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Middle East Market Review 2019

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Despite sluggish growth in the region over the last few years, economic expansion within the GCC states is expected to reach 2.4% in 2018 and 3% in 2019.

2.4%

Economic growth 2018

3%

Economic growth 2019

11%

Increase in contract awards

Middle East Market Review* 

Unsurprisingly, oil prices continue to have a significant impact on growth, along with geopolitical tensions, global trade tensions, and global macroeconomic performance as a whole. Despite sluggish growth in the region over the last few years, GDP in GCC countries is expected to improve slightly, reaching 2.1% in 2019, up from 2% in 2018, supported by higher oil prices, a slower pace of fiscal consolidation and the implementation of public investment projects. These recently revised figures from the International Monetary Fund (IMF) are below the previous forecasts of 2.4% for 2018 and 3% for 2019.

Since hitting a ten-year low in January 2016, oil prices have improved considerably, rising from below US$30 per barrel to around US$85 in October 2018, before falling back to US$50 per barrel in January 2019. This growth has been supported by extended production cuts by both OPEC and non-OPEC oil producers, along with global oil supply disruptions, particularly in Venezuela and Iran. Most government budgets have now been adjusted to consider between US$50 to US$60 per barrel the average. Needless to say, higher oil prices will provide regional governments with an opportunity to peruse strategic projects and appraise some of the previously proposed austerity measures, which in turn will support growth. With that said, as the future of oil prices faces significant uncertainty, so too does the growth outlook for oil exporters.

Brent crude oil prices 

ME Oil prices

Subdued economic performance in the region in previous years has resulted in ambitious fiscal consolidation measures being implemented, including cutbacks on capital expenditure and benefits to public sector employees, reform of energy and water subsidies, the introduction of land taxes, and the introduction of VAT at 5%. It now appears, however, that governments are softening their stance on cutbacks, having ap expansionary budgets for 2018 and 2019, with a particular focus on developing the non-oil economy and public infrastructure. These strategic goals are key components of regional National Development Plans, such as “ ‘Saudi Vison 2030’ and ‘Qatar National Vison 2030’, and are further supported by major regional events, such as Expo 2020 in Dubai and the FIFA World Cup 2022 in Qatar. Additionally, to help stimulate growth, further emphasis has been placed on improving the business environment, with a range of measures being implemented across the GCC states. Measures implemented include new insolvency laws, visa reforms, reduced time and cost for building permits, the streamlining of electricity connections for new plots, and moves towards making it easier to start a new business.

Bolstered by strengthening oil prices, increased government spending and a slower pace of fiscal consolidation, economic growth in the GCC states is expected to have rebounded to 2.4% in 2018, and to reach 3% in 2019 after hitting an eight-year low of 0.4% in 2017, according to the IMF. As part of its Regional Economic Outlook, the IMF has revised the UAE’s expected economic growth downwards from the October 2018 forecasts, projecting 2.8% real GDP growth for 2019 compared to the earlier forecast of 3.6%, compared to 2.9% in 2018 and 0.8% in 2017. According to the latest IMF projections, the UAE economy grew by a lower-than-expected 1.7% in 2018, against the October forecast of 2.9%. In 2020, the UAE is projected to grow by 3.3% in 2020, supported by a strong non-oil growth for the year at 4%. Similarly, Saudi Arabia is following a positive trend, with a forecast of 2.4% in 2019, compared to 2.2% and 0.9% in the previous two years.

Construction activity plays a significant role in regional economic development. A whitepaper published by Ventures Onsite estimates that in 2019, construction contract awards for building works will reach $69 billion followed by energy projects at $38bn and infrastructure at $17bn.This represents an 11% increase across the board when compared to 2018, largely due to growth in the energy and infrastructure sectors. Similar to previous years, the UAE, Saudi Arabia and Qatar will remain the top three markets in the GCC construction industry.

GCC construction contract award by industry

ME review 1

This growth is partially attributable to increased GCC government budgets in 2018, for sectors such as infrastructure, healthcare and education. In addition, GCC governments are also making remarkable investments in the tourism and hospitality sectors, as well as leisure attractions. Projects include airport developments, such as the further development of Al Maktoum Airport in Dubai, seaport developments, including the Dubai Harbor Project, and metro developments, such as the Bahrain Rapid Transport Network, which is estimated at a cost US$8 billion across all phases.

Whilst the UAE remains the leader in the GCC construction industry, Saudi Arabia is beginning to close the gap. Project awards in Saudi Arabia are expected to increase from US$31 million in 2018 to US$40 million in 2019, compared to a forecasted reduction of US$2.6 million in the UAE to US$48 million. Meanwhile, contract awards in Bahrain are expected to contract from US$4.6 million to US$3.9 million in 2019, while Qatar, Oman and Kuwait, although much smaller markets, are forecasted to expand also. 

GCC construction contractor award by country

Me Review 2

With growth forecasts beginning to move upwards once more, there is a risk that previously subdued markets such as Saudi Arabia could face capacity issues, particularly for prestigious projects necessitating international tier one contractors. The exodus of an estimated 800,000 expats from Saudi Arabia in the past 12 to 18 months could compound capacity issues, if demand rises considerably. On the other hand, a capacity gap would present an opportunity for UAE-focused companies to weather a potential slowdown by becoming more active in the Saudi market. In some respects, this is already taking place. Despite a somewhat positive outlook for the region as a whole, it remains to be seen if the dynamic influences of oil prices, trade wars, geopolitical tensions and macroeconomics will convene to spur on industry growth.

Contributors:

Damien Gallogly, John Chavez, Oliver Keegan, Rasanga Wickramage, Kevin Gardiner, Ameer Hamdan, Garvan Barry, Michael McLoughlin

Exchange rates

Middle east exchnage rates

Kingdom of Saudi Arabia Market Review*

GDP of US$183.5 billion was reported within the first quarter of 2018, forecasting an estimated overall increase of 2.2% by the end of 2018, primarily due to a recovery in oil production and public spending. Macroeconomic reports suggest GDP will slow, maintaining an average of 2% in 2019.

Non-oil revenue recorded a 48% increase from the same period last year, totaling US$56.25 billion, with the fastest growth coming from taxes on goods and services. The Kingdom is also working on a number of economic reforms, most notably within the ‘Vision 2030’ - Saudi Arabia’s ambitious social and economic reform plan set to diversify its oil-reliant economy away from its dependency on finite natural resources. As part of this initiative, Saudi Arabia is attempting to become a hub for tourism and other service industries, with large infrastructure projects such as the US$500 billion NEOM project. Born from the ambition of ‘Vision 2030’, this project targets the creation of a vibrant society and a thriving economy. Construction is due to commence in 2019, with initial plans including hotels, airports, residential areas and a causeway linking Saudi Arabia with Egypt. NEOM is attracting overwhelming interest from foreign investors and is likely to result in vast opportunities for companies working within the construction industry.

The Kingdom plans to spend US$1.1 trillion on infrastructure projects alone in the next 20 years. Whilst work continues on Jeddah and Riyadh airports, as well as the Metro system, work is due to begin on significant projects fundamental to ‘Vision 2030’. The projects include various shopping malls and major redevelopments, such as Al Ruwaid Redevelopment located in Jeddah and New Jeddah Downtown, known as the Corniche of Jeddah.

The Kingdom plans to spend US$1.1 trillion on infrastructure projects alone in the next 20 years. 

The Initial Public Offering (IPO) of one of the world’s largest companies by revenue, state-run Saudi Aramco was put on hold in 2018, with much of the ambitious economic and social plan to diversify the Saudi economy now set to rely on the Public Investment Fund (PIF) as an orchestrator of economic growth. Reports suggest that the IPO will go ahead in late 2020 or early 2021, with HH Prince Mohammed Bin Salman reportedly stating in an interview with Bloomberg that the IPO has been estimated to reach above US$2 trillion.

The International Monetary Fund (IMF) projects 2.9% non-oil GDP growth for Saudi Arabia in 2019, as Government spending and confidence increase. However, real GDP growth is projected to slow to 1.9%, as real oil growth slows to 0.7%, according to the Executive Board of the IMF. The increase in fuel and utility prices, the introduction of expat levies leading to a higher cost of living, and a decrease in expat workers, all have the potential to have a negative effect on the economy. However, with a high level of investment within the Kingdom leading to a large number of construction projects coming onstream, Saudi Arabia is likely to become the leading construction market in the GCC, paving the way for new opportunities and business growth.

Linesight average Kingdom of Saudi Arabia construction costs 2019 

KSA construction costs

Kingdom of Saudi Arabia main contractors* 

KSA Contractors

Kingdom of Saudi Arabia design firms 

KSA design firms

UAE Market Review*

For 2019, its Regional Economic Outlook has projected 2.8% real GDP growth, compared to the earlier forecast of 3.6%. According to the latest IMF projections, the UAE economy grew by 1.7% in 2018, against the October forecast of 2.9%. Growth of 3.3% is projected for 2020, supported by strong non-oil growth at 4% . “Expo 2020-related spending in Dubai and Abu Dhabi’s fiscal stimulus are expected to support near-term growth in the UAE,” according to Jihad Azour, the IMF’s Mideast and Central Asia department director. 

Low oil prices mean that the construction industry in the UAE has continued to face uncertainty over the last year, negatively impacting Government revenue and affecting investment decisions. This has a significant impact on the market, particularly in Dubai, leading to developers focusing on more affordable options across all segments of real estate. Affordability is becoming increasingly important, as rents continue to fall across both the Commercial and Residential sectors, averaging an 11% drop in 2018. This has also impacted the retail market, with several brands vacating underperforming stores. Hotels operators are continuing to expand the price-sensitive, midscale segment, in order to meet the current demand ahead of the UAE’s hosting of the Expo in 2020. 

The outlook for 2019 is positive, with an upswing in Government spending. The UAE 2019 fiscal budget is the largest in the country’s history, standing at US$15.5 billion, with infrastructure investment for the upcoming Expo 2020. The planned schemes for 2019 will cater to the need to develop and upgrade the UAE’s infrastructure, and continue its growth as a preferred destination for business, entrepreneurship and tourism. 

Revenue projections for 2019 indicate Dubai’s ongoing diversification, and according to the Director General of the Department of Finance, “do not rely on oil revenues, which account for only 8% of total projected revenues for the fiscal year 2019”. Non-tax revenue accounts for 64% of the total projections, with the remainder coming from tax (25%) and government investment (3%). The UAE’s main contributor to this economic diversity is tourism, with its status as a global travel and logistics hub underpinned by the presence of major airlines across seven international airports, in addition to seaports such as Jebel Ali port in Dubai and KIZAD in Abu Dhabi. 

The UAE 2019 fiscal budget is the largest in the country’s history, standing at US$15.5 billion .

In addition to the Expo 2020 project, other large-scale developments that are currently underway include Dubai Hill Estate, Dubai Creek Harbour and Beachfront Mina Seyahi. Community and public-orientated developments that have been recently delivered, such as The Beach at Jumeirah Beach Residence, Le Mer Jumeirah, City Walk and Box Park, are proving successful and adding to the vibrancy of Dubai. Other notable ongoing projects in the Emirates include Dubai South/Dubai World Central, Downtown Dubai, Palm Island Deira, Mohammed bin Rashid (MBR) City, Abu Dhabi Hyperloop (targeting 2019 for commencement of construction), Museum of the Future, and Royal Atlantis Hotel, amongst others.

Linesight average UAE construction costs 2018 

UAE construction costs

UAE main contractors* 

UAE Main Contractors

UAE design firms

UAE design firms

Kuwait Market Review

The unemployment rate remains low, at around 2.1%. Although 60% of the country’s GDP comes from exporting oil, Kuwait is actively reducing its reliance on oil, with growth in non-oil activities forecasted to increase by 3% in 2019. Relatively low interest rates are also expected to have a favorable effect on GDP growth. 

Unlike Saudi and UAE, Kuwait has postponed VAT implementation to 2021 following a parliament vote. The rescheduling is believed to be due to domestic and political oppositions, the potential negative impact on consumer spending, and the technical challenges involved in a new tax reform.

Kuwait is actively reducing its reliance on oil, with growth in non-oil activities forecasted to increase by 3% in 2019. 

In construction, project awards had only reached US$5.28 billion up to December 2018, which was less than half of the US$13.2 billion projected at the beginning of last year. This was also estimated to be significantly below the average of the last five years, which is mainly attributable to delays with the implementation of megaprojects, such as the KAPP Al-Zour North IWPP and the KIPIC petrochemical complex. Construction of the Subbiya link of the Sheikh Jaber Al Ahmad Al Sabah Causeway is moving at a steady pace and is on track for completion. Other significant projects underway include the world’s tallest judicial building and the South Al Mutlaa City Major Infrastructure Works Package Contract 2. The Government has also announced investment plans of US$160 billion to develop its islands over the next 20 years, which is expected to create 200,000 jobs and generate annual revenues of US$40 billion dollars.

With pressure increasing from parliament and the State Audit Bureau (SAB) as a result of the setbacks, and given the critical role key projects play in Kuwait’s five-year development plan (FY2015/16-2019/20) and ‘Vision 2035’, awards are projected to pick up this 2019. Under these plans, the Government aims to increase the country’s revenue fourfold, going from US$43.6 billion in 2017 to US$164 billion by 2035. This strategy is focusing on the development of transport infrastructure, commercial buildings, healthcare infrastructure, industrial facilities, water distillation facilities and renewable energy projects.

Private investment is expected to play a larger role in Kuwait’s power projects for the foreseeable future. In July, the Kuwait Authority for Private Partnerships Projects (KAPP) announced it was accepting expressions of interest from private firms for the construction of two power and water desalination plants. 

Looking at geopolitical factors, the severing of ties with Qatar is affecting many of the GCC countries, with Kuwait playing a mediating role between Qatar and the Saudi-led boycotters since the outbreak of the crisis in 2017. So far, the dispute has had no major implications on construction activity in Kuwait. 

Ultimately, as is the case with other GCC states, Kuwait is continuing to implement changes and diversify its economy through increased expenditure on infrastructure, improvements in legislation and making the market more attractive for short and long investments.

Linesight average Kuwaiti construction costs 2019 

Kuwait construction costs

Kuwait main contractors 

Kuwait contractors

Kuwait design firms 

Kuwait design firms

Oman Market Review

Over the past 18 months, the Sultanate of Oman has emerged as one of the most interesting markets in the region, offering good business opportunities for contractors, consultants and investors across a range of industries. The IMF has predicted that Oman will become the fastest growing economy in the GCC region next year. It has also revised the 2019 growth forecast for Oman from 4.1% projected in its April 2018 World Economic Outlook report. The IMF expects Oman’s economy to grow by 1.9% this year. This is largely attributable to increased oil prices, which stood at US$52.13 per barrel as of mid-January 2019.

Moreover, following on from the signed GCC VAT Framework Agreement in 2017, the Sultanate of Oman is aiming to implement the 5% VAT regime from September 2019. On the other hand, it was reported that the implementation date is still flexible, depending on the wider economic circumstances, as highlighted during a meeting held by the Oman Chamber of Commerce and Industry last September 2018. The launch of the consumption tax, such as VAT, as well as other taxes and excise taxes, will help the GCC states diversify their revenues from oil duties, which have fallen sharply with the volatility of oil prices. This diversification will support the Sultanate of Oman in its efforts to enhance its fiscal management program. It is worth noting, however, that the government has also indicated that many essential foodstuffs will be subjected to a zero VAT rate, which may also be applicable for public transport and real estate.

With about US$177 billion worth of projects planned or underway, the Sultanate of Oman has a substantial pipeline of projects, which are needed to support Muscat’s aims at diversification into logistics, tourism and manufacturing, as well as improving public services and infrastructure.

The Omani Ministry of Manpower is very serious about Omanization, which was enacted by the Government in 1988, and allows Oman to be self-reliant by decreasing dependency on expatriates. In 1993, the time of the first Omani census, more than a quarter of those living in Oman were expatriates. Since then, however, many have left. Professional trades, such as banking, leasing, insurance, hospitality and tourism, retail and transportation are almost closed to non-Omanis, with the Omanization ratio for some of these sectors standing above 90%.  

Current major projects include the Duqm Special Economic Zone, which was valued at US$30 billion; the Duqm New Town, valued at US$20 billion; the Oman National railway, valued at US$15 billion; and the Madinat Al Irfan ‘City for the Future’, currently estimated at US$13 billion, constituting one of Oman’s largest urban development projects at 4.9 million sq.m. and scheduled for delivery in 2023.

Linesight average Omani construction costs 2019 

Oman construction costs

Oman main contractors 

Oman contractors

Oman design firms 

Oman design firms

Bahrain Market Review*

Its economy grew by 1.8% in 2018, and in its latest Regional Economic Outlook, the International Monetary Fund (IMF) expects it to maintain the same pace this year, which is a downward revision from its last forecast. As of early September, the Central Bank of Bahrain’s governor put the expected growth figure for 2019 at 2-2.5%. This will largely be funded by the introduction of VAT at 5% and an increase in revenue from oil due to increased prices. It is also thought that a further 14% reduction in public spending will be required to bring the public finances into order, which will have the effect of reducing consumer sentiment and private investment.

The country experienced growth of 2.8% to the end of Q3 in 2018. This growth in output is expected to decelerate to 2.6% in 2019, as the government undertakes fiscal reforms and introduces taxes in order to correct the fiscal deficit, which currently stands at 6.9% of GDP. 

These economic austerity measures come largely as a condition of an aid package from Bahrain’s GCC neighbors, particularly Saudi Arabia, Kuwait and the UAE, who between them have invested US$10 billion in the form of loans, grants and deposits. This investment is further to the existing GCC Development Fund, which from 2011 to 2018 has tendered projects to the value of US$5.1 billion in Bahrain.

The Bahraini construction market remains buoyant, with housing, tourism projects and infrastructure projects all contributing to the sector. Ongoing government-funded infrastructure projects include the new US$1.1 billion terminal building at Bahrain International Airport, a 1500MW power station, the expansion of the Alba Aluminium production facility, new Muharraq bridge and the widely anticipated Bahrain Metro Rail system. The Metro project will be one of the largest PPP projects to be undertaken in Bahrain, at a value of US$1.5 to 2 billion for 114km of monorail, tram and light rail interlinked systems.

On the private investment side, reclaimed lands such as Diyar Al Muharraq, Bahrain Bay and Al Madeena Al Shamaliya continue to introduce large-scale projects to the island’s construction sector. The recent award of the Marassi Galleria Mall and Entertainment Centre and the accompanying Vida Residences on the eastern side of Diya Al Muharraq is one of the largest contract awards of 2018. The Hospitality sector continues to grow in Bahrain as tourist numbers are increasing year-on-year. Further investment is expected in this sector, with the development of the Al Sahel resort, the Address Hotel and Residence at Diyar al Muharraq, the Hilton Hotel at Bahrain Bay, as well as hotel developments at Financial Harbour and Bahrain Marina. In the Retail sector, the Marassi Galleria Mall, Seef Mall Hamala and Dilmunia Mall, along with planned extensions to City Centre Mall and The Avenues, are all exciting projects due to come online in 2019.

Bahrain continues to perform well in attracting direct foreign investment, with the construction of three data centers for a leading global web service provider and the completion of the Mondelez food manufacturing facility. This is further indication of the country’s standing as a business friendly environment within the MENA region.

Linesight average Bahraini construction costs 2018 

Bahrain construction costsd

Bahrain main contractors* 

Nahrain Contractors

Bahrain design firms 

Bahrain design firms

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