projects are taking BIM on board. However, to fully benefit from the advantages of this, it has to be implemented from the outset of the project design and include all stakeholders, from the client to the designer to the contractor.
“Considering the complexity and sheer size of the projects carried out in the UAE, this will certainly be the way forward to minimise the impact that changes have on a project as well as highlight conflicts in the design early on,” he says, adding that Plafond is actively using BIM on some of the projects it is currently executing.
Finally, Farge has noticed an increased number of design build opportunities in recent months. Given the depth of ALEC Fit-Out’s resources, this is something he’s keen on exploring further.
“We have a collaborative approach to design/fit-out solutions, which has seen our team align with leading local and international consultants. Their creative flair and space planning capabilities are complemented by our detail development, coordinated finishing and value engineering capabilities, thus ensuring that the client receives the best possible solution, in line with their design brief and project budget,” he concludes.
