Contractors in the Middle East will see increasingly tight profit margins in 2012 as competition for deals heats up amid a slowdown in construction in some markets, Fitch Ratings said.
Multibillion-dollar government spending plans in Qatar and Saudi Arabia will help to bolster the regional market, but contractor margins will continued to slide, the agency said.
"With the recently increasing competition, contractors have started to go for lower margins and Fitch expects this to remain the case over the next few years," said Bashar Al Natoor, director of the agency’s EMEA team in Dubai. “In Saudi Arabia and Qatar, infrastructure spending continues to be strong but with lower margins.”
In the UAE, once the region’s building hub, Abu Dhabi has reined in its spend on construction projects in recent months, alarming contractors who had banked on the oil-rich emirate to offset the collapse of Dubai’s real estate market.
The UAE's property boom ended in 2008, with home prices in the Dubai emirate plunging by about 60 percent, forcing many developers to abandon projects. More than half of the projects in Gulf country were scrapped or cancelled as project finance dried up.
Citigroup said last month that the value of projects scrapped or on hold in the Gulf state soared to $958bn in the 12 months to October, signalling a recovery may be some way off.
“A sharper-than-anticipated slowdown in the construction sector in Abu Dhabi could have some implications for contractors operating in the UAE,” Fitch said. “The Dubai construction market will also remain fragile in the medium-term.”
Contractors in the UAE market have increasingly looked across the region to bolster their order books as domestic revenues dwindle. This has ramped up competition for deals in markets such as Saudi Arabia and Qatar, forcing contractors to reduce their costs.
“A decline in project tenders across EMEA will increase competitive pressures,” said Fitch. “Contracting is inherently about managing project risk and completing on budget. Balancing this risk/reward conundrum in an increasingly thin margin business will be a key challenge for management in 2012.”