Gulf contracting industry experiences rapid growth
The GCC contracting industry is witnessing strong growth, which is projected to increase further in the years to come, according to a research report.
This is due to the vast number of projects being planned and executed, the Kuwait Financial Centre (Markaz)'s GCC Contracting Industry report was quoted in the Gulf Daily News, our sister publication.
Currently, projects worth more than $900 billion are at various stages of development throughout the GCC of which real estate projects account for a significant value at $516 billion.
Urbanisation of a young, growing population, influx of expatriate labour and relaxation of rules allowing foreign ownership of real estate have led to increased demands for affordable housing.
The focus has, hence, shifted from catering to higher income groups to catering to middle and lower income groups, the report said.
Public-private partnership projects are another avenue that is yet to be fully explored.
The GCC countries are investing significantly in infrastructure development across many verticals, to meet the rising demands of a young and vibrant population, improve accessibility within the region and to diversify the economy away from the oil and gas sector.
This expansion is supported by rising government surpluses, enhanced spending measures and higher budgetary allocations to infrastructure development.
The opportunities for both local and international contracting players in the industry are plentiful, resulting in increased competition and a challenging business environment.
While the overall outlook for the industry is optimistic, according to Markaz, there are challenges within and outside the GCC region.
Lower growth forecasts for major economies and slower recovery of European countries from the debt crisis could affect international oil prices and therefore, the spending pattern of the GCC countries.
Increasing competition, rising costs, availability of skilled and unskilled labour, supply chain bottlenecks - as GCC nations are dependent on imported machinery, raw materials and labour - could lead to lower net profit margins in the industry.
Diligence measures, with respect to lending for real estate and other construction activities, have been strengthened post the Dubai crisis.
Banks have enforced stricter collateral requirements, equitable distribution of project risks, and stringent covenants on project cash flows to safeguard their equity.
Attracting foreign investments is also a challenge due to high degree of information asymmetry, poor enforcement of legal contracts and lack of protection for investor interests, the report said.