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onstruction Intelligence Report In-depth analysis of the Middle East’s construction markets in 2018 4th edition


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A year to look forward to?

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elcome to the 2018 Construction Intelligence Report (CiR), an annual report designed to be an authoritative source of information for construction professionals and associated entities within the industry in the GCC and wider Middle East region. Once again, the CiR compiles the best analysis available in the market with exclusive insights from the industry, as well as the results from the CiR Survey 2017-2018, to provide construction professionals with what is hopefully a comprehensive overview of the current state of construction in the GCC. As ever, the CiR draws together the expertise of CPI Trade Media, a Dubai-based publisher that produces Big Project Middle East, Middle East Consultant, and many other titles, with an array of knowledge partners and industry analysts. We also again handpick some of the best analysis and reports reviewing the sectors and markets featured in this year’s edition. Since it was first launched in 2014, the CiR Survey has formed the centre-piece of the report and is one of the most complete pictures available of how the construction industry views its performance. It also, via the survey salary section, provides a look at how much individuals are being paid and what their job security outlook is. The good news is that the results show that the industry is feeling more optimistic than it has for a number of years. Stability is returning and that is reflected in the results. People are also beginning to look further than the short-term, but it is a cautious optimism.

Where does this optimism come from? Well, 2018 is expected to be the year that the oil price begins to slowly rise again and this could fuel a resurgence in projects that will – perhaps ironically – help countries in the GCC to accelerate their programmes of economic diversification. All eyes are on the Saudi Arabian market and whether the pace of reform can help kickstart construction activity in a market that is calculated to have almost a $1 trillion worth of projects. Elsewhere, countries like Bahrain (with financial services) Oman (tourism and logistics) and Kuwait (establishing it as a commercial centre) have set-out their clearest agenda yet – with projects planned to support those targets – in terms of how they will diversify. Within the GCC, the UAE is possibly the closest to acheiving its national goals but a maturing construction industry is beginning to look beyond the Expo 2020 Dubai to other parts of the country and possibly further afield as that event nears. One of themes from this year’s report is whether the largely UAE-based construction industry will move outwards and across the Middle East at the beginning of the next decade. While the GCC national development plans will continue to supply the project pipeline for years to come, a more stable decade in the wider region could tempt many companies that have been happy to circulate in the warm and inviting of waters of the Gulf to set-off into uncharted territory.

Stephen White Editor, Construction Intelligence Report 2018


contents

2018 Volume 4 Year in review REVIEW

06 A time to climb

CiR survey SALARY SURVEY

12

Salaries in 2018: A new reality

BUSINESS SURVEY

14

A brighter outlook

MARKET SURVEY

16

Back to normal?

Sector focus TRENDS

20

A time to build – Trends in the market

INTERVIEW

24

Patience is its own reward – LACASA leveraging Dubai for international success

RISK MANAGEMENT

26

The risk of not understanding your business

CONSTRUCTION TECHNOLOGY

28

Binary building with BIM and AR

CONSTRUCTION IT

30

Finding the right tools

CONSTRUCTION SUSTAINABILITY

32

A road map for green building

BUILDING CODES AND REGULATIONS

36 4

On the face of it – AESG on façade design


contents

QUALITY MATTERS

38

Steel framing systems – How design is a crucial element in project success

PUBLIC PRIVATE PARTNERSHIPS

42

Putting PPP in the frame

Country focus DATA

48

The GCC in figures

SAUDI ARABIA

50

Positive on a reforming Saudi Arabia

SAUDI ARABIA

52

Addressing KSA’s housing challenge

UNITED ARAB EMIRATES

56

UAE 2018 market review

UNITED ARAB EMIRATES

60 Planning for beyond Expo 2020 Dubai UNITED ARAB EMIRATES

64

Living with VAT

KUWAIT

66

Will Kuwait’s construction market begin to recover in 2018?

BAHRAIN

70

Bahrain takes a pragmatic approach to housing

OMAN

72

Oman prioritises its diversification programme

IRAQ

74

Iraq begins its post-ISIS recovery

EGYPT

76

Building a future for Egypt 5


YEAR IN REVIEW

There are a lot of large-scale opportunities in the Kingdom to be delivered in the foreseeable future; once the government has completed a review and reprioritisation of its key projects.

A time to climb Construction companies should prepare for an improving environment in 2018, according to industry observers

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hile data published by MEED suggested that the value of project awards slipped once again to close to $100 billion in 2017 – marking a four-year decline – a report by BNC Network stated the combined value of the 22,680 active construction projects across the GCC had exceeded $2.43 trillion in November. So, was the past year merely a new low or a turning point in a four-year period of contraction for the construction sector in the GCC? In his assessment of the current construction climate in the region, David Clifton, regional development director, Faithful+Gould said he believes the story of the construction industry in 2017 was one of contracting backlogs and uncertainty around whether the industry has reached the bottom of the economic cycle. 6

“In terms of new awards, the key markets of Saudi Arabia and the United Arab Emirates would appear to have bottomed out as awards are relatively flat in KSA and undershooting in UAE versus 2016, but in both markets government budgets for capital projects are increasing for 2018 – which historically drives private sector sentiment,” he commented. “However, there is still a regional issue, with funding developments, as liquidity is attracted more to senior debt such as government and corporate high-grade debt rather than feeding the development market. There are some indications that there are areas where financing can be raised, such as the PPP deals struck for Saudi’s General Authority for Civil Aviation (GACA) and Export Credit Agency (ECAs) backed credit lines for Dubai World Trade Centre (DWTC) by UK Export Finance (UKEF) and Kuwait’s


YEAR IN REVIEW

7


YEAR IN REVIEW

“GCC governments, conscious that the oil dependent model is not sustainable, continue to implement reform agendas with various initiatives to lower the burden on public budgets and transition to a diversified economy with a more skilled workforce”

Clean Fuels Project by Italy.” Clifton believes that the industry should be able to feel cautiously optimistic for the year ahead. “As we look to 2018 there are numerous signs to stoke optimism for the industry. During the last 24 months in Saudi Arabia we’ve seen a significant contraction of work in pipeline or delivery fall from $1.1 trillion to $800 billion in early 2017 and now rapidly 8

expanding to $1.75 trillion. Even if a minority of the giga and mega projects recently announced gained traction, the outlook is clearly positive and the industry will see the end to the contractionary period and move into growth again.” Drawing a comparison with the UAE and the stand-out market of Dubai (investment in real estate remains particularly strong. At $77.6 billion the value of land transactions in Dubai

ranks higher than the GDP of 144 out of the 211 countries recognised by the United Nations), he said that there is still significant ongoing work as Expo 2020 Dubai draws closer although Oil and Gas (O+G) will be the key sector to drive growth. He predicts that the sector could see a re-ignition of projects that have been on hold for a number of years. “Since the oil price collapse in 2014, regional investment

in capital projects has shrunk significantly in the O+G sector. With three years of low investment and a midterm stabilisation in oil prices, oil companies are beginning the reinvestment cycle,” he remarked. “This can be seen with examples such as Saudi Aramco’s commitment to lift spending to $414 Billion over the coming decade and BP’s move to develop the second phase of the Khazzan gas


YEAR IN REVIEW

Fiscal adjustment will need to continue over the medium-term with measures to increase revenue, such as further energy price reforms or VAT in the GCC, and controls on public spending.

project in Oman. Couple this with the low tender prices in the construction market, due to the low levels of work over the past two years, and the scene is set for an attractive time to procure, whilst ensuring the revenue that is still critical to regional government balance sheets is kept flowing. We have seen projects already closing as ADNOC commits to the further expansion of Zakum offshore gas field. There is a

precedent for this significant investment in the O+G sector at the bottom of the market which was ADNOC’s original signing of the Zakum project.” In the latest Deloitte GCC Powers of Construction report, Cynthia Corby, Audit Partner and Infrastructure & Capital Projects Leader, at the analyst’s Middle East office states the $2 trillion pipeline in projects indicates there is still a need and demand for projects in a region that is trying to reduce its dependency on oil. “As we know, GCC geographies differ in their infrastructure needs, and their stages in development and investment in key infrastructure and social infrastructure. All of the countries have state-led economies, where governments are reliant on natural resources which they remain focused on diversifying,” she said. “GCC governments, conscious that the oil dependent model is not sustainable, continue to implement reform agendas with various initiatives to lower the burden on public budgets and transition to a diversified economy with a more skilled workforce. “Regional governments remain focused on changing their development models and pursuing fiscal adjustment policies, while ambitious national transformation plans to strengthen economic resilience are work in progress. Some of the key strategic initiatives which governments are grappling with involve

GCC projects in 2017, $US billions 50

Source: MEED

43.5

40

30

24

20 11.5

10

8.5

10

UAE

Saudi Arabia

Oman

Kuwait

GCC project awards 2014-2017, $US billions

Bahrain

Source: MEED/Statista

180

150

120

90

60

30

2014

2015

the private sector taking a more active role in the economy, job generation for a rapidly growing labour force, increased localisation, and attracting foreign investors through updated laws and the easing of restrictions.” Much of the focus of 2018 will be on Saudi Arabia and wheher the construction industry can begin to recover. Much of the reform of the past two years in the Saudi

2016

2017

market has concentrated on these goals with the national Saudi Vision 2030 strategy and its broad set of objectives an attempt to wean the country off its dependence on high oil prices. “The Kingdom aims to increase the contribution to GDP from the private sector to 65% from the current 40%. There is a plan to privatise a number of public entities in the healthcare, services 9


YEAR IN REVIEW

and energy sectors, as well as privatising projects and having them delivered on a PPP basis,” she noted. “Construction of mixed-use schemes is being planned in the Kingdom. Saudi Arabia’s Public Investment Fund

(PIF) is planning a project in the north-western region called NEOM, which aims to develop nine key economic sectors, including biotech, energy, mobility and digital science. There is a lot of large-scale opportunities

for the Kingdom to be delivered in the foreseeable future, once the government will have completed a review and reprioritisation of key projects.” According to Corby, whilst business conditions

are tougher today and project activity has been slowing down since 2015, the construction industry in the GCC will sustain its workflow going forward. This will be driven, like the Saudi Vision 2030, by economic and

GCC country by GDP, $US billions (2014-2018) Saudi Arabia

UAE

Kuwait

Oman

Bahrain

800

600

400

200

2014

10

2015

2016

2017

2018


YEAR IN REVIEW

Economic and funding reforms could bolster an improvement to the construction sector as oil prices slowly rise and governments speeds up development plans.

demographic needs, such as Abu Dhabi Economic Vision 2030 and Dubai Plan 2021, as well as tourism related projects, and the commitment from governments towards infrastructure investment. “Fiscal adjustment will need to continue over the medium-term with measures to increase revenue, such as further energy price reforms or VAT in the GCC, and controls on public spending. The International Monetary Fund (IMF) predicts that as a result of the oil price recovery, lowered spending, and the reforms implemented on energy prices, the overall GCC deficit is expected to reduce in 2017 to 4% of GDP,

“In terms of new awards, the key markets of Saudi Arabia and the United Arab Emirates would appear to have bottomed out as awards are relatively flat in KSA and undershooting in UAE versus 2016”

from 10% of GDP in the past two years. The fiscal balance in the GCC has been negative since 2014, but the deficit could be reduced to less than 1% of GDP by 2022 if the implementation of reforms is sustained, according to the IMF,” she said. “A number of multi-billion dollar schemes, including various metro systems, have contributed to the increase of total contract awards in the region over the past years, and these will likely stabilise to lower levels in the foreseeable future as various social infrastructure projects conclude over the next few years. “Various GCC governments intend to have the private

sector supporting the provision of costly traditional government projects through the use of public-private partnership (PPP), buildoperate-transfer (BOT) or other financing models, which will have a positive impact on sector activity. The use of public-private partnerships, attracting foreign direct investment and privatisation of state-owned assets are key elements to achieve the GCC leaders’ visions for socio-economic reform and fiscal balance.” Read David Clifton’s 2018 GCC Construction Industry Outlook on www.fgould.com. The Deloitte GCC Powers of Construction is available at: www2.deloitte.com

The IMF assesses the GCC’s need to diversify In light of lower oil prices and the slowdown in the public sector, countries need to accelerate structural reforms to diversify their economies away from hydrocarbons and boost the role of the private sector. This large economic transformation will take time, will need to be carefully managed, and will be crucial for securing adequate employment opportunities for the rapidly growing labour force. Raising productivity, which has generally been weak in the GCC countries, will be a key to generating

stronger non-oil growth and high quality, high paying jobs for nationals. Despite the progress so far, further measures to improve the business environment and to diversify and expand the role of the private sector are needed. The successful cases of Indonesia, Malaysia, and Mexico suggest that reducing commodity dependence takes time. In the GCC region, the UAE has had some success in diversifying its export base through financial, transport, and business services, as well as through tourism.

Bahrain has increased the role of financial services and food processing. Though at varying degrees for each country, business indicators show room to improve. The GCC development plans need to be actionable measures, sequenced, and implemented, and risks should be monitored. Priority should be given to product market reforms, with a focus on business competition and regulation, and reforms to the legal system and property rights. Importantly, risks and unintended consequences of reforms need to be identified

and addressed. PPPs should be supported by robust regulatory frameworks that ensure cost-effectiveness and limited fiscal risks; close monitoring is needed to ensure service delivery and avoid the potential buildup of contingent liabilities. A strong framework for privatisation would ensure a transparent and competitive environment. Increasing the role of credit bureaus would strengthen lenders’ ability to properly monitor the credit risk of SMEs. Upgrades to labour regulations should include feedback from the private sector.

11


CIR SURVEY

Salaries in 2017-2018: A new reality Narrow pay rises for construction professionals in the GCC, number of people on middle-rated salaries grows

A

renewed focus on completing ongoing projects – and a sense that the market has bottomed out – means the CiR Salary Survey 2017-2018 shows a positive trend to a more optimistic construction industry. The effects of four years of uncertainty continue to be felt however; and what was once a knee-jerk shift downwards and away from six-figure in salaries appears now to be a long-term trend. Growth in middle-level salaries outstripped other pay grades in 2018 and some may argue that salaries are progressing towards a more realistic valuation. Current salaries are certainly tracking the real-time performance

12

of the construction market and this means we could be looking at a new reality in salaries in the region. The percentage of individuals being paid less than $40,000 per year in 2017 was 33.51%, a narrow rise from the 2016’s survey but up 5% from the first survey in 2014. It compares to the major story of 2017 which was a large swing from the highest grades to the middle ranges from $40,000 to $99,999 per year. This group now represents 42.27% of incomes; which is 7% up on the 35.08% registered just 12 months ago. It is also more than 2% up on the same grouping in 2014 (which was registered at 40.25%). The survey results suggest this apparent bounce back from last year’s dip can be related to the

fall in plus-$100,000 salaries. Almost a third of construction professionals (31.94%) were paid over $100,000 in 2016. This figure is now down to less than a quarter or 24.23%. If last year’s results suggested that firms were looking to the protect top salaries by bolstering the lowest paid ranks of their staff, then 2018’s may show that attitude changed as the depression in the number of projects continued on for another year. 43.81% of those surveyed reported that they had a zero or negligible increase in salary and therefore effectively had a decline relative to a 2% increase in real prices. This was however an improvement on the previous year’s figure of 46.6% and more than a quarter (25.26%) surveyed said they

had an increase between .1% and 5%. There were also more people receiving an increase of between 10% to 20% (9.27% in 2017 versus 5.24% in 2016). As fewer people said they received a decrease in salary (2.06% versus 3.14% in 2016) it could be deduced that rather than reducing the salaries of its highest paid construction professionals, the industry is not replacing them when they leave and/are putting replacements on lower pay grades. The number of respondents that received annual bonuses and benefits that totalled less than $1,000 was over 40% (at 42.78%). This figure has increased since 2014 from 34.42. It is notable that Salary Survey does not record 0% increases so that figure may or may not hide


CIR SURVEY

Fewer people said they had a decrease in salaries last year, but narrow rises for many compare unfavourably to rises in prices.

What was your base salary? (2017 vs. 2016) 2017

How much did you receive in bonuses/benefits? (2017 vs. 2016)

2016

2017

40%

40%

30%

30%

20%

20%

10%

10%

Under $40,000

$40,00059,999

$60,00079,999

a considerable shift in bonuses and benefits. The ongoing trend away from large bonuses and benefits worth more than $30,000 continued again with only those rated between $5,000 to $9,999 seeing an increase. Overall, the survey of salaries

$80,00099,999

$100,000149,999

$150,000 plus

in demonstrates that companies have re-allocated their funding of pay grades in 2017 with most of its being sourced from the highest earners. But while people are generally being paid less, they are beginning to feel more positive regarding their

By what percentage has your total salary increased in the last year?

2016

Under $1,000

$1,0004,999

$5,0009,999

immediate to medium-term job prosects. 35.05% (the most popular response) compared to 30.37% 12 months ago expect to stay at their current employer for between 1-3 years and a further 18.04%, compared to 17.28% last year, predict a stay

How long do you expect to remain working at your current company?

$10,00029,999

$30,00049,999

$50,000 plus

of between 3-5 years. The UAE remains the best regarded place at 67.01% for the most competitive salaries. The figure was down 2.1% on last year with Saudi Arabia rising to 13.4% (an increase of 3.98%) and Kuwait rising to 4.64%.

Which GCC country in your opinion offers the most competitive salaries?

0%

43.81%

0-12 months

14.95%

UAE

76.46%

0.1-5%

25.26%

1-3 years

30.05%

Saudi Arabia

15.29%

5-10%

18.04%

3-5 years

18.04%

Oman

1.76%

10-15%

5.15%

5+ years

31.96%

Kuwait

5.29%

15-20%

4.12%

Bahrain

1.17%

20%+

1.55%

It has decreased

2.06% 13


CIR SURVEY

A brighter outlook The construction industry is feeling more optimistic, but concerns for business and costs remain

U

nsurprisingly, the results showing that the declines in salaries have slowed or in some pay grades improved since the last Construction Intelligence Report reflects a more positive overall outlook for the construction industry in 2018, but doubts remain at a business level. Further survey data also suggests that worries in the market have moved on from a crunch in contract values to concerns that could be interpreted – if you like to describe your glass as half-full – as indicators of a recovery. When asked whether they were less or more positive regarding the state of the

construction sector as a whole compared to 12 months ago, almost half (48.97%) responded that they were feeling positive. 18.04% registered that they were very positive looking forwards. Likewise, fewer people (20.62%) were feeling negative compared to last year when 32.46% of respondents said they were either less or very negative regarding the industry outlook. This year’s survey also asked the construction industry whether economic changes had impacted their business in 2017 and while 52.58% said it had, this compares favourably with the 59.69% that answered the same question back at the end of 2016. Furthermore, the survey

registers a swing in attitudes towards a better outlook with 26.8% responding that they were positively impacted. While clearly not an overwhelmingly positive perspective (it is still just over a quarter of responses) it does mark an improvement during a period where the industry is dealing with a legacy of contraction in the market and uncertainty regarding the impact of new taxation law. This will be a key category to watch out for in the next report. The challenges listed as part of the survey cover a number of areas and respondents could name more than one. The impact of slow or non-payments facing companies continues to be the

outstanding problem facing the sector as it was in 2017. Results from this year’s survey suggest only a short fall in the problem from 31.21% last year to 30.28%. More positively, poor contract margins which had been as high as 26% last year fell to 21.39% of respondents selecting it in the survey. The biggest increase was the cost of materials which rose 4.38% to 15%. This increase was joined by rises in people highlighting the competence of sub-contractors (13.06%) and keeping up with regulations (9.17%); all are factors associated with a rise in activity not a contraction in work. Other challenges

“The survey registers a swing in attitudes towards a better outlook with 26.80% responding that they were positively impacted”

14


CIR SURVEY

While it may have fallen compared to last year’s survey, the impact of slow or non-payments facing companies continues to be the outstanding problem facing the sector.

What category best describes the company you work for? 23.20%

25%

20%

18.56%

18.56%

15% 9.79%

10%

7.73% 5.67% 4.12%

4.12%

5%

3.61%

2.06%

1.55%

0.52%

General contractor

Subcontractor

Supplier

for the GCC construction industry include a lack of skills in the workforce (8.33%). Minor factors inputted under ‘Others’ include less government contracts, slow decision making and digital adoption. The top-five descriptions of

Construction management

Project owner

Developer

the companies that participated in the survey were 18.56% identifying themselves as a General Contractor - a designation that had by far the largest share of responses. Taking the second largest share were Consultants with

How do you feel about the industry compared to 12 months ago?

Project Architect management

Engineer

Consultant

23.2%, followed by Construction Contractors and construction sector Suppliers (both 18.56%), then Subcontractors (7.73%) with Engineering firms holding the fifth highest share (5.67%). The remaining categories included: Project Management

What will be the major challenge for your company in 2018?

Designer

0.52%

Facilities management

Other

(4.12%/joint 6th); Construction Management (4.12%/joint 6th); Architects (3.61%/7th); Developers (2.06%/8th); Designers (1.55%/9th); Facilities Management (0.52/10th highest); and Project Owners (0.52/10th highest).

How do you feel about the industry compared to 12 months ago?

Very positive

18.04%

Slow client payment

30.28%

Negatively

52.58%

More positive

30.93%

Poor contract margins

21.39%

Positively

16.80%

Same as last year

30.41%

Cost of raw materials

15.00%

No effect

20.62%

Less positive

18.04%

Subcontractor reliability 13.06%

Very negative

2.58%

Keeping with regulation

9.17%

Lack of workforce skills

8.33%

Other

2.78% 15


CIR SURVEY

Back to normal?

Government-led contracts viewed as major growth area as leisure and retail recoils

T

he CiR’s survey of the GCC construction industry is always a useful barometer of where the industry believes the opportunities in the market lie. One of the outstanding outcomes of this year’s survey is the rise in importance of private sector clients in the past 12 months. Public Entity clients have been rated as the mainstay of the industry since the very first CiR. For the first time, respondents said that private developers form the majority of their clients. The figure of 34.54% of respondents is similar to the levels recorded for public entities such as governments and municipalities in previous years. With private clients registering a more than 10% rise on 2017, respondents said that public entities make up 24.74%, effectively marking 16

a like-for-like swap between the two classes of clients. Large international contractors also fell in the Which best describes your clients? category from 18.85% to 12.89%. The last CiR speculated that as they are often tasked with large scale infrastructure projects that there was a correlation between the data and the three main sectors respondents expected to see growth in 2017. Fast-forward to 2018 and there are signs of where and how this change is happening. At the beginning of 2017, Leisure and Retail and Commercial Property shared 35% of the votes for the sectors regarded as having the greatest possibility of growth by those participating in the survey. A year down the line, a lot of the Expo 2020 Dubai projects have been unveiled and so has the scale of investment relating

directly to that event. The region may also have one of the world’s biggest sporting events coming in 2022, but it looks like it will be falling short of expectations. Consequently, those two categories now sit at 31.75% of the share but with a fall of almost 7% in optimism for growth in the leisure sector rescued by a leap of almost 8% in Commercial and Property Development. With the UAE market experiencing an in-flux of private developers looking to use the areas of the country opened up by years of infrastructure development, it should probably be no surprise that they are forming a major tranche of employers of the construction industry. Although, a significant slice of the project pie is still in the private sector, 2018 is still regarded as a year where public sector spending should return in some areas. This is

typified by a surge in optimism in the Energy Sector which at 17.49% is up by 5.46%. Data from last year showed a shift away from Saudi Arabia to other markets. This has not continued with the results remaining largely static, bar a 2% decline in respondents saying they were active in Bahrain. As we enter 2018, optimism surrounding the Saudi market is showing some resurgence even if it hasn’t yet manifested in actual contracts for many respondents. When asked which markets offer the best opportunities for new business in 2017, almost a third of participants agree that the UAE market is the main market for opportunities this year. The Saudi market (20.8%/ up by 9.48%) however has almost doubled in popularity as reforms continue, disruption declines and new initiatives such as NEOM remind the industry


CIR SURVEY

Although, a significant slice of the project pie is still in the private sector, 2018 is still regarded as a year where public sector spending should return in some areas.

Which market offers the best opportunities for new business (2018 vs. 2017)? 2018

2017

30%

25%

20%

15%

10%

5%

UAE

Saudi Arabia

Oman

that it is still the biggest market in the region. This is a return to similar ratings recorded by the 2014/15 survey where 22% of the construction industry listed it as the most promising destination for new business. Respondents also feel that Oman and Kuwait could offer

Kuwait

Bahrain

Iraq

them more opportunities this year with each market respectively scoring rises of 2.49% and 3.04%. Beyond the GCC, the major successes scored against the so-called Islamic States have not yet transformed into a belief the countries most

Where is your company active in the GCC?

Iran

Levant

North Africa

affected by them offer the best opportunities. The top-five countries regarded as best-forbusiness opportunities are in the GCC with territories such Central Asia and North Africa displacing Iran which has fallen from 4th to 8th on the list. The Levant territory is now rated as

Where does your company have its regional headquarters?

East Africa

Central Asia

Other

offering the least opportunities for GCC construction industry. The UAE remains the hub (a rise of 7% in those headquartered there) for the region but it is clear the GCC, in general, is regarded as a safe-harbour for the industry in the years ahead.

Which of the below best describes the majority of your clients?

UAE

38.37%

UAE

72.0%

Government

24.74%

Saudi Arabia

22.09%

Saudi Arabia

7.0%

Private developers

34.54%

Oman

15.35%

Oman

3.0%

Int. contractors

12.89%

Kuwait

14.19%

Kuwait

2.0%

Local contractors

12.37%

Bahrain

10.00%

Other

16.0%

Mid-size contractors

8.76%

Other

6.70% 17


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Sector focus A time to build – Trends in the market Patience is its own reward – Leveraging Dubai for international success The risk of not understanding your business – Risk management Binary building – Design technology Finding the right tools – Construction IT A road map for green building – Sustainability design On the face of it – Façade design 19


MARKET TRENDS

With oil prices unlikely to bounce back to previous highs, a premium will be placed on value engineering and innovation.

A Time to Build

Saeed Al Abbar, managing director at AESG, picks his major trends for the building industry in the year ahead

W

ith 2017 in the rear-view mirror, it’s time for the building industry to set its sights on the year ahead. Whilst still challenging, the last 12 months have definitely seen an uptick in the market as regional governments and the private sector have adapted to the new paradigm of lower oil prices and set in place strategies and programs that provide a more economically sustainable development pathway. As a result of these programs, the coming year holds much promise for the industry particularly for those well placed to capitalise on the new trends in the market. Despite this, the lower levels of liquidity in the market is certainly driving regional government and private developers to be very strategic with their investment decisions. To quote Charles Darwin, ‘It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.’ So, with a sense of cautious optimism, I would like to set out what I believe, in my humble opinion, will be the key trends and areas of focus for 20

the building industry, in 2018.

“While the adage ‘you can’t get something for nothing’ generally holds true, we are now at a stage where near-zero energy buildings are a reality and can be made possible through costeffective means”

Zero and Near-Zero Energy Buildings Off the back of the historic Paris Climate Change Agreement in 2015, the world is beginning to set in place a clear roadmap for decarbonizing the global economy. Buildings, which account for over 40% of global carbon emissions, form the frontline of the fight against climate change and in order to reach the objectives of the Paris agreement, we need to reach a point where the building stock is net zero by 2050. With regional governments being signatories to the Paris Agreement, the region’s building industry will be faced with the challenge of adapting to this requirement. Those that act now will have a significant competitive advantage once such targets make their way into regional building codes and regulations – something that has already commenced in Europe. While the adage ‘you can’t get something for nothing’ generally holds true, we are now at a stage where near-zero energy buildings are a reality and can be made possible through cost-effective means. The interest is clear. In fact, even though reaching a point of netzero is slightly more challenging,

it too is gradually becoming more main stream and there are several upcoming projects that have set net-zero targets. We are currently even working with a number of developers that have set near zero and even net zero energy targets on their projects. Fire and Life Safety Given the number of high profile façade fires globally and regionally, fire safety for facades has been a focal point for the industry, and is vital for developers to manage their liability and safeguard their investments. By now, all countries in the Middle East have well established fire codes that are continuously updated and enhanced. It will become increasingly necessary for fire and life safety teams to work together with façade teams to ensure that the façade designs themselves are developed following best practices for fire safety. In addition to these efforts put into new developments, it is the maintenance and operation of existing fire safety systems that will largely impact the efforts to reduce fire related incidents. Upgrading these systems at existing properties is key, and we will see developers taking retroactive steps to


MARKET TRENDS

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MARKET TRENDS

Commissioning has rarely been given its due attention in the past but it is the most essential part of a project as it brings all the systems and services together, says Al Abbar.

make sure their properties to meet new fire codes. In fact, our façade engineering and fire and life safety team have worked together on several projects where building owners, who have become concerned with the fire risk exposure of their new and existing assets, have required detailed surveys and remediation plans to address the risk of façade fires on their buildings. Commissioning Though commissioning has rarely been given its due attention in the past, it is in my humble opinion the most essential part of the project as it brings all the systems and services together and ensures they work in harmony. I always use the adage that no airline would receive an aircraft that has not undergone a rigorous testing, commissioning and 22

integration regime. Modern buildings, which in many cases have more system components than a jumbo jet and represent a similar level of investment, therefore also need to receive the same care and attention when being brought into service. I always tell clients that if they try and cut corners and save costs in commissioning, they are basically accepting that they are happy to receive a building that does not work as intended – and consequently they are not getting what they paid for. Not only does inadequate commissioning pose a significant risk to the safety and health of those within the building, but buildings not properly commissioned will use upwards of 25% of the energy they would have used had they gone through an exercise of optimisation and integration of systems. As the market has matured

over recent years and a number of developers have observed the losses they have incurred during operation of inadequately commissioned buildings, we are now seeing greater focus on this area and most developers are now employing the services of third party commissioning specialists to manage and oversee the commissioning process right from the start of design until handover. This in turn will create greater professionalism and accountability in the MEP sector and significantly improve quality, which in my opinion is much needed in the region. To use another analogy – the historic practices of allowing MEP contractors to carry out their own testing and commissioning is like asking school children to mark their own exam papers without the teacher verifying that they have marked their

work correctly or honestly. Value Engineering With oil prices unlikely to bounce back to previous highs, a premium will be placed on value engineering and innovation. Reflecting the importance of this has been the emergence of consultancy service providers and contractors whose approach to value engineering is led by technical specialists and supported by cost consultants rather than the other way around. This has proven to be more effective as it enables value and system function to be clearly understood and defined so that value engineering does not become a simple cost-cutting exercise. Many developers have experienced the issues with what I term ‘vandalism engineering’ associated with simply removing cost items from a BOQ without due regard


MARKET TRENDS

“With oil prices unlikely to bounce back to previous highs, a premium will be placed on value engineering and innovation� for whether the building will still function as intended. With our knowledge of the local market, we have been successful at applying value engineering methodology to a number of projects. I strongly believe that consultants and contractors that are successful in 2018 will be those that integrate value engineering into their processes and are able to provide more value at lower cost to the client. To reiterate, those that approach value engineering as a pure cost-cutting exercise without due regard for function or value will soon be found out as the developer ends up with a building that does not work as intended.

Management of existing assets A number of high-value buildings in the region are aging so there is a greater need for managing these assets to maintain their quality and performance. We have seen a lot of demand for recommissioning the mechanical, electrical, fire life safety and even façade systems of older buildings to bring them in line with modern standards and codes. A developing trend has been for property owners to request recommissioning for their buildings, which requires a holistic diagnosis of all systems in the building to ensure their proper functionality. This

includes a thorough review of vital systems such as air conditioning, the BMS, and fire and life safety systems. Organisations that decided to take this up in 2018 would do well to treat BMS as the starting point, as this is not only where building systems are orchestrated but BMS will also help pinpoint where systems are not working in harmony. This not only validates that the building systems provide a safe and healthy environment for occupants but also provides significant energy savings. Overall, the outlook for the building industry is bright. As with any industry, there will be challenges to overcome. However, by paying careful

attention and adapting to the changes and new trends in the industry, developers will be able to safeguard their investments and ensure smooth operations for years to come. The industry is moving forward at a rapid pace and innovation is finally taking a firm hold on the building sector. Those that ignore these tides of change will simply be left behind. About Saeed Al Abbar

Saeed Al Abbar is the Founding Managing Director of AESG, a specialist consultancy firm in the Middle East. He is involved in managing and directing design and construction projects throughout the Middle East.

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INTERVIEW

Eng Emad Jabar explains that post-Expo-2020 Dubai, LACASA will be well-prepared to continue its international expansion in the GCC and MENA regions.

Patience is its own reward Eng Emad Jabar, managing partner, LACASA, says now is the time for the firm to look beyond Expo 2020 Dubai

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ACASA means house in Spanish and managing Eng Emad Jabar is a cordial and polite host during an interview looking at what lies beyond Expo 2020 Dubai for the UAE-based architectural and engineering firm. The company started last year racking up 18 new projects and the momentum was carried through 2017; leading to growth of 15% and more staff to fill the ranks required to serve projects valued north of $1.2 billion. It is unsurprising then, that Eng Jabar is in a positive mood. “2017 was an excellent for us but I also mean the industry in general,” he remarks. “We were always optimistic even at the beginning of the year, but we have achieved even more than we expected.” As a multidisciplinary firm LACASA offers services including project management, structural design, interior design, architectural design, MEP design and supervision of projects, through its team of quantity surveyors. 70% of its assignments are within the UAE market with its current and recent project list including the $54m Art Centre Mall in Al Barsha and Dubai Properties 24

Dubai Wharf, as well as a long list of numerous hotel and furnished apartment projects which make up more than two-thirds of its ledger. Eng Jabar says the firm enters 2018 in an even stronger position than the previous year. “The major projects that we grabbed in 2017 will now continue with us up into 2019 and some of them into 2020. We have just signed some projects from clients who we worked hard with in the last quarter of 2017,” he explains, before adding that LACASA is continuing to recruit staff and could jump from 350 to 400 employees by the end of the year. “We have also just got a new office that will total 1,150 sqm, which we are now fitting it out for the new staff we need to appoint. So we are feeling optimistic that 2018 will also be a good year.” LACASA serves the GCC and MENA region with design handled from Dubai. Eng Jaber regards the construction and real estate markets in the UAE as reaching a point of maturity. While large scale developments still exist (he notes that developers such as Emaar and DPG are focusing more frequently on rental not just sales to provide an

The importance of being civil Eng Emad Jaber is a civil engineer by profession, and notes that his experience in the field, combined with his staff’s expertise, are what make a winning formula for LACASA. Efficiency is something that inspires him on a professional level. “I’m a civil engineer, I’m not an architect. I manage architects, and that’s beneficial to the client. Civil engineers are mathematical people – one plus one equals two, and for me architecture starts from that formula. We should have an efficient building, we should have a functional building, and that building should make money. Architects focus on the form, the spaces, making it iconic – as a civil engineer, I want both!”

income) it is projects owned by smaller developers that is driving much of the growth for his organisation. “We still work with most of the major developers but about two years ago we also started looking at small developers that have only one or two projects. Before, we were only looking at big developers but we found this segment to be really significant and have attracted 10 to 12 developers that own projects worth in the region of $50-100 million. What is good about these small developers is that they are long-term investors and they know – whether the market is currently good or bad – the demand cycle will eventually come back.” Focusing on the risks – or rather opportunities – he is advising smaller developers that they’re approach is the correct one to take in a maturing market. “I don’t see a downturn. The market is getting more mature and the developers are better educated to know when to start or stop a project,” he comments. “For us, the competition is greater, you have to worker hard to secure work, the problems are different but the market is good.” Looking beyond the Expo 2020 Dubai event in two years’


INTERVIEW

“I don’t see a downturn. The market is getting more mature and the developers are better educated to know when to start or stop a project”

time, LACASA expects to build on its promising starts in markets such as Saudi Arabia, Syria, Sudan, Iraq, Libya and Tunisia where it has leveraged its reputation as a leading Dubai-based consultancy. Eng Jabar explains that the firm has had to sit back and maintain a watchful eye on many of them during an unsettled decade, but is sure LACASA will be

prepared they are ready to build again: “The UAE will not stay how it is now after Expo 2020 Dubai but our 10-year strategy means we are prepared for it. We already have seven offices in the Middle East and MENA region which we established back in 2009, 2010. And we think these markets will come after 2020 as politically and, in terms of their security, they will stabilise.”

It may take years for some of them to recover but, like the long-term view he takes on investments and property development, he fully believes LACASA is on track to have just 20% of its projects in the UAE by 2025 – with the vast majority coming from LACASA’s return to its incubated markets. In preparation the Dubai office will further evolve as a hub

for a fully international firm which he hopes will benefit from a decade learning about these emerging markets. “Our major office will be a major player in the development of these countries. We have kept a local presence in these markets, working with our local partners so that when we activate our offices we will be getting good-sized projects.” 25


Managing Risk

The risk of not understanding your organisation To achieve success and remain successful, it may be more worthwhile for construction professionals to study the elements of failure, argues Sameer Daoud of Drake & Scull International (DSI)

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anaging risk in the construction industry is not only about being aware of possible adverse outcomes in operations, it is also about understanding the layout of the organisation and how you engage your personnel, to prevent the people and work environment from becoming a risk to the organisation itself. It’s natural to attribute success to our own skill, while explaining away failure as due to unforeseen circumstances beyond our control. Being able to rationalise every outcome after the fact does not usually help us improve. Everything appears obvious in hindsight when connecting the dots to determine cause -and -effect. However, this is of no help when you’re trying to avoid making mistakes in the future. To avoid potential threats, you need to be able to foresee them in the first place. This is the foundation of risk management – outlining possible scenarios and developing contingency

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plans. Risk management is about prioritising potential risks, not planning for every eventuality! That would be counterproductive. The aim is to know how to react, and not become overwhelmed and paralysed in the face of adverse situations. The key is maintaining a balance between careful preparation and quick, decisive action, elements that depend on each other. Money and resources are competitive advantages, but the side-effects can be temptation and greed. Both have been known to cause problems, yet, it is rare that we are able or willing to recognise these traits in ourselves or in the organisations we serve. This is an area of risk management that, if you can master it, represents a direct and valuable competitive advantage. Having success can make it easy to start believing you are infallible. The story of a meteoric rise and fall is one familiar to all, from ancient Greek mythology to the modern corporate world. Possibly the

“It’s natural to attribute success to our own skill, while explaining away failure as due to unforeseen circumstances beyond our control”

most important, yet difficult, part of risk management is knowing that each person and organisation carries within them the seeds of their own demise. The trick is to not let these take root. This is essential. Whether a major multinational or a small business, failure is usually the consequence of personal weaknesses and character flaws, more than any particular shortcoming in skill or lack of intelligence. Simply put, it is difficult to see the least flattering sides of ourselves clearly, let alone be critical of those we have chosen to place our faith in. Neither are we inclined to want to believe that the least desirable scenarios will play out. Refusing to acknowledge the inherent risk of our own blind spots explains why organisations often find themselves in situations that they can’t resolve. It is hard to consider situations properly that we don’t want to believe can come about at all or which are even possible. Finding the motivation to develop a


Managing Risk

To avoid potential threats to a project, you need to be able to foresee them in the first place and know how to react, says DSI’s Sameer Daoud.

comprehensive ‘Plan B’ in response to such ‘hypothetical’ situations is difficult. Even if you can, that means having to highlight all the things that can go wrong with ‘Plan A,’ and risking the organisation losing faith in its overall pursuit of success. Nonetheless, it is vital to maintain a realistic outlook on a situation and to ask the questions that you know will yield uncomfortable answers. One of these relates to transparency and accountability. Effective management is the skill to align incentives for the actors in an organisation that create the optimal conditions to produce desired outcomes. This, of course, is also valid for the leadership themselves. Those responsible for setting incentives and goals are themselves driven, first and foremost, by incentives. More often than not, it is when these this individuals’ self-

interests are is misaligned that the seeds of systemic failure and downfall are sown. A common scenario is that the incentives are structured in such a way that no one is willing to assume risk or responsibility for solving problems, due to the fear that they will be blamed if something goes wrong. Simply associating yourself with a problem by pointing it out and making suggestions for improvement can prove costly. That is why properly documenting what was said and done, to demonstrate one’s own importance and innocence or ignorance of internal problems, may come to overshadow the focus on effective collaboration. Building a career today is in no small part about having the skill to disassociate oneself from making traceable contributions and to skirt accountability when necessary.

So, how does an organisation come to find itself in a situation where this is typical behaviour? My view is that succeeding, whether as a person, company, or a nation, often starts out with a situation where limited resources require ingenuity to solve a problem and to compete by increasing efficiency. The next thing you know, you’ have found smarter ways to get things done and are winning in the marketplace. The prerequisite then was then is a lack of resources for handling a clear problem, which defined everyone’s purpose. Without any clear obstacle to overcome, however, the primary drive and focus for the members of an organisation is to protect their position, and from there, atrophy is inevitable. There is a profound quote that states: “We have met the enemy, and they are us.”

Construction professionals need to be willing to accept that facing adverse outcomes is a natural part of the path to accomplish what they are attempting. The biggest threat to organisations is to have having no one willing to assume risk, because there is no incentive for them to do so. In the end, all innovation is about having courage. About Sameer Daoud

Sameer Daoud is chief development officer at Drake & Scull International (DSI). He leads the work to identify business trends and set strategic direction to create new business. Daoud has served as the Global Business Leader for Infrastructure & Water in Arcadis and as regional managing director Transport and Infrastructure at Hyder Consulting.

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Cutting EdgE dEsign

BIM has changed everything from the design workflow and the software used by engineers, to the design skills required and the visualisation of the project with clients.

Binary building Atkins’ senior product manager Steven Anderson and director of digital disruption for the MENA region, Marc Durand, explain the evolution of engineering design from a digital to a virtual reality model

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he rise of disruptive digital technologies has now become prominent in the architecture, engineering and construction industries. With buildings becoming increasingly complex in design and execution, traditional approaches are no longer suitable. Radical new innovations are required, and Atkins, one of the world’s most respected design and engineering and project management consultancies, is taking a lead in this movement. Atkins has been helping to shape the adoption of building information modelling (BIM) – the digital representation of the physical and functional characteristics of a building – since its inception. The team has been strategically proactive in leading the exploitation of BIM to implement better integrated design solutions for clients’ projects since recognising long ago that BIM represents the future for the industry. When the design and build contractors consortium appointed Atkins in 2006 to deliver the multi-disciplinary detail design for the civil works elements on the Dubai Metro

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project, BIM systems were not commonly used in mainstream civil engineering, despite their roots going back to 1963. Using Revit 2008, Steven Anderson, a product manager at Atkins, led a small team to drive BIM implementation and develop multidiscipline design models to demonstrate buildability and coordination on the Green Line section of the project. “We learned new skills and used technology which allowed us to resolve design

“The latest technology will allow realtime rendering with better graphics and to enable better engagement with clients”

problems within the models rather than on-site,” says Anderson. “In 2008, BIM was mostly undercover, as we were also learning how to use and best implement the technology, solving design challenges and building models virtually before building them. This also gave the client and the construction teams an understanding of how the stations and other facilities would be put together, with all the internal systems fully integrated.” Consequently, this project was the catalyst for the planning and implementation of new metro networks across the GCC. When implementing BIM, Atkins focuses on four areas: policy, process, people and technology. Atkins is involved in more than 50 projects around the world where BIM is being successfully applied to deliver projects more efficiently and effectively than traditional methods would have allowed. These are primarily delivered through a design-build process. With this approach, the use of BIM has proven invaluable to the project team, beginning with the design phase and continuing through planning to a project‘s construction, commissioning


Cutting EdgE dEsign

and operation. In 2011, it was appointed lead designer for King Abdulaziz International Airport in Jeddah. This was the first major multi-disciplinary project where BIM was embraced across the Atkins group, and information management started to gain traction. At this stage, the maturity of BIM was mainly driven by the requirement to coordinate design and provide material quantities for the site construction teams. Today, Marc Durand, director of digital disruption for MENA, says Atkins is using digital tools to drive new ways of working with clients. An example of this is MR (mixed reality) technology, which bring members from anywhere into a project’s eco-system, linking all the visualisations with engineering innovations. Using virtual reality (VR) to

engage stakeholders in the design helps ensure clear, comprehensive understanding between the client, the design intent and contractor. In the past, projects in the Middle East have required numerous design changes as a result of problems understanding 2D drawings. Immersive environments help demystify the understanding of data. Not everyone can do coding or manage databases, but everyone can quickly learn to navigate a virtual model and access data through it. Durand adds: “Atkins will continue to put a lot of resources into developing a whole line of products, to drive further innovation within the organisation.” As clients become more educated, technology will enable more co-creation with

clients on projects. With the capabilities of clients growing, there will also be more rapid growth and adoption of these digital tools. There will be more integration and thirst for access to information, even before a project has started. Clients are moving into faster understanding, acceptance and decision-making, including deep dives into topics, without limiting the number of design possibilities. The latest technology will allow real-time rendering with better graphics and displays. This will make it easier to immerse clients in the design ecosystem to help them fully understand the design intent. It also opens the possibility of designing with clients in real time, with real-time output, by placing them into a simulation before buildings are built.

Working with early computer technology in the 1950s, teams at Atkins developed stress analysis tools, project planning programmes and one of the first optimised structural computer-aided design packages in the industry, eventually supporting its teams in putting computers to work across the business. Development in computer services also helped to quickly design things that were cheaper – but still needed the engineer to fit all the answers together. Computers were so cutting-edge that most of the time was used to test exactly what could be done to benefit the business. Today, this legacy of embracing technology enables Atkins’ teams to meet the technical challenges of clients’ most complex infrastructure projects. 29


CONSTRUCTION IT

IT is in essence just another tool – but an essential one, considering its widespread application in all aspects of a construction business.

Finding the right tool for the job Ian Hauptfleisch, general manager of Construction Computer Software (Gulf), explains why having the right IT tools is crucial for any project

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f we don’t use the right tools, equipment, systems and processes, then quality, speed and safety will be compromised. So why don’t we apply the same notion to the IT solutions we choose to implement in contracting organisations? The purpose of IT is to streamline business processes, increase accuracy and efficiency, provide auditable and accurate information, reduce cumbersome and error-ridden manual capture(s), collation and analysis, and most importantly to save you time and money. Can this be said of the IT solutions you have in place right now? IT is in essence just another tool – but an essential one, considering its widespread application in all aspects of a construction business. Admittedly, software doesn’t make people work, but rather vice versa – the cliché ‘what you put in is what you get out’ rings true. However, software must be purpose-oriented and provide the necessary platform, features, functions and ease of use to make input a formality and timely, reliable and accurate output a reality. 30

“Processes and procedures imposed by companies are often there to compensate for the inadequacies of the software solutions in place”

IT solutions are either earning or costing you money. The construction industry is unique, considering the many variables associated with it, and it is for this very reason that the IT solution(s) procured and implemented to manage these challenges are best of brand and fit for purpose. The standard accounting data that most systems can provide is not sufficient, relevant or timely enough for effective control of construction projects. Processes and procedures imposed by companies are often there to compensate for the inadequacies of the software solutions in place. The overhead involved in implementing and complying with these superfluous processes and procedures is costly. If the software is fit for purpose, the best practice processes and procedures should be intrinsic to the software itself. Considerations when reviewing an IT solution for the construction environment: • Be cautious of the ‘we’ll customise it for you’ pitch. If software is fit for purpose, minimal customisation should be required.

• Don’t be sold on dreamware. See the software work and meet existing users. • Be wary of funding the IT vendor’s research and development costs. • Does the IT vendor understand your business intimately? • Quality and locality of support – get existing users’ impartial opinions on their support and service experience. • Access to development staff, not just salesman or technicians. • Expect to pay – if a system is worth it and has the credentials to prove it, the savings made and reduction of losses will easily and quickly offset the cost. • It doesn’t happen overnight – there is a learning curve and settling-in time associated with any new software application. • Software doesn’t make people work, people make software work. Implementing the best solution but not having the right buy-in and personnel to drive and champion it is akin to having the best F1 racing car – driven by a jockey.


CONSTRUCTION IT

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GREEN BUILDING

A road map for green building Ibrahim Al Zu’bi, head of sustainability at Majid Al Futtaim Holding, provides an in-depth look at how the retail developer has integrated green building principles across its properties

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he environmental impact of buildings and the construction sector is indisputable. According to the United Nations Environment Programme (UNEP), buildings contribute up to 40% of the world’s total greenhouse gas emissions and approximately 25% of water consumption. At 32

the same time, construction uses more raw materials globally than any other sector, per statistics released by the World Economic Forum in 2016. These figures are troublesome at best, especially given the co-existing threats to global resources that climate change poses. The good news is that regulators and key property

sector players are becoming increasingly aware of the issue, as demonstrated by the emergence of numerous green building certifications, including LEED, BREEAM and Estidama, in recent years. In addition to minimising water and energy consumption and waste production, green buildings generate their

own energy through on-site renewable sources while taking into consideration their socio-economic contribution to surrounding areas. Essentially, integrating green building principles in property ensures that a development has a favourable impact on customers and tenants – how they shop, how they work


GREEN BUILDING

The benefits of green buildings are not purely environmental but should also lead to improved income and reduced operating costs.

LEED Gold at Hilton Garden Inn in Dubai and BREEAM Communities accreditation at Al Zahia – a first for the region. The benefits of green buildings are not purely environmental. They extend to long-term financial benefits in terms of both income and reduced operating costs. For example, across our assets, our operational portfolio has experienced a reduction in like-for-like energy and water consumption of 139.7 million kw/h and 1.9 million m3 between 2010 and 2015. We have also had an 18% improvement in recycling rates across our hotels and a 17% improvement at our malls, and the installation of LED lighting across our malls is expected to save the business $820,000. To shape our journey of integrating green building principles across our assets, we have established a green building excellence toolkit comprising six key elements. At its core, this toolkit can be adapted and used as a roadmap for green building development.

and their lifestyle decisions. For Majid Al Futtaim, this definition has informed the way we operate, and over the years we have attained numerous green building milestones. These include LEED Platinum certification at City Centre Me’aisem and My City Centre Al Barsha, Earth Check certification at 11 of our hotels,

1. Conduct market research Prior to setting or reviewing any internal policies, a comprehensive review of international best practices must be conducted to help shape the contents of relevant policies, the procedures that support their implementation, and the manner in which their performance is tracked and monitored. 2. Set and review policies Policies are the foundation of the green building strategy. Majid

“Our operational portfolio has experienced a reduction in like-for-like energy and water consumption of 139.7 million kw/h and 1.9 million m3 between 2010 and 2015. We have also had an 18% improvement in recycling rates across our hotels and a 17% improvement at our malls”

Al Futtaim has established five main policies to support our goals in this realm. Each policy is reviewed on an annual basis and updated in accordance with international best practices. Green Building Policy: Our Green Building Policy sets out a series of objectives for each of our business units to support the development and operation of green buildings. Critically, it sets out our commitment to achieving LEED Gold or equivalent on all new construction projects. Energy Management Policy: Our Energy Management Policy ensures the application of electricity and water efficiency concepts in design and development, and throughout the operational lifecycle of our properties. It aims to limit and control electricity and water wastage, minimise electricity and water costs, and reduce carbon emissions and environmental impact. Labour Standards Policy: This policy sets out the standards we apply to our own employee workforce, and which we expect our direct suppliers and contractors to meet – for example those building and operating our assets – to ensure the protection and enhancement of labour standards. Procurement Policy Framework: The framework sets guiding principles to ensure that all suppliers perform in line with a host of criteria around environmental protection, energy conservation and social considerations Green Star Ratings: Majid 33


GREEN BUILDING

The installation of LED lighting in the malls owned by Majid Al Futtaim Holding are expected to save the business almost $1 million.

Al Futtaim’s Green Star Rating system is a market first. It assesses the sustainability credentials of store fit-outs; last year, 343 green star ratings were awarded across our portfolio. All Majid Al Futtaim mall tenants must achieve a minimum of three stars. 3. Establish best practice procedures Best practices act as howto guides, to ensure clear ownership and understanding of the way policies should be applied, tracked and interpreted across different asset classes. Examples of key procedures which support Majid Al Futtaim’s green building goals include:

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“As the economies of the MENA region grow, so will the strain on key resources such as water and energy. This challenge will be further augmented by the region’s climate”

Community Engagement Guidelines: This charter, and the accompanying guidelines, ensures that we consistently maintain an inclusive, engaging approach towards our key stakeholders to understand their needs and develop long-term mutually beneficial relationships in developing and operating our assets. Sustainability Implementation Plan: This project-based tracker enables us to apply our high-level commitments across all our developments and tailor them to the specific conditions at each site, to ensure meaningful sustainability objectives are delivered for every scheme. Labour Audits: We conduct

regular health and safety audits of the supply chain workers on our construction sites and in our assets, and labour accommodation audits for staff that receive labour accommodation provisions. These audits ensure that all direct suppliers and contractors abide by our Labour Standards Policy, and provide a formal opportunity to collaborate to improve conditions. 4. Communicate goals to key stakeholders Once a set of policies and procedures is established, it is important to consider how best to communicate them to the wider business. The combination of communication


GREEN BUILDING

channels used depends on the nature of the policy or procedure being publicised. However, it is important to bear in mind that the continued success of any sustainability campaign relies on the sustainability strategy being relatable and easily communicable. 5. Track performance Establishing a monitoring process is vital to ensuring that the desired results are delivered against the green building objectives. One means by which Majid Al Futtaim consistently measures performance is via our environmental performance tracking process, which comprises: Construction Environmental

Data: We consistently collect data across all our new construction sites to ensure that we can measure, understand and manage the environmental impact of our developments. Tracking our socio-economic performance: Twice a year, we audit the accommodation our contractors provide to construction workers, to ensure the accommodation provided meets the requirements stipulated in the Labour Standards Policy. Tracking Operational Environmental Performance: We collect electricity, gas, water and waste data for 100% of the assets over which we have operational control, the results of which inform our

asset-level environmental improvement plans and help us understand the impact of our green building certifications on actual performance.

group would support decisionmaking and demonstrate the business case for green buildings through collating and reviewing lessons learned.

6. Collate, review and share lessons learned Taking stock of lessons learned along the way, and building on the findings of performance tracking, is critical to ensuring the best possible return on investments in green buildings Developers must make concerted efforts to innovate internally and externally. For example, consider establishing a working group tasked with challenging the business to lead by example and pioneer leading standards. The same working

In conclusion As the economies of the MENA region grow, so will the strain on key resources such as water and energy. This challenge will be further augmented by the region’s climate. More than ever, resource efficiency is critical to long-term sustainability of the MENA. For property development, integrating green building is an effective way of reducing energy consumption, improving water management, reducing waste and attaining financial gains.

Decrypting the impact of green codes Wayne Morgan, sustainability consultant at Cundall, says green building codes and regulations are helping the UAE to take the right steps towards achieving tangible results in reducing energy consumption. “Over the last five to seven years, the increase in both the number of green building codes and their implementation has seen an increase. Originally, the LEED certification process was used, along with Estidama’s Pearl Rating System from 2010. In recent years, however, there has

been a drive towards further localisation of standards, with the introduction of the GSAS Sustainability Rating System in other GCC countries, and more recently the newly released Al Saafat Rating System in Dubai. “From 2018 onwards all buildings are required to achieve a minimum rating of Bronze, by using the system. This is a clear drive to reduce the energy consumption of all new buildings, which in turn will force developers and designers to more closely consider the impact of the design and construction of

the building. While previous regulations and rating systems have been in place and used, this is the first mandatory requirement put in place, which will ensure that minimum reductions will be met. “Initiatives like this demonstrate a step in the right direction for ensuring sustainable practices are used throughout the UAE. Not enough emphasis is being placed on the use of sustainable practices – whether it’s developers, consultants or contractors. Having the Al Saafat Rating System in place will now

ensure that this is achieved on all buildings in Dubai. “The recent introduction of the WELL building standard has only had a small impact within the region, with only a few buildings looking to achieve any level of certification at this time, although we are seeing an increased interest in it. The WELL standard is more occupant-driven and ensures the health and well-being of the building’s occupants. This will help drive the technologies within buildings to be more adaptive to the occupant and their overall experience.”

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FAÇADES

On the face of it AESG on the importance of collaboration in façade design

L

ast year, saw the release of the updated Fire and Life Safety Code in the UAE which introduced new guidelines for building facades. This included additional fire testing requirements, installation guidelines and definition of the roles and responsibilities of each party involved in the project. On our recent projects, AESG have been working with developers and design teams to assist in developing façade designs that are in line with the new code requirements. AESG’s façade team are uniquely positioned to deliver truly integrated façade designs to our clients. The division is headed by Belarmino Cordero who has a background in 36

architecture and a PhD in construction technologies. His knowledge and architectural flair is in many ways an advantage when it comes to consulting on façade design as it ensures that the architectural intent of the design is preserved. Miguel Fernandez, a senior façade consultant at AESG, meanwhile has a background in façade contracting, which means that he is well placed to consult on making the architect’s ideas work from an engineering and constructability perspective without distorting the design intent. Within AESG’s façade team also exist skills in BIM, energy simulation and fire and life safety. This combination of expertise contributes to the development of

“Beyond architects and designers, the market has also seen a growing demand from contractors for consultancy services to assess the risk of non-compliance with the new codes”

truly integrated façade solutions. According to Cordero, developing world class façade designs relies on the coordination of multiple disciplines in the design team. For this reason, AESG champion a bespoke iterative design process which enables design solutions to be optimised. This interaction between architects and façade designers can involve a validation of a façade design or can go into a deeper process which examines aspects such as the selection of materials. This has evolved rapidly under the new guidelines, particularly over recent months. Cordero explains, “We have also seen a requirement to work together to get civil defense and other authority


FAÇADES

The updated Fire and Life Safety Code in the UAE has introduced new guidelines for cladding such as testing, installation and clarification of responsibilities for each party involved in a building’s development.

“It is critical for contractors to identify any issues as soon as possible so they can raise it with the civil defence at an early stage” approvals during construction”. Beyond architects and designers, the market has also seen a growing demand from contractors for consultancy services to assess the risk of noncompliance with the new codes. The code now asks for a larger scope of testing and site validation to be carried out. Furthermore, there are mechanisms of continual adjustments which can be applied to lessen the impact, but the question of whether construction of the façade system will ultimately adhere to the code, and/or whether further tests will need to be paid for, is placing a degree of uncertainty into contractor minds. It is therefore critical for them FACADE + FIRE

to identify any issues as soon as possible. That way they can raise potential issues with the appropriate parties at an early stage to determine whether there will be any extra costs involved. Some contractors are adjusting to the new process faster than others and are becoming more and more prepared to pay to engage a consultant while they are tendering. By doing this, they can assess a design to make sure they have the budget and have made some provision to have some contingency for additional testing that may be needed well in advance. They are also preparing for a possible outcome where some part of the design may

be non-compliant in a year or two down the line. Cordero continues: “AESG has also seen interest grow from developers. In the past when the codes were not as robust when it came to façade materials there were less controls in construction. “Consequently, some buildings were constructed using materials, such aluminum epoxy panels with a combustible layer, that would not meet today’s standards. If you are starting to build a façade system from scratch the difference in cost to meet the new codes can be negligible. He adds: “Retrofitting where all of the cladding is removed or an entire façade

refurbished can be expensive. Nevertheless, AESG has seen design enquiries for retrofits increase over the past year.” Many of these approaches in 2017 were initial cost exercises to ascertain what would need to be budgeted to upgrade the façade to current standards. In other cases, building owners were in the process of selling a building or revising the building insurance policy and therefore required a clear understanding of any fire risks associated with the façade. We have also had cases where we have been approached by sellers who have been asked by buyers for a cost-analysis of a refurbishment before they would acquire a building.

AESG’s integrated FLS-façade design process AESG’S INTEGRATED FLS-FACADE DESIGN PROCESS

C O N C E P T / S C H E M AT I C

D E TA I L

TENDER

FIRE REQUIREMENT F O R F I R E S T O P S AT FAC A D E S

INFORM THE DESIGN

V A L I D AT I O N I N REGARDS OF COMBUSTIBILITY/ SPREAD OF FLAMES

CLADDING M AT E R I A L S / SYSTEMS

REQUIREMENT F O R F I R E R AT E D

V A L I D AT I O N

FAC A D E S

I N T E R P R E TAT I O N INFORM THE

OF FLS CODES

DESIGN

AFFECTING

FLS REVIEW PRIOR SUBMISSION

FAC A D E D E TA I L S A N D S P E C I F I C AT I O N S

FAC A D E S

FACADE CASE STUDY: YAS South, IDR, UAE Arena AESG’s Façades and Fire & Life Safety team has provided an integrated design review to assess the risk of non compliance against the new 2017 UAE Fire and Life Safety Code.

37


QUALITY MATTERS

voestalpine Metsec Metsec has been active in the GCC for over a decade working closely with engineers,fabricators and architects to efficiently design and specify purlin products.

38


QUALITY MATTERS

Steel framing systems: How design is a crucial element in project success Robert Marsh, commercial & technical manager for Metsec in the Middle East, explores the company’s heritage and how it’s framing design capabilities help reduce cost and product wastage for customers

S

pecialist cold rollforming company voestalpine Metsec plc has been providing products for construction and manufacturing industries for over 85 years. It focuses on adding value through quality products, expert design, precision manufacturing and on-time, in-full product delivery. With offices in both the UK and Middle East customers have access to support across a range of construction projects including

commercial, residential and industrial developments. Service Offering Metsec offers purlins, side rails and steel framing systems, including infill, continuous and high bay walling as well as complete SFS load bearing structures, to the Middle East region, and boasts an impressive number of major projects both in the UK and Middle East including Abu Dhabi airport, the Nakilat Damen shipyard, and Warner Brothers World in Abu Dhabi to name a few. 39


QUALITY MATTERS

Metsec is a name that people in the construction industry know and trust and this is reinforced through strong long-term relationships, and working closely to deliver the most cost effective solutions and the highest level of customer service. Collaboration & Support Metsec works collaboratively with project design teams to produce value engineered designs, and offers its full design capabilities to any project it works on. Design

40

specification drawings can be produced for estimating support and full construction drawings are underwritten by Metsec’s professional indemnity insurance and warranty, should Metsec products be used, providing customers with complete confidence in its service and systems. Metsec warranties, in particular, have proven popular in the Middle East, as they give that added layer of reassurance and help reduce liability and risk on high profile projects.

Benefits of Design Collaboration Metsec works closely with the consulting engineers, architects and contractors at design stage and our design engineers work to produce value engineered solutions to help streamline and produce the most efficient design. The experienced Metsec in-house design team can help reduce design time on projects by taking responsibility for the design of the steel framing, making the process for contractors, architects

and engineers more efficient. Our design software quickly provides the most economical solution available based on the design parameters inputted. The design and planning stages underpin an entire construction project. If this crucial part of a project is rushed or all relevant parties are not properly consulted, a project will be subject to constant changes as it develops, to factor in elements that were not fully considered or understood in the initial stages. The design is the most


QUALITY MATTERS

Metsec’s own design team will work alongside engineers, architects and contractors during a project’s early stages to streamline the construction.

“The design and planning stages underpin an entire construction project. If this crucial part of a project is rushed or all relevant parties are not properly consulted, a project will be subject to constant changes as it develops” crucial stage of any project and getting it right before moving ahead is the foundation for a smooth delivery and successful build. During early planning stages, manufacturers and specialists – like Metsec – can offer a myriad of benefits. Working collaboratively, main contractors and architects can enlist not only technical and estimating support, but can benefit from Metsec’s consultancy. Engaging all relevant parties at design

stage promotes a collaborative approach from the outset. Service Service is at the heart of everything Metsec does. With a deep understanding of customers’ needs, Metsec invests in systems and resources to meet those needs. This has been the cornerstone of the long-term customer relationships that have been built by Metsec. Metsec provides CPD training, expert technical

advice, updates customers on its BIM capabilities, as well as offer free design and support services on products to ensure all parties have support throughout all projects. Metsec’s superior design capabilities mean it can partner with customers to value engineer and accurately specify the solutions needed for their project – which often brings substantial cost efficiencies to its customers. Additionally Metsec is the first Tier 2

Designer and Manufacturer complying with BIM Level 2 for Design & Construction in the UK, the first tier two organisation globally to have achieved the new Kitemark for BIM (PAS 1192-2) from BSI, the business standards company and has BIM models for all its purlins and steel framing products able to be downloaded from their website. This means we are experts with regard to BIM and able to provide support on all BIM projects. 41


PPP FOCUS

Time is a factor. Building infrastructure for mega-projects such as Expo 2020 Dubai is encouraging a wider adoption of PPPs in the GCC.

Putting PPP in the frame Why hasn’t the region fully embraced PPP funding? Experts offer insight into the barriers to success and the need for a legal framework

P

ublic-private partnerships (PPP) have come to the forefront across the GCC in recent years, due to significant infrastructure requirements and reduced government budgets. Budgets have shrunk for many reasons, but primarily due to the steep decline and continued stagnation of hydrocarbon revenues. The result is that projects and sectors once exclusively funded by governments have now been opened to the private sector. Through PPP, regional governments can leverage efficiencies and expertise in the private sector to achieve their development goals. Despite this potential, however, PPP has yet to gain significant acceptance and traction in the GCC. “Collaboration between the public and private sectors in the GCC has been around for some time. However, the relationship has generally been restricted to service contracts and to the water, energy and transport sectors. Most projects in GCC markets developed using a recognised PPP model have traditionally done so under each market’s own version of tender and procurement laws,” says Ahmed Almihdar, senior research analyst at JLL.

42

“There are several financing-related risks, so it’s important to ask the following questions: Does an enforceable legal framework exist? Are there funding guarantees? Is the government committed to meet its obligations?”

One of the key reasons PPP has yet to make a mark is due to a lack of legislation; however, this has begun to change. Almihdar elaborates: “A PPP legislative framework is currently lacking in most GCC markets, with the exception of Kuwait and the emirate of Dubai.” He continues: “Kuwait has made the most progress in establishing a PPP framework, having released a PPP law in 2008 and expanding it in 2014. Dubai introduced its own PPP law in 2015 and is looking likely to update it in the coming years. Oman and Qatar have also announced that they are drafting a PPP law, while Saudi Arabia established the National Centre for Privatisation in 2017 and is thought to be drafting its own PPP law as well.” Parsons’ Javad Farooq agrees with Almihdar’s assessment, adding: “Considering the sustained depression in hydrocarbon prices, the region appears primed for public-private partnership opportunities. Some countries are more advanced than others in the legislative process, supported by appropriate authorised bodies; however, all of the countries appear to be exploring this form of project delivery.”

As governments look to fulfil their commitments for the delivery of infrastructure, especially with regards to time-sensitive mega projects such as Expo 2020 and the 2022 Qatar World Cup, the benefits of PPP are perhaps even more relevant to them today. “New accommodation is generally provided as part of the process. This will be aligned to design and construction best practice, with new facilities being maintained for a concession period, typically 20 years or more. The public sector entity makes no payment for the facilities or services until the contractual handover date, so there is always a powerful incentive for the developer to complete the works in accordance with the programme. There are also significant sanctions for failure or non-performance, both during the construction and concession periods. These keep the building contractor and facilities management contractor focused on performance. PPP projects are also described as being off balance sheet, which is a significant consideration for businesses when capital-funded versus revenue-funded alternatives options are being planned,”


PPP FOCUS

comments Paul Sweeney, regional director – head of Programme Management KSA at Faithful+Gould. Yasser Khan, business director at Arcadis, adds: “Access to third-party finance is an obvious benefit as it reduces the need to borrow; however, when done well, the value extends much further. PPPs can harness the private sector to drive efficiencies and bring in levels of financial, technical or technological expertise that may be less developed in some government departments.” While PPP as a form of procurement offer several

benefits, there are also risks that can have a significant impact on the delivery of projects. “There are several financingrelated risks, so it’s important to ask the following questions: Does an enforceable legal framework exist? Are there funding guarantees? Is the government committed to meet its obligations? If the answer to these questions is no, securing the requirement capital from banks may prove difficult or costly. If there’s a failure on the operator side, the costs of re-entering the business could be significant. It should also be understood that the

procurement and tendering processes are complex, costly and lengthy compared to the more traditional procurement methods, and the public body needs to remain committed throughout the process,” cautions Parsons’ Farooq. JLL’s Almihdar notes that the immature PPP sector and the lack of established legal framework are risks for international firms looking to enter GCC markets for the first time. That said, he says there are benefits to entering the market at this nascent stage. “Those who choose to absorb the risk and enter while the market

develops could benefit in the long term. Early participation can develop relationships with government agencies, as well as the practical skills and knowledge to position private sector consortiums as frontrunners for future PPPs.” Taking the complexity of PPP into account, clients must fully understand and chart in detail their requirements, while the public sector should select partners who are committed to the project and have the capacity to take it on. F+G’s Sweeney is keen to point out that obsolescence is another real risk on projects 43


PPP FOCUS

Contractors in the region take the downside risk and the clients take on the upside risk which often leads to PPPs failing, argues Faithful+Gould’s Paul Sweeney.

“PPPs can harness the expertise of the private sector to drive efficiencies on a project, and can often bring in levels of financial, technical or technological expertise that may be less developed in some government departments” of this nature. “Design, specification and construction obsolescence is also a risk. For example, technology is constantly evolving at pace, so what is state-of-the-art today could become obsolete in 12 months. On major projects, technology to be installed three or four years hence is a real challenge, as solutions at that time will be better, smaller, more efficient or fundamentally different. In this case you have to ask, how can the public sector get what they need, as educational or healthcare demands evolve?” Barriers to PPP Success Research published in 2016 by MEED found that 23% of

44

the 80 PPP projects brought to market in the MENA region since 1996 failed to conclude in a deal. A number of reasons cited in that report have yet to be addressed, while new challenges have also appeared. “Up to now, one of the biggest barriers to wider adoption of PPP in the region has been the procurement approach that’s traditionally followed. The current model transfers most of the risk on to the private sector; however, in some instances, this just adds higher costs to a project rather than additional value,” Arcadis’ Khan points out. Recent political issues have also had an impact, according to Parsons’ Farooq. “Political changes, the assignment of

risks and a lack of due diligence with respect to determining the value for money (VfM) have all contributed to numerous PPP projects in the region not being concluded. Risk allocation is probably the largest barrier to success. It is imperative that risks are allocated to whomever can best manage them. Assigning all the risks to the private sector results in unsustainable projects.” “Seeking to retain control of the asset, while expecting the private sector to provide the necessary investments comes a close second. To attain maximum benefit from a PPP, owners should be comfortable in allowing the private sector to manage all aspects of the

project from construction to operations. A change in mindset is required whereby the public entity transitions from its traditional owner/ operator role to a position of overseeing the output and performance based on agreed key performance indicators (KPIs); that is, they need to focus on the services rather than on directly owning and operating assets. For organisations with limited PPP experience, this can be extremely challenging, as it can result in a feeling of loss of control.” JLL’s Almihdar notes, “Each GCC market operated separately in the implementation of PPPs, therefore there are a number of reasons behind PPPs not


PPP FOCUS

fully launching in the GCC. Reasons include the structure of models used not falling within traditionally defined PPP models, which makes it difficult to adopt and use in similar/other projects. A failure to establish a stable governing body to oversee the bid process, resulting in delays, also led to investor frustration and hence hesitation in some markets. Political will pre-low oil prices was not as strong as it is now in most markets. This, combined with a lack of legislation, a governing body and clear policy towards PPPs, restricted the growth of the PPP sector in the GCC.” Building a Conducive Environment It’s obvious regional governments still have work to do to ensure that PPP projects conclude favourably in the region. F+G’s Sweeney advises, “There is a requirement to ensure fair regulation and contracting of PPP to make sure both parties are treated amicably – something which traditional contracting in the region hasn’t always been incredibly strong at. A true understanding of risk and reward needs to be understood and accepted by all. The contracting nature of the region rather leans towards contractors taking the downside risk – lump sum – and clients taking the upside risk – VE, etc – which will ultimately cause PPP to fail.” Arcadis’ Khan agrees: “To attract private sector investors and operators, transparent policy frameworks and a fair allocation of risk are

key. Similarly, attractive deal structures with a clearly defined project scope and adequate guarantees on the expected financial return will help to encourage participation in PPP deals. When it comes to the framework put in place, avoiding unnecessary intricacies is also important as this could put off some stakeholders, particularly those with no previous exposure to this procurement model.” In contrast, JLL’s Almihdar says, “Establishing a PPP law is not a prerequisite to successfully complete a project under a PPP framework, and we have already seen examples of this across the GCC markets. In more established, mature real estate markets (the UK, Australia, etc), it is not uncommon for there not to be formal PPP legislation but principles and guidelines instead, and PPPs in those markets have been successfully carried out this way for decades.” He is also quick to point out that GCC market pressures are different to others around the world, which means the region may not be able to adopt the same approach. “While the GCC markets can follow in the same path, growing populations, limited budgets and ambitious plans have placed pressure to develop the PPP market in a short timeframe. The GCC markets are also disadvantaged by there being a number of failed PPP projects, limiting the usage of precedent to develop and progress the sector as mature markets have done.” While successful PPP projects have been few and

“Collaboration between the public and private sectors in the GCC has been around for some time. However, the relationship has generally been restricted to service contracts and to the water, energy and transport sectors”

far between in the GCC, signs of positive change have been seen in recent years. Parsons’ Farooq says, “A successful, albeit relatively small PPP project is the Muharraq Sewage Treatment Plant, the first PPP in Bahrain. Now in the operational phase of the 27-year period, the project has achieved numerous recognitions. I think the project has been a success because it really sought to exploit the benefits of involving the private sector. The project was well structured, the selected private-sector consortia were of high calibre (a testament to the prequalification process), risks were justly assigned and the private sector was able to innovate and introduce new technologies into the Kingdom for the provision of quality services.” In Saudi Arabia, there have been more recent successes. “GACA has been a prevalent user in recent times on PPP. We’ve seen Madina airport successfully delivered by the TAV consortium and have seen a further three airports awarded in this format in 2017. Furthermore, in the power and water sectors in the Kingdom, the dominant delivery vehicles are alternative funding – IWPs, IWPPs and IPPs. The successful delivery of these schemes can broadly be attributed to having experienced organisations within the delivery consortia and a client understanding of correctly partnering to bring the value the delivery model has to fruition,” F+G’s Sweeney concludes. 45


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46


XXXXXXXXXXXXX

47

Country focus Positive on a reforming Saudi Arabia Addressing KSA’s housing challenge UAE 2018 market review Planning for beyond Expo 2020 Dubai Living with VAT in the UAE Kuwait construction market to bounce back in 2018? Bahrain’s pragmatic approach to housing Oman prioritises its diversification programme Iraq begins its post-ISIS recovery Building a future for Egypt 47


DATA

The GCC in figures Population, in millions 30

Source: World Bank

32.75

25 20 15 9.2 10 KSA

UAE

4.05

4.42

Kuwait

Oman

1.42 Bahrain

Source: World Bank, KSA General Authority for Statistics, Oman Cenus Data, UN Data

% Nationals 100 80

63%

60

54%

52%

Oman

Bahrain

31.3%

40 15% 20 KSA

UAE

Kuwait

Real GDP (2016), in US$ billions 750

Source: World Bank

646.4

600 348.7

450 300

110.8 150 KSA

UAE

Kuwait

66.2

Oman

Gross National Income per capita 50k

Bahrain

Source: World Bank

40,480 34,890

40k 30k

32.1

27,720 22,660 18,080

20k 10k KSA

48

UAE

Kuwait

Oman

Bahrain


DATA

Percentage of active construction projects 40 38% 35%

30

20

10

5%

3% KSA

UAE

2%

Kuwait

Oman

Bahrain

Fiscal breakeven oil price projections 2018 (est.) in US$

Source: IMF

100 99 70 75

88.9

68 46.5

50

25

KSA

UAE

Kuwait

Ease of doing business

Oman

Bahrain

Source: World Bank

GCC Rank

Country

Global Rank

1

UAE

21

2

Bahrain

66

3

Oman

71

4

Saudi Arabia

92

5

Kuwait

96

Global Economic Forecast Annual GDP Growth (%)

Source: World Bank

2017

Country

2019

0.6

Saudi Arabia

2.1

2

UAE

3.2

0.2

Kuwait

2.7

0.9

Oman

2.9

1.9

Bahrain

2.3

49


SAUDI ARABIA

Positive on a reforming Saudi Arabia Faithful+Gould’s David Clifton and Donal O’Leary provide an overview of Saudi Arabia’s economy as it enters 2018

O

PEC’s commitment to maintaining constraints in production, coupled with a series of geopolitical events (Kurdistan, Iraq and Iran) and pipeline breakages, means that oil pricing has returned to a $67 per barrel point that has not been seen since May 2015. Although US shale production has picked up most of the lowhanging fields of production, it will subsequently require major investment into new, harder to develop and costlier locations, and therefore we are less likely to see the decline in crude prices. This gives the potential for a lesser budget deficit for the year than currently forecast. The 2018 budget shows an overall increase of 9.9% to $263

50

billion, which includes a 13.6% increase in capital spending to $54 billion. Although this incorporates some already committed monies to new projects, we expect to see a significant uplift in government project awards through the year. With 12% of the budget being funded by debt, we would anticipate a significant further bond issuances soon, – both in US dollars and local denominated Riyals. Total government expenditure is significantly increased when including the Public Investment Fund’s $22 billion and other funds committed to stimulus at $13 billion – a record total of $298 billion. With change very much on the agenda, we’ve seen construction awards lower than we forecast, due to a relatively

“We expect the significant rollout of project management offices (PMOs) across the government and semi-government sector to gain traction during 2018, with prioritised projects and programmes being rolled out at a significant pace”

poor end to the year, at a level comparable to 2016 of- $22bn. Market dynamics are leading awards away from buildings, roads and rail to a high level of activity on power and water and oil and & gas (relative to the previous year). This is expected in the short term to continue, as the delivery lead times on independent power projects (IPP) and independent water and power projects (IWPP) for delivery is significant, and power and water capacity need to be in place early in the development curve. The funding models for these type of developments are well understood regionally, and successful schemes are already in operation. Over the course of 2017, the pipeline of programmes and projects within the industry


SAUDI ARABIA

With funding in place, the government is expect to award more contracts in 2018 as further declines in the oil price are not expected in the year.

has experienced significant flux. With the reprioritisation programme undertaken, we saw the potential works under build or in pipeline decrease from $1.05 trillion to $800 billion in early 2017, before the wave of announcements later in the year, which lifted the market potential to $1.75tn. As the construction industry looks to recoverry over the coming years from after six consecutive quarters of contraction, the 2017 forecast contribution to GDP is $41.5 billion or 6%. The increase in the Kingdom’s budget and the raft of new announcements adds a level of tentative positivity for 2018-2020. We still have a tight lending environment, which is certainly constraining a significant proportion of the private sector that does wish to commence delivery of developments. An additional constraint has been the uncertainty associated with the supporting infrastructure developments that the private sector needs from the government sector. We expect the assigned budgets to actively encourage the private sector to move quite quickly – especially in the fields of housing, hospitality and manufacturing. With the continued loss in backlog for the industry, we have seen another year of contraction in 2017, as the workforce has shrunk as it did in 2016. Given our expectations for 2018, it is expected that by late year, backlogs should come under less pressure. We also expect the significant roll-out of project management offices

GDP, 2008-2018 ($ billion) 800 700 600 500 400 300 200 100 08

09

10

11

12

13

14

15

16

17

18

Construction as a percentage of GDP – KSA, 2012-2017 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 2012

2013

2014

2015

2016

2017

General inflation, January-November 2017 0.1 0 -0.1 -0.2 -0.3 -0.4 -0.5 -0.6 Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

(PMOs) across the government and semi- government sector to gain traction during 2018, with prioritised projects and programmes being rolled out at a relatively significant pace. This is a positive outlook for the industry, given the past two years of contraction and uncertainty. Whilst we know that bonds and PPPs (Public-Private Partnerships) are areas of focus and already being rolled out in certain sectors are already being rolled out, we anticipate seeing other potential forms of transaction come more into play. These could include reverse trade with the Kingdom’s largest customers. The potential to agree direct payment in oil for the delivery of large- scale infrastructure programmes is a distinct option. The pipeline of opportunities in 2018 means our forecast for contracting awards has increased by quite a significant percentage to circa $35 billion, as the governments’ commitments start to come through. This is led by schemes announced in previous years that we believed would be awarded by end of 2017 – including Makkah Metro – and Saudi Aramco’s continued drive to invest $414bn over the 10-year horizon. This is based on the significant increase in government commitment to expenditure a level of PPPtype funding, and on regional liquidity still being quite tight but with the attraction of ECA’s to support certain schemes. 51


SAUDI ARABIA

Addressing the housing challenge Knight Frank’s Raya Majadalani and Stefan Burch on Saudi Arabia’s commitment to affordable and available housing

52


SAUDI ARABIA

Knight Frank is broadly positive that the residential sector in Saudi Arabia will be strong in the long-term thanks to government commitment to tackling supply.

T

he residential market has for some time been softening as highlighted by lower levels of transactions and a correction in sales prices across major cities in Saudi Arabia. This trend is mainly due to a deceleration in economic growth triggered by the fall in oil prices and is exacerbated by a combination of more inherent factors namely the lack of affordability and limited access to financing, a supply shortage in the midto-lower end of the market as well as the lack of suitability of the existing stock. While we see this current situation prevailing in the short term, we remain broadly positive as a result of government initiatives looking to address key challenges restraining the residential sector in Saudi Arabia including high land prices, supply/demand imbalances and affordability among others. Regulatory efforts such as the white land tax, the large housing schemes and the mortgage law, display clear intent from the government to engage with the issues facing the residential

Saudi construction industry value, Real Growth vs. GDP (2016-2026) 8% 6%

GDP

4% 2% 0%

Real Growth

-2% 2016

2017

2018

2019

market in the kingdom. While efforts are slowly filtering through, we see these initiatives as a step in the right direction for a more active real estate market over the coming years. Longer term, demographic factors will continue acting as demand generators for the residential market in Saudi Arabia. This includes a large population which has seen a sustained growth rate over the past decades and a long term trend towards smaller size households. On a macroeconomic level, the economy is expected to gradually adapt to the new norm in oil prices as it diversifies away from its dependence on the hydrocarbon sector in line

2020

2022

Source: Ventures Onsite

357.9

400

331.4 280.3

300

200

2021

with economic reform programs. Therefore GDP growth should regain some momentum in the medium term mainly driven by non-oil GDP, which should provide support to the recovery in the residential market. Recently introduced strategic reforms aimed at creating a favourable environment for investment and strengthening the non-oil sector have placed a focus on real estate which is forecast to double its contribution to economic output throughout the period to 2030. Moreover, the implementation of various urban regeneration initiatives including mixed use communities and investment in infrastructures are expected to act as catalysts for sustainable

Saudi construction industry value, in SAR billions (2016-2026)

159.6

165.4

177.6

Source: Ventures Onsite

192.8

213.5

234.8

2023

2024

2025

2026

Construction and contracts Saudi Arabia will spend $293 million on major infrastructure projects across the kingdom which will include the implementation of 16,000 sanitary drainage connections to homes. A large technology hub could take shape in Saudi Arabia, if talks between Saudi Aramco and Google parent company Alphabet result in a deal.

305.5

255.9

84 hotels comprising 27,281 rooms will come online in 2018 says the ‘Saudi Arabia

100

Hotel Construction Overview’ report. 2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

53


SAUDI ARABIA

development and a more active residential market. The drivers for the Saudi Arabian residential market appear to be generally positive for the long term despite some key risks to market performance including: heightened geopolitical risks weighing on consumer sentiment, further volatility in oil prices and increased challenges entailed by the implementation of economic reforms. Despite maintaining a healthy GDP in 2015, the impact of the challenging macroeconomic backdrop, triggered by lower oil prices, started to trickle into 2016, with the GDP growth rate moderating to 1.7% and expected to further decline to near zero in 2017 according to the IMF estimates (Figure 1). Given the extent to which Saudi Arabia’s economy is reliant on the hydrocarbon sector, the sharp fall in oil revenues, has squeezed the kingdom’s budget surplus which has slipped into a deficit mode. The government has taken several fiscal consolidation measures to curb spending and diversify revenues in an effort to rebalance the budget and adjust to the realities of lower oil prices. Fiscal consolidation continued into 2017 with the introduction of the excise tax and the tax on dependants for expatriates. Coupled with an upward correction in oil prices, these measures should help alleviate pressures on the country’s fiscal position with the deficit anticipated to shrink to 9.3% of GDP in 2017 according to the IMF estimates. 54

Government spending versus revenues (SAR bn) Spending

1000

Revenues

Source: IMF economic outlook database

936

999

856

800

637

612 519

600

400

200

2015

2016

2017

Selected targets of the Saudi Vision 2030 and the NTP in relation with the real estate sector Source: Knight Frank Research, Saudi Vision 2030, NTP

Broad sector targets Increase the real estate sector’s growth to 7% per year up from 4% currently Increase the private sector contribution from 40% to 65% of GDP with particular focus on energy, healthcare, housing and municipal services Double the real estate contribution to GDP from 5% to reach 10% by 2020 Specific housing targets Establish PPPs to develop government land for housing projects Increase the percentage of available housing units to total number of citizens Increase Saudi families homes ownership to 52% by 2020 from 47% currently Other targets Decrease the average time required to approve new residential projects to 60 days Establish fast-track licenses and special finance packages to encourage private sector investment in housing projects

The introduction of the VAT regime at the beginning of 2018 at an initial rate of 5% will contribute in balancing the budget over the coming years. In an effort to adapt the economy to the new norm in oil prices, the government has embarked on an economic reform plan under Saudi Vision 2030 and the National Transformation Plan (NTP) that were launched in 2016 by targeting a diversification of the economy away from oil dependence and encouraging the private sector participation in this process. The real estate sector is a particular area of focus of the economic reform plans, where both the public and the private sectors are encouraged to take a role in ensuring the growth of the property market. We note that housing is the biggest area of government expenditure under the NTP with an allocated budget of SAR 59 billion of the total SAR 268 billion over 5 years, an encouraging step for the sector. As structural reforms are implemented and Saudi Arabia begins to see the benefits of its on-going diversification away from crude oil revenues, overall GDP growth is expected to stabilize at 1.1% in 2018 and should gain further momentum to reach 1.6% in 2019 as forecasted by the IMF. Non-oil sectors are expected to provide support to the overall economy with non-oil GDP growth expected to ramp up to 3% in the medium term ahead of overall GDP growth. The real estate


SAUDI ARABIA

sector has been the keystone of government initiatives in recent years. Various measures aimed at stimulating the property market across the kingdom have come underway. Recent initiatives include the release of regulations for the introduction of a 2.5% ‘white land’ tax on undeveloped land plots, the approval of regulations for the use and listing of Real Estate Investment Trusts (REITs), the introduction of a new mortgage law to boost home ownership, the development of a home-building programme, the launch of the Wafi online program and the creation of a

real estate refinance company by the Public Investment Fund. On the back of decelerating economic growth, triggered by the slump in oil prices in 2014, the residential sector saw a slow down in performance which has continued throughout 2017 in a context of tightening liquidity. On the supply side of the residential market, the reduction in government spending is impacting the financing of real estate projects resulting in delays and scaling back of many real estate and infrastructure projects. On the demand side, households’ real disposable

income has been dampened by weaker economic conditions. Tightening liquidity and fiscal consolidation measures have altered consumer confidence and eroded spending which has, in turn, undermined real estate transaction volumes and values. As a result, the residential sector experienced a decline in sales prices due to the lower level of activity. In recent quarters we have seen that residential real estate prices have flattened, which could be an indication that the market has bottomed out and may be close to stabilising following a year of rapid decline.

Data from the Saudi Arabian Monetary Authority (SAMA) reveals that while real estate residential loans granted by banks trended up sharply from 2011 to 2014, the rate of growth decelerated in 2015 down to 8%. The growth in housing loans remained stable in 2016 at 8% despite measures aimed at addressing the affordability of housing, including the rise in the loan to value ratio. Nonetheless, the growth of residential loans outpaced the growth rate of overall banks’ lending which stood at a mere 2% for 2016, as consumer confidence remains generally low.

KSA: The new GCC Warehouse In the whirlwind of news that came out of Saudi Arabia in November where Saudi Crown Prince Mohammed bin Salman followed up the relaxation of driving laws for women with a crack-down on corruption at the highest ranks of society, the mega-city project NEOM was almost a sidenote. Make no mistake, this is a major declaration that Saudi Arabia wants to place itself at the heart of transportation in the Middle East, Levant and Africa. $500 billion is promised for the 29,500 sq/km mega-project (you could easily fit the cities of Dubai,

Dammam, Riyadh, Jeddah, Abu Dhabi as well as Bahrain into it) that will build a city in the north east of the country close to the borders with Egypt and Jordan. Should it be successful the so-called city of the future (the name itself is a fusion on Neo meaning new and a derivation from the Arabic word “mustaqbal,” or future) would become a major trading centre. The planning for this new role for Saudi Arabia is in the early stages but transport minister Dr Nabeel al-Amudi recently asserted the desire to be a global centre for logistic services and to push its global rank forward in the index of logistic

services performance from 49 to 25, and to increase non-oil exports from 16% to a minimum of 50% of the non-oil GDP. “Transportation is vital in all other sectors, and is a major supporter of economic activity growth. Therefore, the ministry pledged to handle the existence of experts to discuss with them and get introduced to best international and local experiments,” he said. Amudi stated the Saudi decision to diversify its economy base and develop its non-oil exports is no more an option or a secondary decision after the Saudi Vision 2030 has paved the way towards the future, not

to mention the country’s wealth and resources. Initiatives to create financial or economic hubs have been attempted in the Kingdom of Saudi Arabia before with mixed results such as the King Abdullah Economic City and Riyadh’s King Abdullah Financial District. However, the scale, ambition and determination to be built outside of the government system in the Kingdom makes NEOM more a spiritual successor to Sheikh Rashid’s development of Dubai’s port and subsequently Jebel Ali Free Zone. Should it emulate that success then the Crown Prince will have his crown jewel.

55


UAE

According to CBRE, there is good news in both the residential and commercial property market in 2018 are a difficult year.

UAE property market overview Simon Townsend, senior director – Strategic Advisory, Head Valuation, Advisory & Consulting at CBRE, takes an in-depth look at how the UAE property market has performed over the course of a challenging year

I

n economic terms, the UAE appears to be one of the Middle Eastern countries best positioned to withstand the ongoing economic slowdowns witnessed across the region. The economy, buoyed by the presence of strong financial reserves and a relatively diversified economy, has helped to provide some insulation from the potential occurrence of significant financial deficits. Despite continued growth in GDP, there continues to be widespread cost rationalisation measures

implemented across both public and private companies, with the introduction of policy reforms aimed at further streamlining fiscal operations. Dubai Dubai’s economic activity is expected to strengthen during 2018, due to the implementation of various tax initiatives by the UAE government. This includes the introduction of excise tax on selected goods from October 1, which will positively impact the government’s revenue streams.

Office Market The performance of Dubai’s office market remains somewhat fragmented, with broadly stable conditions within the prime office segment but evidence of greater rental variances in the secondary market over the past year. Residential Market There is a notable growth in transaction numbers recorded during the period, maintaining positive momentum in the residential sales market.

According to data from the Dubai Land Department, the total value of residential transactions increased by approximately 11% in H1 over the same period last year, driven by growth in overall transaction numbers, which rose by close to 29%. However, average sales prices experienced a minor dip, falling by around 1%. Hospitality Market While there has been some pressure on hotel revenues, demand levels have generally

Average Dubai prime office rentals, Q3/2012-Q3/2017 (AED/sqm)

Average Dubai apartment rentals, 2014-2017 (000 AED/sqm)

2,000

160

1,500

120

1,000

80

500

40

2012

56

2013

2014

2015

2016

Studio

2017

Q3 2014

1BR

2BR

3BR

Q3 2015

Q3 2016

Q3 2017


UAE

57


UAE

Dubai future hospitality supply, 2017-2019 Hotel

Hotel apartments

Dubai average prime office rents, 2013-2019

Total

Prime office rents

16,000

Annual change % 4%

1,600

2% 12,000

1,200

8,000

800

0%

-2%

-4%

-6% 4,000

400 -8%

2017

remained quite robust, with many hotels witnessing changes in visitor profiles. The UAE has seen a net increase in visitor numbers, further strengthening its holiday destination reputation. It is worth noting that if all developments under construction or in the later stages of planning become operational (as per current timelines), Dubai could become the fifth largest hospitality destination globally, by supply, by 2020, according to STR Global. Abu Dhabi Despite expected economic improvement, the commercial and residential sectors are likely to remain under pressure in the short term at least, with rising inventory levels placing further pressure on rentals and occupancies. However, demand for affordable homes remains robust, especially as the rising cost of living in the capital 58

2018

2019

“We expect to see sustained demand levels for good quality office accommodation, which will underpin stability in the prime office sector. This may also translate into increased investment activity for commercial properties�

2013

2014

orientates tenants towards areas providing more costeffective living opportunities. While visitor numbers are expected to continue to grow, the hospitality sector will see further revenue deflation as the key corporate demand segment remains subdued. However, leisure demand may receive a boost from the opening of the Louvre as well as continuing commitment to the entertainment and leisure sectors. Office Market Abu Dhabi’s office sector continues to experience a softening of market conditions, as contraction of employment growth and weak demand fundamentals add further pressure to both rental and occupancy rates. Occupiers remain cautious with their capital expenditures and consequently new office requirements have become more limited. There is also

2015

2016

2017

sustained evidence of tenants sub-leasing excess accommodation, as they are contracting and working more efficiently, striving to reduce operational overheads while competing in their respective markets. Residential Market Amidst falling rental prices, there remains an apparent shortage of housing units targeted towards the dominant low to middle income segments of the population. While a number of midmarket projects have been launched and subsequently delivered, the size of these developments remains insufficient to cater to the overall market demand for affordable housing options. Retail Market The contribution of wholesale, retail trade, hotel and restaurants accounted for around 12% of total GDP in


UAE

“With strong momentum already visible in residential transactional volumes, we expect to see continued expansion of the market as landlords look to further incentivise investors in order to maintain desired levels of sales” Abu Dhabi. However, despite the sustained increases in overall tourism numbers, this is primarily driven by domestic demand. While 2017 has not seen delivery of any major new retail facilities, there is rising development activity in the community retail segment. Multiple new centres have been built as part of mixed-use master plan developments and within the emirate’s satellite towns, as the government strives to provide better quality facilities and more conveniences to the local population. Ras Al-Khaimah RAK’s property market has continued to experience

a somewhat fragmented performance, with positive growth in the tourism and hospitality sectors but further deflationary trends in other parts of the market. The generally positive overall economic performance reaffirmed the importance of a diversified economy, which again has been buoyed by growth in the tourism market. Hospitality Market RAK’s tourism sector has continued to buck the negative trends experienced across much of the region, posting growth in both tourist arrivals and occupancy rates in the nine months to September 2017. This is also reflected in the

Abu Dhabi average residential rental rates, 2017 vs 2016

performance of RAK’s international airport, which witnessed an increase in passenger movements as the emirate continues its drive to become a yearround tourism destination. Looking Ahead to 2018 With 2018 set to see an improvement in broader economic conditions for the emirates, there may also be some positive knock-on impacts for parts of the real estate sector. As a result, we expect to see sustained demand levels for good quality office accommodation, which will underpin stability in the prime office sector. This may also translate into increased investment activity

for commercial properties, with an increase in the number of listed investment vehicles (especially REITS) adding additional investment capital to the markets seeking investment-grade assets, both putting pressure on availability of such assets and increasing transaction speeds. With strong momentum already visible in residential transactional volumes, we expect to see continued expansion of the market as landlords look to further incentivise investors in order to maintain desired levels of sales velocity. Sustained growth in visitor numbers has helped the hospitality market deliver a solid occupancy performance YTD.

Abu Dhabi upcoming retail supply (sqm)

Ras Al Khaimah 2017 quarterly visitor numbers

160,000

200,000

600,000

120,000

150,000

450,000

80,000

100,000

300,000

40,000

50,000

150,000

Q3 2016

Q3 2017

Studio

1BR

2BR

3BR

2017

2018

2019

Q1

Q2

Q3

59


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“The outlook for Dubai’s economy and real estate market remains positive, despite some key risks which must be monitored and managed”

60


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Dubai has moved on from concentrating on the big statement construction projects and is now focused on sustainable developments.

Planning for beyond Expo 2020 Knight Frank’s Taimur Khan takes an in-depth look at Dubai’s long-term plans for the future

F

or more than a decade Dubai’s success story has been built on being the biggest and brightest. However, since the global financial crisis of 2009 and the more recent slowdown in global economic activity, Dubai has seen a shift in strategic direction. Over the past couple of years, policy-makers have focused on creating a more sustainable and purposeful city, one that is here to stay. Indeed, Dubai’s future strategy is based on holistic dimensions with people and society at its core. Prosperity, diversity, tolerance and multiculturalism are only some of the headlines that underlie the Emirate’s new development direction, elements that continue to attract a wide range of nationalities to live, work and invest in Dubai. On the ground, improvements to Dubai’s infrastructure are taking shape rapidly. The Dubai Canal project, due for completion in 2023, is expected to add approximately 200 waterfront homes and an array of new

food and beverage offerings and entertainment facilities. Similarly, plans to position Dubai as one of the world’s most connected cities are underway. The Smart City project will use the Internet of Things to increase communication and intelligent connection between people, data and devices. It has also established spaces fostering creativity. With phase one already completed and phase two completing in 2021, Dubai Design District will be the centre of the city’s creative community, supporting the growth of the local design industry. While the recovery in 2014 fuelled rumours of a potential housing bubble, the authorities were quick to react by introducing a range of cooling measures. Coupled with developers’ realisation of the need to phase out supply in line with demand, the residential market managed to weather the storm and maintain stability. As the economy opens up in the face of new industries and new talent, demand continues to grow, particularly for off-plan property.

Downtown Dubai continues to be a popular location with its proximity to the emirate’s Central Business District and the vast range of entertainment and lifestyle amenities on offer, such as The Dubai Mall and Dubai Opera; and both occupiers and investors continue to be attracted to the unique offerings on the Palm Jumeirah, supported by luxury hotels and resorts. We anticipate this demand will only continue to strengthen with the introduction of The Pointe and Nakheel Mall, expected to be competed in 2018, offering world-class entertainment, dining and retail destinations. For lifestyle opportunities, residential communities such as Emirates Living and Arabian Ranches are popular among investors as they offer integrated solutions to living, including schools and community malls. With Expo 2020 almost two years away, experts estimate the event will generate approximately 300,000 direct jobs and up to a million indirect jobs. An increase in the workforce will subsequently 61


uae

result in greater demand for housing. Affordable and luxury properties are already under construction to cater to diverse foreign and local appetite. As Dubai continues to cement its reputation as a thriving global business, tourist and retail hub, the real estate sector, particularly the residential market, is expected to thrive and continue to be an integral part of the economy. Residential property has moved through a range of stages over recent history, the latest of which shows a much more stable and mature market compared to five years ago. Since then, the combination of a strong dirham, the collapse in oil prices and a high level of supply have provided a correction to the market. In the present, stable oil prices, a weakening dirham, enhanced regulations, government commitment to infrastructure spending, developers phasing in projects and a more robust economic backdrop have provided stronger footing for the property market. Dubai’s residential market in 2017 has been a story of

stabilisation after a period of weak market performance which started in early 2015. Mainstream sales prices fell by 2% in the year to Q3 2017, according to data from REIDIN. Average price change in the first nine months of the year in 2016 was -5.6%; over the same period in 2017, price fall has slowed to -0.6%. Prime residential prices over the year to September 2017 fell by 3.8%. However, we may be seeing this segment of the market reach its trough, with monthly price growth from August 2017 to September 2017 positive. More so in the prime market, submarket performance has begun to diverge. In prime markets

where new supply has been limited, such as Palm Jumeirah and Emirates Living, we have seen price growth return over the short term, whereas in areas such as Downtown, where new supply is evident, prices have continued to fall. Despite lacklustre market performance across both mainstream and prime residential markets, yields have remained relatively robust. As of Q3 2017, mainstream yields stood at 6.8% and prime yields at 5.5%; a year earlier, mainstream yields were 0.3 percentage points higher and prime yields 0.1 percentage points higher. Mainstream transaction volume in the first nine

UAE construction industry value, in AED billions (2016-2026)

Source: Ventures Onsite

300

225

179.9 132.2

142.8

189.5

201.5

214.7

228.9

245.1

263.1

284.1

159.9

150

75

2016

62

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

months of 2017 rose by 10% compared to the same period a year earlier. The total value of transactions over this period was $10.04 billion, up 12% compared to a year earlier. In the nine months to September 2017, prime transaction volumes increased by 6% and total value of prime transactions was $619 million, up 9% from the same period a year earlier. Dubai continues to attract international buyers to its property market, with over 217 nationalities investing in the market in the 18 months to June 2017, according to data from the Dubai Land Department. Emiratis continue to be the largest group of buyers. The make-up of the top five foreign nationalities remains broadly similar to historic trends, with Indians leading the pack followed by Pakistani, Saudi Arabian and British buyers. More interestingly, the composition of the top ten nationalities by number of transactions shows the broad appeal of Dubai’s property market, with buyers not from the immediate region, such as American and Chinese,


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The outlook for Dubai’s economy remains positive, despite some key risks which must be monitored and managed, advises Knight Frank.

becoming a more material source of investment. On balance, the outlook for the economy and real estate market remains positive, despite some key risks which must be monitored and managed. We also note that price performance will continue to diverge across Dubai in 2018, with neighbourhoods where a significant delivery of new supply is expected likely to continue to see prices soften. As regional economies adapt to the new norm in oil prices, Dubai diversifies in line with Vision 2021 and government infrastructure spending continues ahead of Expo 2020, we anticipate GDP growth to accelerate in

UAE construction industry value, Real Growth vs. GDP (2016-2026)

Source: Ventures Onsite

14% 12% 10%

GDP

8% 6% 4%

Real Growth

2% 2016

2017

2018

2018, providing support for the residential market. In the first nine months of 2017 the effective exchange rate of the dirham fell c. 5% against its weighted basket of currencies. This provided support for the residential market, given the material presence of

2019

2020

2021

2022

international investors in Dubai. Looking ahead, a key risk would be any significant appreciation of the dollar (to which the dirham is pegged) due to rake hikes by the Federal Reserve. Additionally, ongoing geo-political uncertainty may also affect demand.

2023

2024

2025

2026

Overall, risks may be outweighed by the expectation of stronger global economic and trade growth in 2018 than previously forecast, which Dubai would certainly benefit from, given its standing as a regional trading hub and safe haven.

Analysts: Look to Abu Dhabi after Expo 2020 Dubai The growth in commercial building projects in the UAE will help the sector to outperform the broader construction sector in 2018 with Abu Dhabi continuing to show strength beyond Expo 2020. According to analysts BMI Research, the Expo 2020 Dubai and a longterm strategy to diversify the UAE economy away from oil revenues and into higher value add service and tourism industries will stimulate ongoing investment into commercial building projects,

particularly in Abu Dhabi. In its January 2018 Industry Trends Analysis of the UAE construction sector, BMI Research also noted an acceleration “of investment pledges relating to the Expo over the past year as the deadline nears”. “In November 2017, for example, Cimolai Rimond Middle East, a joint-venture between Cimolai and Rimond, secured a deal to construct Al Wasl Plaza in Dubai,” BMI Research stated in the report. “The project is the final major design element of the Expo 2020 site, which will focus

around a planned 438 ha site, the largest ever created for a World Expo. ” “In the long-term, investment in Abu Dhabi’s commercial building sector will help offset an expected decline following the conclusion of Expo 2020. BMI Research anticipates that Abu Dhabi’s share of the pipeline will grow in the coming years as the government prioritises efforts to expand the emirate’s economic base beyond oil.” The Abu Dhabi government aims to attract 7.9 million tourists annually

by 2030 under the auspices of its Abu Dhabi 2030 Plan, up from 4.4 million in 2016. Furthermore, the Emirate hopes to expand its retail and office space to 4 million and 7.5 million sqm by 2030, respectively. “As such, we are seeing a number of big-ticket commercial projects moving through the construction pipeline that will help sustain elevated growth rates. Given our Oil & Gas Team’s expectation that oil is unlikely to rebound, we expect similar projects and investment pledges to accelerate going forward.”

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The construction sector could be hit hard as it is prone to cashflow challenges due in part to the cash intensive nature of the industry, says Zander Muego.

Living with VAT Experts examine the impact of the new tax

A

lthough concerns have been expressed about the impact the introduction of VAT could have on the construction industry, leading experts have believe that it is unlikely that the taxation scheme could have an adverse impact in the long run. Dr Anil G Pillai, chairman and CEO of Airolink Group, a UAE-based construction contracting company, said that he believes VAT will be good for all businesses, not just the construction industry as it would encourage owners to be more cautious and would curtail overspending. “You’ve got to have very good administration, plus accountability (for VAT). When accountability comes into the picture, people are more cautious about how they spend,” said Pillai. “They have educated themselves how to move forwards. VAT is a fantastic idea – I can understand that we’re losing out on 5%, but I say that we can call that an administrative cost you’re paying to the government. “In all the countries that have had an economic boom, they have had some type of accountability. In the UAE, 64

before VAT, there was no accountability and a lot of corruption going on, so I think the government did a fantastic job implementing the 5% VAT, it’s a step in the right direction,” he continued. Sameer Daoud, group chief development officer and managing director for Drake and Scull International (DSI), said that while many see VAT as adding an additional layer of complexity, he doubts that there will be any negative effects on investment. “I doubt that VAT will have any adverse effect on investment in the long run. The simple reason is that this has not been the case anywhere else in the world,” Daoud recently told Big Project ME. “In contrast to income tax, which has a negative effect because there is less money to invest, the introduction of VAT is a corporate tax that benefits the nation as a whole. As a VAT-registered company, this is a simple throughput that is not a complicated process at all, as long as it is clear what VAT applies to, and when. “Ensuring compliance across the supply chain with the new tax entails significant efforts both from within organisations and between business partners.

The high number of parties involved with supplier and sub-contractors quickly creates complexities, making it difficult in to gain a proper overview of transactions,” he continued. In order to resolve the issue, Dr Pillai has called for VAT education to be made available for the construction industry in the UAE, explaining that its rapid introduction has caught some companies unawares. “We need education for this (VAT introduction). The implementation was very quick, without any proper education for people. But now, I can see that the government had the right idea, because you can’t just educate people for a certain period. Instead, it’s an everyday educational process. In this country, their decision was absolutely right – you educate with the problem and you’re forced to adapt. It’s a fantastic idea.” Zander Muego, partner, at project management and cost consultancy firm Thomas & Adamson has warned that proactive measures should be taken to protect suppliers from cashflow issues due to the introduction of VAT across the GCC. His statement follows a recent study by credit insurer

Coface, which found that some construction firms delayed payments by an average of 123-days longer than the contracted payment schedule. “The construction sector is particularly prone to cashflow challenges due to the extended value chain and cash intensive nature of the industry. With cashflow already a major issue, the introduction of VAT is likely to exacerbate this


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“VAT is a fantastic idea – I can understand that we’re losing out on 5%, but I say that we can call that an administrative cost you’re paying to the government”

problem,” explains Muego, adding that problems can arise when VAT is due once a supplier has raised a VAT invoice irrespective of the actual payment date of the invoice. “Since a company will issue a VAT invoice before it receives payment from the customer, VAT will need to be accounted for in the VAT return that covers the time at which the invoice was issued. Currently in the

UAE, if the customer doesn’t pay the invoice within six months of the due date, the supplier will be able to claim ‘bad debt relief’, which is a refund from the authorities of the accountedfor VAT. In practice, while this should somewhat ease the impact, it is still a retrospective action that comes after damage from the initial cashflow shortfall has been suffered – such as job losses or harm to

reputation,” says Muego. He points out that systems that have been tested in other countries can be relied upon to avoid these potential issues. “The UK’s HM Revenue & Customs ‘Cash Accounting Scheme’ works well to deal with this situation where it is common for construction companies to issue a demand for payment after receiving the certification from the customer, in order to

avoid triggering a VAT liability before receiving the payment. The demand for payment is not a VAT invoice and has no VAT consequence, but allows the customer to see the VAT amount due. The customer then pays the VAT amount demanded, triggering the VAT obligation at that point, the construction firm has received payment without causing a cashflow issue,” explains Muego. 65


KUWAIT

Kuwait’s construction sector bouncing back Timetric’s analysis of the Kuwait market finds a construction industry benefiting from government ambition

A

ccording to the National Bank of Kuwait (NBK), the total value of contracts awarded in Kuwait fell by 28% to $13.3 billion in 2017, as compared to the previous year, and below the five-year average of $16.6 billion. In its latest Economic Update, the bank said the surge in contracts in the power and water sector – compared to previous years – was offset by the slowdown in projects across other sectors, mainly in transport and construction. For 2018, the value of 66

projects is expected to remain at 2017 levels, with the largest contribution coming from the construction sector. Due to delays in the bidding phase last year, construction projects worth $6.67 billion have been pushed out to 2018. Additionally, delays in awarding transportation projects valued at $2.3 billion, could also take place this year, the report added. “There are 26 anticipated deals under consideration, of which the Jahra Ministries Complex valued at $866.9 million could be awarded in the first half of 2018. MEED Projects

“The energy and utility construction market is expected to benefit from government plans to double the country’s water desalination capacity by 2030”

reports that the lowest bidder is United Gulf Construction Co, and it is very likely it will be awarded the tender. This project was pushed to 2018 due to budgetary constraints. The other noteworthy project that is expected in 2018 is the Kuwait National Guard’s Kazema Camp project estimated at $1 billion.” Despite a higher number of contracts, the total value of construction awards eased in 2017 to $1.6 billion, NBK’s Economic Update said. More than 30 contracts were awarded in the construction sector, but the small size of the contracts


KUWAIT

In real terms, the Kuwaiti construction industry registered an average annual growth rate of 5.6% during the review period (2012–2016).

– only three were worth more than $100 million – their value fell short of the 21 contracts awarded in 2016, which had a total value of $4 billion. According to Timetric’s report Construction in Kuwait – Key Trends and Opportunities to 2021, to bridge the gap between supply and demand for housing units in the country, the government is focusing on the construction of residential buildings under the public-private partnership (PPP) model. In 2016, the government announced plans to invest $47.6 billion) to build the Mutlah Residential City, Al Subiyah Residential City, Sabah Al-Ahmad township, Bubiyan Island, Al Khairan residential city project and the Kuwait City by 2020. The energy and utility construction market is expected to benefit from government plans to double the country’s water desalination capacity by 2030. The government plans to increase the country’s water production capacity from 450 million gallon per day to 900 million gallon per day by 2030. The government is

Kuwait construction industry value, Real Growth vs. GDP (2016-2026) 5%

Real Growth

4% 3%

GDP

2% 1% 2016

2017

2018

constructing new refineries, driving growth in the energy and utilities construction market over the forecast period. The government plans to increase crude oil production from 3.3 million barrels per day (mmbpd) in 2015 to 4.0mmbpd by 2020. Accordingly, the government plans to build new oil refinery in Al Zour under the PPP model by 2020. The strategy to become a regional hub The government also plans to transform the country into a regional trade and financial hub by 2035. Accordingly, with an investment of $1 billion, the government plans to build the Mubarak-Al-Kabeer Seaport

2019

2020

2.0

1.11

1.19

1.27

1.36

1.43

1.53

1.60

2021

2022

on Boubyan Island by 2021. The government is focusing on developing healthcare infrastructure to provide adequate medical support to all citizens in the country. Accordingly, under the Healthcare Infrastructure Development program the government plans to invest $7.3 billion on the construction on new hospitals and healthcare centres by 2020. The country’s construction industry should continue to expand in real terms over the forecast period (2017–2021), driven by the government’s focus on the development of transport infrastructure, energy and utilities facilities, and affordable housing. The government also

Kuwait construction industry value, in KWD billions (2016-2026)

1.5

1.68

Source: Ventures Onsite

1.77 1.86

1.95

1.0

0.5

2016

2017

2018

Source: Ventures Onsite

2019

2020

2021

2022

2023

2024

2025

2026

2023

2024

2025

2026

plans to spend $117.7 billion to develop roads, rail, airports networks, water infrastructure, power projects and social infrastructure projects by 2020. Furthermore, in January 2017, the government launched New Kuwait 2035 strategy with an aim to transform the country into regional financial and cultural hub by 2035. The government plans to launch 164 sub-programmes and projects to develop tourism infrastructure, IT parks, commercial buildings and other related infrastructure by 2035. With the country beginning to clear a backlog of major projects in energy, infrastructure and housing, the construction sector in Kuwait has seen a resurgence of activity in recent years. The government’s fiveyear National Development Plan committed to spend $112.5 billion over the 2015-20 period, and $39.7billion worth of projects were signed off in the plan’s preliminary year. The country has seen its first successful construction project completed on a public-private partnership (PPP) basis, and according to NBK, there is a 67


KUWAIT

The fall in oil prices since 2014 has counter-intuitively coincided with a spurring of construction activity in Kuwait as regulatory and political challenges have eased.

further $33.1 billion in PPP projects in the pipeline for schemes ranging from power and water to education, health and transport. Major contracts have been won by international construction companies, but many others have been granted to Kuwaiti firms. The country is better able to weather low oil prices than any of its GCC neighbour countries and some see the fall in hydrocarbon revenues, which began in June 2014, as a catalyst for increased investment to diversify the economy. Construction is one of the biggest employers in the private sector, but it accounts for a relatively modest proportion of GDP. According to the Public Authority for Civil Information, there were just under 395,000 construction workers in Kuwait in 2016, all but 21,000 of them expatriate employees, and the construction industry accounted for 18% of jobs in the private sector and just over 15% of all expatriate workers in the country. The most recent data on GDP from the Central Statistical Bureau in Kuwait shows that, according to initial estimates for 2015, the construction sector was valued at $10.8 billion at current prices or $9.8billion at constant prices – by either measure it had grown by just over 4% since 2014 – making construction worth 8.6% of nonoil GDP and 5.3% of overall GDP. (In 2013, a year of higher crude oil prices, the construction industry had been 68

Construction and contracts The Kuwait National Petroleum Company (KNPC) has appointed Kuwait-based Combined Group Contracting Company (CGC) to build 10 new filling stations across the country. The deal is said to be worth $51.25m according to the Kuwait news Agency. Kuwait Projects Company (Holding) has announced that infrastructure work for Hessah Al Mubarak District project, the country’s first-ever comprehensive mixeduse district, has been completed. The entire infrastructure work was completed at the end of 2017 by Al Ahmadiah Contracting and work is now underway to hand over components of public facilities to various government entities. Rosatom is reportedly in negotiations with the Kuwait government that could lead to the Russian nuclear engineering specialists constructing a nuclear plant.

worth just 3.5% of GDP.) According to analysis from Timetric’s Construction Intelligence Centre, Kuwait’s construction sector will be valued at $15.5 billion by 2020. The report found the sector experienced a compound annual growth rate (CAGR) of 5.23% from 2011 to 2015, and predicted a CAGR of 6.44% for 2016 to 2020. The upbeat assessment reflected the scale of ongoing and anticipated infrastructure projects being undertaken by the government and by the so-called “K companies”, which are government-owned enterprises in the energy sector. The raft of contract awards and new tenders that have been granted since 2014 reflect the momentum that followed a number of years of delay. Many of the projects currently under construction or in the planning stages are already overdue. There are more than 100,000 citizens on a waiting list for homes, the country’s international airport is struggling to cope with passenger numbers that more than doubled over 10 years from 4.3 millio in 2003 to 9.4 million in 2013, and the construction of key petrochemical plants and refineries first tendered in 2008 and 2009 has not yet been completed. A number of factors may have prompted the fillip to construction seen since 2014, including: a new sense of urgency as a result of the fall in oil prices; a decrease in political infighting resulting from a temporary boycott of parliamentary

elections by opposition groups; and the amendment to laws on PPP development, smoothing the way for greater private sector involvement in infrastructure schemes. Businesses in the construction sector are keen to see the pace of development continue. Ghalib Safouq, assistant undersecretary at the Ministry of Public Works (MPW) Construction Division, told OBG, “There are 13 major construction contracts currently under implementation through the ministry’s Construction Division valued a $22.5 billion, with an additional set of projects, valued


KUWAIT

“The construction industry registered an average annual growth rate of 5.6% during the review period (2012–2016). This growth was supported by the government’s Five-Year Development Plan 2009–2014, under which the government invested in developing transport infrastructure, industrial parks, healthcare facilities and residential buildings”

at a total of $6 billion, which are under design. The government is in a good position to be able to continue investing over the next several years.” A key driver for much of the new construction work in Kuwait is the National Development Plan running from April 2015 to March 2020. Lawmakers sanctioned $112.5 billion in spending contained in the plan in February 2015. This gave a second lease of life to no fewer than 421 development schemes carried over from the previous fiveyear planning period. Across all sectors in Kuwait, blueprints for action that had

been tied up in red tape were being given the green light. In March 2016 the MPW announced 30 infrastructure projects with a combined value of $11.3 billion and $7.6 billion between Q2 and Q4 of 2017 as its contribution to the national plan’s objectives. In January 2017 a longerterm vision for development, known as New Kuwait, was launched, promoting a greater role for the private sector and foreign direct investment is diversifying and reducing its dependence on oil. New Kuwait contains 164 development plans, with some suggesting it will keep the country’s

construction sector busy for 18 years. Safouq told OBG, “Government spending on infrastructure is creating a lot of opportunity for the involvement and development of the private sector economy in Kuwait, because while the MPW’s Construction Division acts as the government’s general contractor, the actual building is subcontracted to the private sector.” As the PAHW works to meet demand for these homes, new suburbs are being built and others planned. PAHW construction projects, at varying distances from Kuwait City, include Sabah Al Ahmad

(65 km away, 11,794 homes), Jaber Al Ahmad (22 km away, 6679 homes), North West Sulaibikhat (20 km away, 1736 units), Wafra (370 homes and its extension a further 2426) and West Abdullah Al Mubarak (70 km away, 5201 homes). PAHW said several additional community schemes are in the planning stage including: Khairan, 80 km south of the city, where 35,530 homes are planned; and south of Sabah, where a further 25,000-unit development is planned. The PAHW’s future plans include building 52,000 homes in the Nawaf Al Ahmad project, 60 km north of Kuwait City. 69


BAHRAIN

Taking a pragmatic approach to property Bahrain is one of least oil and gas-dependent economies in the GCC but it must address its housing shortage

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umber of festival waterfront and neighbourhood retail projects are opening or are currently under construction in Bahrain, according to real estate and property development analysts CBRE, highlighting projects like the Avenues, were scheduled to open in late 2017 with 33,000sqm GLA, and The Oasis, a large regional shopping centre opposite the grand mosque in Juffair, which will open in 2018. “Retail and leisure are seen as the main drivers of tourism in the country, and international retail operators, including The Avenues and Alshaya Group, continue to work with the local 70

market to evolve the offering,” says Heather Longden, associate director of CBRE Bahrain. Yazan Haddad, CEO of Bahrain Marina Development Company, the developer building Bahrain Marina, a 310,000sqm mixed-use development project in the heart of Manama,

agrees that there has been a notable shift in the way projects are being designed and built in the Kingdom. He says that as a developer, Bahrain Marina Development Company has been careful to keep in mind the bigger picture while designing and building

its massive mixed-use project. “Every project has its own unique niche, but they all tie into an overall development. It’s this pragmatic plan that the Kingdom itself is embarking on, for the Year 2030 Vision. It’s an ambitious plan, and we’re part of it. It aims to help develop

Bahrain construction industry value, in BHD billions (2016-2026) 2.0

Source: Ventures Onsite

1.68

1.5 0.89

0.97

1.06

1.14

1.23

1.33

1.43

1.55

1.99 1.83

1.0

0.5

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026


BAHRAIN

Bahrain has a short-fall in residential housing to meet in the short-term. Looking further ahead, it is hoped regional investors will view it as an ideal second home location.

the country and bring more investment into the Bahraini market, from different sectors. We are just one of many sectors – be it entertainment, education or healthcare, there are many projects in the pipeline that go into different sectors. “We have seen that the pragmatic development plans of the Kingdom have contributed to the boom that we’ve seen recently in the Kingdom, across all sectors. As you drive the streets of Bahrain, you see the number of cranes that are part of the development of such mega projects. There’s a good plan in place to develop the country, to increase investment and to increase the potential for investment within the real estate sector,” Haddad asserts, pointing out that the real estate sector is a driver of many other sectors and industries across the country. The number of residential applications pending allocation of units currently stands at 55,000 and is estimated to grow by 5,000 each year, driving the high demand for residential units. Additionally, the number of housing developments, both social and private, has increased in recent years, with more than 17 housing projects underway, including some private projects. In terms of the residential market, the highest growth potential is in the affordable housing market a with a deficit of about 55,000 applicants waiting for units, which increases by 5,000 applicants per year. According to CBRE, the residential sector in Bahrain has been under-supplied for

Bahrain construction industry value, Real Growth vs. GDP (2016-2026)

Source: Ventures Onsite

10% GDP 8% 6%

Real Growth

4% 2%

2016

2017

2018

over 25 years, with a housing shortage of approximately 75,000 units estimated in 2017. The majority of the shortage is in the low-to middle-income segment, catering to the needs of Bahraini families, backing up the findings of the EDB report. In order to rectify this imbalance, the government is leading an intensive strategy to close the supply/demand gap, with 40,000 units scheduled to be introduced under the housing plan by 2020. “Areas popular with expatriates for both apartment rental and sales continue to be Juffair, Seef , Amwaj and Reef Island. One of the most active districts of Bahrain for new residential development is Juffair, where there are a number of large-scale residential tower projects under construction and planned for completion in 2017 and 2018,” says James Lynn, director of CBRE Bahrain. “This is anticipated to lead to a significant increase in freehold supply over the next two years in this area of Bahrain. In 2016, the micro market comprised of 2,800 freehold units and this is expected to rise to over

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5,000 units by 2018, which is almost 79% growth within a short two-year period.” Finally, another major growth area for Bahrain is the infrastructure projects sector, where EDB estimates the value of the Kingdom’s pipeline of large-scale infrastructure projects across a wide range of sectors to be $32 billion. These projects will support growth within the real estate market and help maintain robust economic growth throughout the Kingdom. The report adds that Bahrain is also implementing soft infrastructure, such as smart legislation which will enable investors to realise value from their capital. One example is a new regulation developed in consultation with the private sector to specifically support growth in the Kingdom’s real estate sector. “Infrastructure is being invested in heavily,” says Jerad Bachar, executive director – Tourism & Leisure Business Development for the Economic Development Board. “Bahrain is a country that’s fortunate to have a long-standing diverse economy. Less than 20% of the economy

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is dependent on oil and gas. Real estate, in Q1 2017 reached 4.5% of the economy, equivalent to $1.7 billion. So it’s a big driver within our economy, and it’s a growing part of the economy. Investment in infrastructure is across the gamut. Infrastructurerelated to road works is a big part of that $32 billion pipeline, while $1 billion of that is invested in Bahrain International Airport, along with everything supporting the airport. Telecommunications upgrades and so forth are a big part of that as well, along with healthcare facilities. That $32 billion is quite diversified, as is the source of financing. Some of that is coming from the GCC fund, some is coming from the government of Bahrain itself, and then a good part of that is coming from the private sector developing everything around their projects and helping support them from an infrastructure standpoint. “The goal is really to continue to drive diversification within the economy. These development projects that are coming into the market now are all part of that diversification growth,” he concludes. 71


OMAN

The government of Oman has been seeking to encourage construction in the Sultanate by introducing tax and funding reforms to make it easier to get projects moving.

Oman priotising diversification

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A sharp fall downturn needs to be off-set by a better business environment

ccording to Timetric, Oman’s construction industry suffered a sharp downturn in 2017, in part due to public expenditure cuts that stemmed from a decline in the country’s oil production. Consequently, construction output contracted by 6.1% in 2017, following an average annual growth of 9.8% during the preceding three years. “Although the collapse of oil prices in 2014 affected the oil-dependent economy, the government’s effort to diversify the economy through investments in non-oil sectors supported the industry’s overall growth in 2015–2016,” says the analysts in its Construction in Oman – Key Trends and Opportunities to 2022 report.

Oman construction industry value, in OMR billions (2016-2026) 8

6.88 6.30 5.72

6

4 2.26

2.53

2.85

3.27

3.76

4.20

4.62

2016

2017

2018

Like its fellow GCC countries, Oman is exploring ways to reduce its dependency on oil by creating a steadily more diversified economy. The country has consequently introduced a number of programmes to stimulate the economy. This has included a mixture of reduced government spending

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2022

and an increase in taxation in the country. The beginning of 2017 saw a rise in corporate tax rates from 12% to 15%, as well as the levying of a 3% tax rate for certain payers and the end of an exemption on the first $8,230 of taxable profits. The revisions to its taxation has also allowed it to grant construction sites a 90-day Source: Ventures Onsite

16

8

Real Growth

GDP

4

2016

72

2017

2018

5.12

2

Oman construction industry value, Real Growth vs. GDP (2016-2026)

12

Source: Ventures Onsite

2019

2020

2021

2022

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2026

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2026

exemption from being classified as permanent establishments (where taxation of 12% on income is applicable). It has also put the regulations and frameworks in place for project funding across models such as PPPs, Build Operate Transfer (BOT), Build Own Operate Transfer (BOOT). Timetric’s report notes that implementation of the Eighth Five-Year Development Plan 2011–2015 supported the industry’s expansion, under which the government invested $31.2 billion to develop the country’s residential, transport, industrial and healthcare infrastructure – and the spending should continue to rise in the country. “The industry is expected to recover in 2018, supported


OMAN

by a gradual recovery in global oil prices.” Timetric believes this growth is expected to continue throughout its forecast period (2018–2022), while its bolstered by the ongoing Ninth Five-Year Development Plan 2016–2020. Under the plan, the government is committed to investing $171.7 billion until 2020 to develop overall infrastructure. This assessment is echoed by analysts at BMI Research who predict that Oman’s transport and non-residential segments will outperform the country’s broader construction industry both in 2018 and over the next five years, “fuelling headline construction growth that ranks among the highest globally.” In its latest Infrastructure report on the market it adds:

“A gradual rise in the price of oil and government support for a sweeping economic diversification scheme will remain the major drivers of growth. We continue to expect Oman to be one of the better performers in terms of construction sector growth, both on a global and regional basis. As such, in 2018 we are forecasting growth of 10.4%, while over the next five years we expect the country’s construction sector to expand by an annualised average of 9.9%.” According to BMI, Oman’s various Special Economic Zones are a “key factor” in its ability to source private sector investment into infrastructure. “Illustrating their importance, the Special Economic Zone Authority

Construction and contracts 77 interchanges and 41 bridges are under construction in Oman Oman plans to invest $10.39bn into developing new housing units for expatriates. Fichtner, Synergy Consulting and DLA Piper are working on a large-scale solar independent power project.

of Duqm signed a land lease agreement with Al Wusta Cement Company to build a cement factory in Duqm, Oman. The cement plant will require a capital expenditure of $584.38 million. Construction is slated to begin in 2018 and production is expected to start in 2020. “Chinese companies continue to be among the most active international investors in Oman’s infrastructure sector. China-based Dalian Mingyuan Holdings plans to construct a petrochemical facility at a Sino-Oman industrial park in the Duqm Special Economic Zone (SEZ) in Oman. An investment of around $2.8 billion will be required in the first phase of the project, with annual olefin output estimated at 1.8 million tonnes.” 73


IRAQ

Iraq begins its post-ISIS recovery Improved security to boost oil production and construction

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ccording to the World Bank’s latest report, the ISIS war and low oil prices since mid2014 have severely impacted the economy. A contraction in oil production resulted in negative overall growth in 2017, but owing to improved security the non-oil growth is expected to turn positive after a three year decline, despite the ongoing fiscal consolidation. The government’s reform effort – but not reconstruction – is supported by a large international financing package. Growth will accelerate in 2018, sustained by higher oil production, despite persistent security risks. 74

“The ISIS insurgency and low oil prices have severely impacted Iraq’s growth, which decelerated in 2014-15, with government non-oil investment declining by two-thirds and rapid contraction of agriculture, manufacturing and construction. Strong oil production sustained economic

growth in 2016, while the OPEC agreement to cut production until March 2018 is expected to lead to a contraction in growth in 2017,” says the organisation. “Non-oil growth has been negative since 2014, but a better security situation and the benefits of an initial

reconstruction effort are expected to sustain non-oil growth at 1.5% in 2017. The drivers are construction and services on the supply side, and pick-up in government consumption and investments on the demand side. Owing to the pegged exchange

Iraq construction industry value, in IQD billions (2016-2026)

Source: Ventures Onsite

35,483

40,000 32,458

42,436 38,799

29,697 30,000

20,000

14,811

17,033

19,588

22,137

24,580

27,082

10,000

2016

2017

2018

2019

2020

2021

2022

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2026


IRAQ

Most infrastructure segments should benefit foreign government investment, including transportation and power infrastructure.

Iraq construction industry value, Real Growth vs. GDP (2016-2026)

Source: Ventures Onsite

12%

9%

GDP

6%

3% Real Growth 2016

2017

2018

rate and subdued aggregate demand, inflation has averaged 0.4% in 2016 and was estimated at 2% in 2017. The World Bank says the government is prioritising its limited investment expenditure for reconstruction in areas liberated from ISIS, and to increase electricity. Likewise the Kurdistan regional government is also implementing measures to contain expenditure and improve non-oil revenue. Its fiscal deficit decreased by 80% from 2014 to 2016 while “spending pressures remain high to assist IDPs and refugees.” The private investment arm of the World Bank, the International Financial Corporation (IFC) currently has over $1 billion worth of investments in a variety of projects including banks, cement plants and telecommunications – with the organisation revealing at the start of 2018 that it is will shortly confirm a further $250 million investment in a telecommunication venture. The World Bank’s initiatives are somewhat dwarfed by the $100 billion worth of projects recently unveiled by the

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2022

Construction and contracts Alstom has signed a memorandum of understanding (MoU) with the government of Iraq for the development of an elevated train in Baghdad and metro in Basra. The Iraqi Ministry of Electricity (MoE) signed an agreement worth over $400 million with GE Power in November 2017 to build 14 electric substations in the country. GE has also signed over $1 billion worth of contracts for power generation and maintenance projects in the Middle Eastern nation.

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government’s own Iraqi National Investment Commission (NIC). In 2018, the government will seek to source foreign funding for the 157 projects it has detailed (ahead of the first major funding event – the International Conference for Reconstruction of Iraq held in Kuwait). The list of projects include rebuilding destroyed facilities like Mosul’s airport and new investments to strengthen and diversify the economy away from oil sales, by developing transport, agriculture and industries based on the nation’s energy wealth, including petrochemicals and oil refining. The government believes that the process of constructing homes, hospitals, schools, roads, businesses and telecommunications will be key to providing jobs for the young, as well as aid social stability in the country. Analysts BMI Research describes the Iraq construction market as performing better than it had previously expected with activity to improve by double digit numbers in 2018. “After shrinking 39.4% in 2016 and only growing an estimated 0.1% in 2017, growth in

2018 will tick up 11.2%, followed by an annual average of 8.1% over 2018-2022. While conflict against Islamic State (IS) has ended, there remain significant tensions between Baghdad and the Kurdistan Region following an independence referendum. Iraq’s precarious but improving fiscal position will ensure the country leans heavily on donor funding for the foreseeable future, believes the analyst. “Our Oil & Gas team forecasts that the price of Brent will rise to $75 per barrel by 2021, which, combined with continued inflows of donor money and a reducing deficit, should enable the Iraqi government to allocate additional funding to rebuild the country’s shattered infrastructure base. Baghdad estimates that over a 10-year period, the cost of reconstruction could be as high as USD100bn. A number of foreign governments and multilateral institutions have pledged financial assistance to the Iraqi government. The World Bank approved a $400 million support line in October 2017, which will be complemented by financial assistance from the EU and the US, among other governments. “A number of private firms have also expressed interest in participating in the reconstruction process. Most infrastructure segments will benefit from this uptick in investment, including transportation and power infrastructure. This underpins our view that fixed investment will be a key growth driver over the coming years.” 75


EGYPT

Building a future on infrastructure and FDI Ahead of the first-ever Construct Egypt event, dmg::events updates the industry on the resurgent country

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gypt is home to one of the world’s most important pieces of internationally significant infrastructure. At an enlarged 193km, a figure it hit after $8 billion worth of extension works were completed in 2015, the Suez Canal connects the Mediterranean with the Red Sea, providing shipping with one of its greatest shortcuts and facilitating the flow of billions in global trade. The benefits for Egypt can be measured in two simple ways: there is the revenue, which was a nudge

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over $5 billion in 2016, and there is also opportunity. Egypt is hoping to see its income from the project rise to more than $13 billion by 2023, thanks to a plan that will see the expanded capacity used as a catalyst for the long-term development of the Suez Canal Economic Zone. This takes the free zone model that has seen significant success in Gulf countries and super sizes it to match the scale of the Egypt’s potential. Spanning 461km2, almost two-thirds the size of Singapore, the zone consists of two areas integrating existing

“There was a sharp rise in the value of investments made into Egypt’s construction sector recently in 2016, which rose 198.6%, following a rise of 43.2% in the previous year”

infrastructure around East Port Said and Ain Sokhna Port, two development areas in Qantara West and East Ismailia, plus four more ports. Investors in both the zone and the country’s wider construction sector will take heart from Egypt’s underlying numbers, as well as the direction in which they are heading. Egypt’s gross domestic product (GDP) sat at $332.3 billion in 2016 having risen steadily every year since 2004, ignoring the global financial crisis. GDP was forecast to grow at 3.5% in 2017, increasing to 5.4% growth


EGYPT

Egypt wants to further expand capacity for the long-term development of a trading hub located in the Suez Canal Economic Zone.

by 2019. The construction sector’s fortunes are naturally linked to those of the wider economy, but some of the core needs within the market industrial and infrastructure development, such as the canal zone, plus an expanding need for housing - have helped the sector’s growth stay ahead of the mark set by Egypt’s GDP. Looking ahead, growth of 6.2% is forecast for 2018, rising gradually thereafter to a peak of just over 10% by 2024. By 2025 the construction sector’s contribution to GDP is forecast to rise to 5.8%, with its value up

from an estimated $9 billion in 2016 to a forecast $32 billion, demonstrating that construction will remain an important mainstay of the country’s economic performance. Encouragingly there was a sharp rise in the value of investments made into Egypt’s construction sector recently in 2016, which rose 198.6%, following a rise of 43.2% in the previous year. Such funds are crucial to the sector’s ongoing health and its ability to attract both local and international investment make it a central component in an economy keen to see new money enter circulation. In real terms construction attracted a relatively modest $506.2 million in 2015, followed by a more robust $1.4 billion in 2016. The lion’s share of this funding was sourced from the private sector (some 60%) but this came after public sector investment climbed from just over 28% in 2015 to 40% in 2016. Egypt’s construction industry will no doubt be keen to see more deals like that signed in July 2016, when the country put pen to paper on 20 economic agreements worth some $15 billion with the Chinese government. The deal is set to include extensive investments in the country’s housing, transport and energy sectors and will likely see Chinese firms bidding for work they will execute with local resources. Deals like the one done with China speak to the two important but indirect ways construction makes

Construction and contracts Mohsen Salah, the chairman of Egyptian state-owned Arab Contractors says the company has entered into a JV with Orascom Construction Company (OC) to build the country’s first monorail on the outskirts of Cairo. Abu Dhabi-based Masdar will develop a wind power project capable of more than 800 megawatts (MW) in Egypt. Thales has been awarded a threeyear contract for the modernisation of signalling and telecommunication systems, and all the works related to a 180km section of line between the towns of Asyut and Nagh Hammadi in Upper Egypt, part of the Alexandria-Cairo-Aswan rail corridor. The project is completely financed by the World Bank and will allow trains to travel at speeds of up to 160kmph, as opposed to the current 120kmph.

a contribution to Egypt’s development. First it helps to provide jobs to the 91.5 million people who live with double digit unemployment figures: unemployment sat around the 12.5% mark in mid-2016. They also bring in vital foreign direct investment, which stood at $12.7 billion in 2015. More than $2 billion of that came from the UAE and Saudi Arabia alone. Egypt has made bold moves to help attract more such investment, agreeing a $12 billion deal with the IMF just days after it floated its currency and saw a subsequent devaluation of around 48%. Dividends from the moves have started to emerge, and the currency has clawed back some of its initial losses. It is hoped these renewed economic conditions will boost overseas interest, with the World Bank suggesting private investment was expected to pick up in the second half of the 2017 financial year, supported by what it characterised as ‘enhanced competitiveness’ following the devaluation and other positive changes in the business climate. These changes have already had a direct impact on the construction sector, keeping big ticket infrastructure projects going and seeing new funds attracted to the market as the Egyptian Pound became cheaper. Observers believe that the construction sector has the fundamentals in place to deliver steady returns. If the financial changes Egypt has seen over the last year deliver the predicted results and the country can balance the 77


EGYPT

The currency flotation bought the prices of some residential units down in US dollar terms, which forced price increases in Egyptian Pounds upwards of 30% in 2016.

Egypt construction industry value, Real Growth vs. GDP (2016-2026) 12%

Source: Ventures Onsite

Real Growth

9%

6% GDP 3%

2016

2017

2018

market’s needs with its own fiscal requirements, investors could respond positively to well-priced opportunities to participate in development. If so, growth in the construction sector should continue to march ahead of the wider economy and fuel continued opportunities for regional contractors and suppliers alike. Egypt’s demand for housing is prolific. Thanks to a population that has grown by more than 23 million since 2017 and a steady stream of 800,000 marriages a year putting young couples in the housing market, developers with the right mix of properties have a ready and willing audience of buyers. Across the country some estimates put the housing demand at 500,000 units each year, for the five years from 2016, just to keep pace with population growth. It will take a coordinated effort and considerable investment to make those numbers a reality. In 2016, the Egyptian Ministry of Housing signed four public private partnership contracts with major real estate developers in worth 78

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$26.8 billion to make a dent in the much-needed housing stock deficit, but some of the largest deals have been hit by delays and may take longer than projected to come to fruition. The first quarter of 2017 saw strong interest from companies in tenders issued for Cairo New Capital City, which “reflects the strong demand to acquire land for new residential projects.” The retail development has seen one of the biggest changes in the market that will come this year. In late March 2017 Dubai-headquartered developer Majid Al Futaim opened the doors on the Mall of Egypt, a new $700 million retail experience, complete with its own indoor ski slope.

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Despite Egyptians’ spending power being curbed by 2016’s currency float the developer remains bullish, telling Bloomberg it will be investing a further $600 million in another Cairo mall, as well as making massive additions to an existing property. The impact on the employment market has been felt too, with estimates suggesting the mall opening has created 41,000 direct and indirect jobs. Meanwhile Almaza City Center, a 103,000m2 regional mall located in Heliopolis is expected to be opened in the first quarter of 2019. The commercial property scene in Egypt is one offering opportunity, particularly in

Cairo, as demand for highquality product outpaces supply, which is limited by the availability of land. Five new office buildings were expected to be completed within Cairo Festival City in the third quarter of 2017, bringing 60,000m2 of grade A office space to New Cairo. This will make up the bulk of a total 70,000m2 expected to become available during the year. Looking ahead a recently announced project, Smart Village East at Al Bourouj is being produced by a public private partnership including Capital Group Properties, creating a mixed-use development due for completion in 2021. As part of a strategy to generate $26 billion in income from the tourism industry by 2020, Egypt’s government is looking at the construction of new tourist destinations in Ras Sedr, Ain Sokhna, the Gulf of Aqaba, the North Coast and the Red Sea. Plans include the construction of 1.4 million new hotel rooms. There is also a government-backed plan to help the owners of dilapidated hotel properties renovate by funding

Egypt construction industry value, in EGP billions (2016-2026)

Source: Ventures Onsite

854.2

800 623.5

735.7

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2025

527.5

600 441.8 363.6 400

200

145.4

172.7

2016

2017

204.8

2018

250.6

2019

301.0

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EGYPT

some refurbishment costs. The Egyptian government has also signed deals with international developers prepared to fund major developments to improve industrial and administrative areas. At the end of 2016 it gave 80ha of land to a Russian consortium to build a $4.6 billion industrial port facility in Port Said and also concluded a $20 billion deal signed with China Fortune Land Development to develop and manage a 57km2 portion of its new administrative capital development. Egypt’s network of healthcare and education facilities is in much need of investment to bolster their ability to deliver services to the communities they serve. While there are signs that funding may start to

“Egypt has made bold moves to attract more investment, agreeing a $12 billion deal with the IMF just days after it floated its currency and saw a subsequent devaluation of around 48%”

flow if the private sector can find suitable opportunities, there is still much work to do. The government has moved some of the way on healthcare, approving a draft national health insurance law, which would enable more people to pay for the healthcare they need, and allocating $2.94 billion in the 2016/2017 budget to healthcare spending, although this amount is below the world average as a percentage of GDP. In 2016 Egypt’s Ministry of Health kicked-off a healthcare improvement project, earmarking approximately $380m to construct or renovate a total of 135 hospitals around the nation by 2017. In newly developing areas, there are extensive plans for

improved healthcare and education facilities. For instance, 663 healthcare facilities are included in plans for a new capital east of Cairo, where some 700 kindergartens are also scheduled to be built, to cater for a youthful and growing population. Some 11.5 million children are of school age, spread across an approximate 40,000 school buildings providing 355,000 classrooms nationwide. There is a significant gap in the education infrastructure generating a need for an estimated 5,000 new schools to meet current demand. This offers substantial education development opportunities, especially around the populations centres of Cairo and Alexandria. 79


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Construction Intelligence Report 2018  
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