Oil price drop is a major challenge for the GCC’s construction sector

Falling oil prices pose a major challenge to the growth of the construction sector in the GCC, a report by Alpen Capital has said.

The dip in oil prices may push the GCC nations to restrict state spending, hampering the growth of the construction industry which is materially dependent on government funding, the report stated.

Opportunities available in the industry could also be affected due to lower investments from the private sector and plunging disposable income levels.

Lower tourist inflow from oil-dependent nations may further hamper the sector’s growth, the report added.

International crude prices fell from $115 per barrel last year to as low as $45 in January this year, although they have since rebounded to roughly $60-$65 per barrel.

Although the Gulf countries have dismissed any immediate effects of the oil price drop on their economies, analysts say that the impact might only be visible towards the end of this year.

In its report, Alpen also outlined other challenges for the GCC construction industry such as high dependence on expatriate staff; a possible shortage of raw materials – particularly cement and higher costs; and increased competition, which could continue to impact margins.

The regional construction industry saw increased activities in the infrastructure sector in 2013 and 2014 due to an upbeat economic sentiment. However, the industry’s contribution to the region’s GDP almost remained flat from 5.5 per cent in 2010 to 5.7 per cent in 2014, Alpen said.

However, it stressed that the industry is forecast to see growth from 2015-2018, encouraged by factors such as favorable macroeconomics, positive demographics and rising tourism activities.

“Higher budget allocation towards the construction sector, as part of the strategic vision of the member nations, lends an added push to the industry,” said MD of Alpen Capital ME Sameena Ahmad.

The GCC governments’ challenge to diversify their economies from oil and gas and their consistent focus on infrastructure development has kept the construction industry in focus, added MD of Alpen Capital Investment Bank Qatar Sanjay Bhatia.

In Saudi Arabia, efforts to boost religious tourism have translated into higher budget allocations towards the hospitality, retail, and infrastructure sectors. The push towards affordable housing and the recent law allowing for mortgages are expected to further increase construction activities in the near future, the report stated.

The forecasts for the UAE are also favourable and are based on its economic recovery, safe-haven status, liberal investment climate, relatively advanced real estate regulatory framework and a buoyant infrastructure project pipeline as part of the country’s strategic vision 2021.

In Qatar, the report said the construction sector will benefit from a healthy population growth, mega events such as the FIFA World Cup and an improving economy.

The industry is also predicted to see strong growth within Kuwait, Oman and Bahrain.

“Activity in sectors across infrastructure, residential, commercial, hospitality and retail have taken centre stage in inviting global participation and attracting the attention of businesses and tourists alike,” said Bhatia.

“Although investments are directly dependent on the pace of each government, we believe that the GCC region continues to be a desirable location with accelerating growth prospects for the near future,” he added.

The value of planned construction projects or those underway in the GCC is estimated to reach $172bn this year, a recent report by Deloitte found.

Another study by Ventures ME stated that construction projects with a combined value of $67.6bn were completed in the region last year.