Alastair Stewart’s recent trip to Dubai opened his eyes to a surprising amount of construction activity going on, although margins are slimmer and clients tougher than ever before
Construction booms and busts don’t come boomier or bustier than Dubai’s. For almost a decade the only way seemed to be up, economically and physically, for the emirate’s vertiginous property sector - until everything stopped in its tracks in 2009. But there are now stirrings of life on long-mothballed sites and even suggestions that clients may be starting to pay their bills.
Heading off to Dubai for some winter sun recently, I expected to encounter metaphorical if not actual tumbleweed blowing through deserted commercial and residential developments. Not so. While activity was nowhere near the heady levels of 2008, cranes were moving and builders were building.
Property prices had fallen by over half from their peak, but according to the latest data from Knight Frank, prime residential prices bounced 20% in the year to Q3. Paradoxically, the turmoil afflicting much of the Middle East appears to have helped spur this revival. Dubai has always been a safe haven for many high net worth individuals in the wider Middle East and North Africa region.
I used the trip as an opportunity to catch up with Paul Woodman, Kier’s head of overseas operations. We’d met on a couple of analysts’ research trips during the boom times hosted by Carillion, his then-employer in the region. It is not hard to see what attracted so many contractors and consultants to Dubai in the noughties. “Then you stuck your head out of the window and [a job] would hit you,” he recalls, possibly only half-flippantly.
Work has returned to the emirate, mainly finishing off stalled sites as funding has started to trickle again. Developers have been under pressure to show customers progress, although with nothing like the same degree of urgency - a view supported by the several communal tea breaks I spotted wandering past sites. “It’s now one floor a month rather than one a week,” according to Woodman.
At first glance, developers - particularly residential - appear to be on a hiding to nothing. Travelling around at night, there are far more apartments with lights off rather than on. However, that doesn’t mean that they are unsold. It is commonly held that large swaths have been bought by Iranians, Egyptians, Russians and others who not only want to park their capital beyond the reach of their own regimes but might also wish for personal bolt-holes should the political environment deteriorate at home.
Where developers are finishing buildings, they are frequently trying to do it as inexpensively as possible. Contracts that would frequently command cost plus 15% are now on thinner margins, but still attractive
Kier, however, eschews the more visible apartment and office blocks and is targeting the more prosaic, and somewhat less competitive, infrastructure sector. Drains, roads and the like frequently lagged behind developments during the boom and there is still plenty of catching up to be done.
Whatever sector it is, clients have become tougher - or savvier - to deal with. Cash is flowing but it’s still tight. Where developers are finishing buildings, they are frequently trying to do it as inexpensively as possible. Contracts that would frequently command cost plus 15% are now on thinner margins, but still attractive for UK companies - a view that Carillion attests to. But you have to work harder to get your money. According to Woodman: “Relationships are absolutely critical, more so now than ever.”
One issue that has left many a UK firm scarred, has been payments (or, rather lack of them) for work undertaken during the boom. Progress for many had been glacial but, again, there has been some thawing. Woodman hints that this is not an issue for Kier but suggests other companies are beginning to make ground.
Tactics are all very hush-hush, for obvious reasons, but good client relationships and a spot of compromise seem to be the key secrets for a degree of acceptable resolution.
Wider afield in the region, varying pictures emerge. In Abu Dhabi several large stalled projects are being dusted down, ranging from transport to the long-heralded museum district. Saudi Arabia is likely to make large investments in social and transport infrastructure. But one much-vaunted destination that could again leave foreign companies with burnt fingers is Qatar. While there are huge investments planned, not least to gear up for the 2022 World Cup, the degree of competition has become cut-throat and some rash agreements may have been made. “Everybody rushed in when the market in Dubai stopped,” Woodman recalls. But when work does pick up companies could find themselves squeezed, having agreed to fixed-price contracts, made in leaner times, but with inflation building up.
The big prize, however, could be an unlikely sounding one - Iraq. It needn’t be stressed that the country’s infrastructure is, quite literally, bombed out. But the oil production necessary to pay for renewal is picking up steadily. Kier is exploring possibilities with oil and gas companies (which offer relative security in their heavily guarded exclusion zones) and has opened a small office in Basra, which it shares with Mott MacDonald. Others are likely to follow. It may not be an imminent destination for seekers of winter sun or retail therapy, but for UK companies the country could provide some respite from the colder climate in back home.
Alastair Stewart is building analyst at Progressive Research