Middle East Series: Construction boom 1 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
It is difficult to figure out where to start in a discussion of the construction boom in the Middle-East. There has been so much written on this sector in the past 2-3 years, in particular on the UAE by virtue of their ambitious developments, that many might probably be already familiar on this theme.

This is a liquidity-driven boom of course, and the key reason for that liquidity is petrodollars as oil prices remain stubbornly high these few years. As mentioned in my last article, the Arabs have learnt from their last boom in the 1970s and are looking to diversify their economy as the oil boom will not last forever: firstly oil prices undergo cyclical moves in conjunction with the global economy, and secondly there is the fear that Peak Oil may already be on us, with supply plateauing in a few years, if not now.

The construction boom looks to me to be taking emphasis along different lines for various key nations in the Middle-East, and I'll start with the UAE. Dubai in particular has developed a reputation as the hottest new playground for the super-wealthy, with its grand developments such as the Palm (a man-made island in the shape of a palm tree), the Burj Al Arab (reputed to be the world's only seven-star hotel) and the World (a series of reclaimed islands that will form the shape of the world). Surely the most Westernised country city in the Gulf, it has marketed itself successfuly as the tourist destination to head for; massive developments, mostly tourism-related, are under construction everywhere, each vying to outdo the other as the biggest, tallest or most luxurious. Hotel occupancy rates are >90%. It is the conference and exhibition hub for the region and a leader in the MICE industry, hosting the World Bank and IMF conference in 2003 (the same one that Singapore is having soon). Its sister city, Abu Dhabi, also the capital of the UAE, has also been focusing on mega construction projects, typically mixed developments comprising residential, commercial and tourism complexes as well as providing elaborate and highly sophisticated infrastructure developments.

Although rents have been rising and still remain strong, supported by revamped property laws that allow for property ownership and investment by locals as well as opening of the market further to foreigners which has seen foreign funds starting to come in, the real estate market is seen to slow down by the end of 2006. The effects of the completion of various construction projects over the coming few years will increase supply, and will exert a downward pressure on prices. This pressure is seen to have less of an effect on commercial and industrial real estate, in comparison with residential property. It is worth noting that the major UAE developers are moving abroad; indeed, the largest, Emaar Properties, has for the most part sold ts developments in the UAE.

In actual fact, the largest construction market in the whole of the Middle East would be Saudi Arabia, with the UAE probably coming in second. The focus is different in the largest of the Gulf states: construction of public infrastructure, which include expansion of infrastructure, transport and municipal services, and expansion of the country's electricity network and water supplies. Public housing is also an area of expected strong future demand given the strong population growth.

Two countries which have come in for less mention but have also experienced high construction growth, going by the growth in demand for cement, are Qatar and Bahrain. Their target audience are still foreigners but they are not just concentrating on tourism, but also as financial hubs. Doha, capital of Qatar, for example, is seen to be taking a different direction from Dubai in its property development focus ---- less of a resort approach. Given that Qatar is set to become the world capital of the gas-to-liquids industry by 2010 and the single largest supplier of liquefied natural gas to the United States, by virtue of its huge natural gas reserves, the coffers are overflowing and some actually see this as a hotter region than the UAE for the future. Bahrain is the incumbent financial hub for the Gulf, and probably draws the best comparison case to Singapore --- it will always draw in capital and will benefit from the booming Gulf economies through capital flows. For Singapore's construction and real estate firms, these two countries, together with the requisite UAE, are seen to offer the most opportunities for project participation (probably also because they are the most open and foreigner-friendly economies).

Some also see long-term potential in the Iraqi reconstruction sector, though these would obviously not be in the areas of luxury housing and more along the lines of basic infrastructure construction.

Beneficiaries of a buoyant construction industry are not hard to conceptualise: sectors which provide the basic building materials will benefit, such as paint, ceramics, glass, cement and steel industries --- the basic materials industries. Bulk shipping traffic transporting these materials to the Gulf apparently command higher rates compared to global benchmarks, which have led to some shippers focusing on the area in search of higher margins(eg. Courage Marine recently). Construction and infrastructure companies with strong presence in the Middle East will obviously benefit as well. For those who believe in emerging markets, the construction sector is one that must not be missed, given the high population growth and relatively backward infrastructure that offers plenty of room for investment.

References:
(1) Canada.com: Boom-town Middle-East
(2) Middle East Times Dec 05: Petrodollar overflow produces Dubai construction boom
(3) Khaleej Times Aug 06: UAE real estate developers target projects in India
(4) Oxford Business Group Aug 06: Abu Dhabi: More Demand
(5) Emirates Today Aug 06: UAE: Funds are deploying cash cushions into value stocks
(6) Ameinfo.com Oct 05: Saudi Arabia's $35 billion construction boom
(7) MenaFN.com Nov 06: A continuing construction boom in Qatar may see the demand for cement go up steeply over the next two years
(8) MenaFN.com Jan 06: Real estate boom stirs investments - Bahrain
(9) Ameinfo.com Dec 04: Doha's strategy for success
(10) Gulf Daily News Oct 05: GCC construction boom in spotlight
(11) Khaleej Times Jan 06: Construction boom in the UAE supports secondary industries