The contracting sector in the Gulf Cooperation Council (GCC) is currently growing up as projects worth USD 900 million, including property projects worth USD 516 million, are being carried out, an economic report showed here on Sunday.
Relatively less affected by the global financial crisis and the political turmoil in the wider MENA region, the contracting industry in the GCC is witnessing strong growth, which is projected to increase further in the years to come. Currently, projects worth more than USD 900 billion are at various stages of development throughout the GCC of which real estate projects accounts for a significant value at USD 516 billion, Kuwait Financial Centre (Markaz) said.
Opportunities in contracting sector can be segregated into multiple verticals depending on the industry they originate from. Among all industries, real estate tops the list with projects worth over USD 516 billion in pipeline, to be awarded over the coming years. Urbanization of a young, growing population, influx of expatriate labor, and relaxation of rules allowing foreign ownership of real estate, have led to increased demands for affordable housing. The focus has, hence, shifted from catering to higher income groups to catering to middle and lower income groups. public-private partnership projects are another avenue that is yet to be fully explored, the report said.
The GCC countries are investing significantly in infrastructure development across many verticals, to meet the rising demands of a young and vibrant population, improve accessibility within the region, and to diversify the economy away from the oil and gas sector. This expansion is supported by rising government surpluses, enhanced spending measures, and higher budgetary allocations to infrastructure development. The opportunities for both local and international contracting players in the industry are plentiful, resulting in increased competition, and a challenging business environment, it added.
While the overall outlook for the industry is optimistic, it faces challenges within and outside the GCC region. Lower growth forecasts for major economies and slower recovery of European countries from the debt crisis could affect international oil prices and therefore, the spending pattern of the GCC countries.
Increasing competition, rising costs, availability of skilled and unskilled labor, supply chain bottlenecks - as GCC nations are dependent on imported machinery, raw materials and labor, - could lead to lower net profit margins in the industry. Diligence measures, with respect to lending for real estate and other construction activities, have been strengthened post the Dubai crisis. Banks have enforced stricter collateral requirements, equitable distribution of project risks, and stringent covenants on project cash flows to safeguard their equity. Attracting foreign investments is also a challenge due to high degree of information asymmetry, poor enforcement of legal contracts and lack of protection for investor interests. Despite these challenges, the contracting industry is projected to post a strong growth and has enormous potential for further growth in the coming years due to the vast number of projects being planned and executed.