Often described as the Middle East’s architectural playground, the UAE construction market witnessed a marked slowdown from 2008-11 within the grips of a bumpy global economy. There were many sore points in the industry, from trimmed funding to aborted projects, cautious developers to costly raw materials and downsized contracts. The plague became so widespread that, according to MEED Projects, 2011 saw the cancellation of $188.7 billion worth of real estate projects.

But 2012 witnessed a gradual uptick in construction buy-in underpinned by a revival of government spending into non-oil sectors, improvement in investor sentiment and the UAE’s growing reputation as a safe haven. A study by DMG Events confirmed this, stating that the value of completed construction projects in the GCC likely rose by 71 per cent to $79.8 billion in 2012, as compared to $46.5 billion in 2011.

Shaken And Stirred

Despite these green shoots, Khaldoun Tabari, CEO of Drake & Scull International (DSI), is cautious on the outlook for the MENA construction sector in 2013.

“It is a market that will remain challenging,” he says.

He should know. Spearheading a 130-year-old company that’s credited with sculpting the region’s best landmarks, Tabari has moulded DSI into a leader in design, engineering and construction across the GCC, North Africa and South Asia.

Instead, the CEO sides with industry experts who say that construction growth is impeded due to the availability of capital funding.

As liquidity is constricted, companies are often severely undercutting their expansion and growth.

Even DSI – despite its mammoth market size and order book – faces a similar issue.

“Collection of payments is, in fact, one of our biggest problems,” Tabari confesses. “Although liquidity is improving – since real estate developers and contractors can now get financing from less stringent banks – the risk is from clients: can you get back your money?”

In order to successfully reduce receivables, the company has improved collections during the last quarter of 2012, and has also extended contract provisioning to the second half of the year.

So how can construction companies protect themselves until capital and growth returns?

Busting out

The behemoth Drake & Scull has found a way. By increasing exposure to new fast-growing markets, entering joint ventures and partnerships with foreign companies, and developing capabilities to act as a one-stop shop handling large and complex projects, DSI is successfully mitigating business risk.

This is a reaction to an industry-wide phenomenon where competition is at an all-time high, margins are tight and new projects remain scarce. This has nudged many contractors into shifting focus to infrastructure projects where margins are higher and opportunities greater.

Similarly, developers are increasingly moving away from small and medium projects to multifaceted multi-billion dollar ones requisitioning civil, mechanical, electrical and infrastructure facilities, among others.

Evidently, only specialised contractors with sophisticated technical skills can meet these requirements.

No wonder then that DSI has gone from being a pure mechanical, electrical and plumbing (MEP) contractor to a multi-disciplinary one with business units in water and power, oil and gas, civil contracting and rail.

There is also a lot of synergy involved with using business units in one market for transference to another market.

A case in point, Tabari points out, is DSI’s German subsidiary (Passavant Roediger) that has developed several profitable water and sewerage treatment plants in Eastern Europe, China and the MENA region.

“The skill set required for, say rails, is the same as that required for MEP, so we work on economies of scale.”

In addition, the company has signed many engineering, procurement and construction (EPC) contracts, most recently one for pipeline installation at the Zubair Oil Field (one of the largest in the world) in Basrah.

“Iraq,” says Tabari, “is a focal market for DSI’s oil and gas business.”

The largest economy in the GCC – Saudi Arabia – is also DSI’s biggest market: “Saudi leads investments in the construction world and since we are an established brand there, we find that project pipelines are strong and contractors present.”

The company has already established offices in Iraq, India, Algeria and Vietnam with future expansion planned in other areas.

“Our key focus markets will be Saudi Arabia, India and Algeria. Gross margins from these are expected to improve since direct expenses related to the establishment of news offices in Iraq, India and Algeria are completely rendered and incurred.”

Tabari’s outlook for Oman is also positive largely due to the government support that is pumping money into sectoral growth outside of oil.

“Growth will come by expanding into newer markets or if we get more traction in existing markets. In a small market you should grow horizontally and in a large market you should grow vertically,” adds Tabari.

Tabari is surprisingly blasé about Qatar due to the delay in project awards in 2012. Ranked as one of the fastest growing economies in the world, the country’s ambitious infrastructure development plans under the National Vision 2030 and World Cup 2022, make it a poster boy to many in the construction industry.

He disagrees, “The market in Qatar has not taken off yet, though we have seen some movement in the last two months and expect improvement in the second half of 2013.”

With regard to partnerships, Tabari adopts a contrarian view, expanding when people are contracting, and contracting when people are expanding.

“Look at the current Indian market, for instance, it is ripe for acquisitions. Earlier Indian companies were priced at 20×P/E, but they’re relatively cheap now at 7×P/E. Such valuations aid partnerships, and in turn, help our expansion into a particular market.”

Numbers game

For the first nine of months of 2012, DSI reported total revenues of Dhs2.1 billion and a net profit of Dhs83 million for the same period.

The order backlog closed at Dhs7.5 billion as of Sept 2012 while total project awards for the first nine months reached Dhs2.7 billion.

The cumulative revenues for the first nine months of 2012 indicate a continued momentum, a healthy backlog and sustainable growth and sound fundamentals for DSI,” says Tabari.

“The solid performance of DSI‘s core MEP business has been strong with over 10 per cent net margins and will continue to contribute to the growth of DSI .The oil & gas and civil businesses are expected to enhance revenue growth during the last quarter. Expansion into rail is on track and the company is prequalifying for major bids in that sector across the region.”

Tabari is also optimistic about the real estate sector.

“The property market is strikingly different from construction. It has potential, especially in KSA, Lebanon, Dubai and Abu Dhabi, where prices are going up due to greater demand from nationals in Egypt, Lebanon and Syria.”

In Dubai he pegs the Marina, JBR, Burj and Palm Jumeirah areas as strong buys.

Signs of life

Tabari ends on a positive note, stating that it is from this very downturn that growth for the construction market will emerge. As the sector continues shrinking, there will be an exit of small and medium players, which will increase industry consolidation.

“In turn these players will quote the correct prices, subsequently improving not only margins for the remaining players, but also productivity on major projects across the region.”

Currently there are an estimated $4.2 trillion worth of ongoing construction projects in MENA, with the UAE representing the biggest slice at $698 billion, data released by MEED reveals.

According to MEED Gulf Projects Index, growth in the UAE’s projects industry was attributed to the revival of three projects worth $960 million, and the launch of three new projects worth a combined $230 million. Elsewhere in the region, Kuwait recorded the region’s biggest rise in the value of its projects sector, increasing 1.4 per cent to $185.9 billion. Oman continued its growth trend, with the value of its projects sector rising 12 per cent compared to the same period in 2011; while Saudi Arabia, Bahrain and Qatar remained relatively steady.

“There are signs of recovery,” says Tabari. “In the long-term I am positive, but in the short- to medium- term we will see.”

Renewed focus on diversification from oil, increased government spending, along with a better economic outlook will boost construction activity. The fallout from the Arab Spring and the Euro crisis, along with a robust tourism sector will also infuse much-needed credit and subsequent development of construction-related activities. Key findings in a Deloitte report indicate that large infrastructure projects, particularly around social and transport infrastructure, will offer tremendous opportunities for contractors, as will continuing upstream and downstream oil and gas related developments in the coming years.

Tabari anticipates that investment in healthcare, hotels and education will also provide a shot in the arm to construction.

“At Drake & Scull we are neither pessimistic nor optimistic. We are currently conservative in our approach, more so than two years ago, and watching the market carefully.”