Shortage of materials and workers hits Gulf construction boom

Financial Times, 4 November 2006

By Richard Dean in Dubai

When the Asian Games get under way in the tiny Gulf state of Qatar next month, athletes will be competing for more than just medals, beds will also be at a premium. The Japanese team is packing its own air beds, while organisers are believed to be chartering cruise ships to make up for a shortage of accommodation in the capital Doha.

Qatar's problems are not unique. Across the Gulf Arab states, hotel, residential and office projects are being delayed, as the construction industry struggles to keep pace with the wealth and ambition of cities such as Doha and Dubai.

"It's indicative of the real estate boom, and the large scale of the projects going on in the region," says Monica Malik, an economist at Standard Chartered bank in Dubai. "There is a shortage of manpower and also of materials. It is not just this region - there is a boom going on in China."

Anecdotal evidence suggests that construction costs in the Gulf rose 15 per cent a year in 2004 and 2005. Homeowners on Dubai's man-made Palm Jumeirah Island, including David Beckham, the former England football captain, will start receiving keys to their villas and apartments this month - almost a year behind schedule. And the nearby Jumeirah Beach Residence of 6,000 luxury homes is set for completion before the end of 2006, also a year late.

Simon Williams, an economist at HSBC in Dubai, says infrastructure such as transport is struggling to cope, as investment spending soars, sucking in thousands of expatriate workers. "No one could have anticipated that growth was going to be as rapid or sustained as it has been over the past five years. These are problems of success, not of failure."

He says the combined economies of the six main Gulf Arab states have doubled since 2002 and tripled since 1998. Their combined gross domestic products will be about $720bn (£377bn, €564bn) this year, which would make the GCC - comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates - the world's 15th biggest economy.

"When you see economies doubling in size in five years, it's a massive challenge to try matching capacity with demand," he added.

Shortages have led to rising input costs, which are inevitably passed on to consumers, fuelling inflation, although some states are feeling the impact more than others. The International Monetary Fund forecast inflation this year of 9 per cent in Qatar and 7.7 cent in the UAE, but just 1 per cent in Saudi Arabia.

More worrying, sources in the construction sector have voiced fears privately that some contractors are cutting corners, using cheaper materials and less qualified staff, in an attempt to save money and hit deadlines.

A recent survey by Gulf Talent, a Dubai-based re-cruitment company, said construction staff were being poached from the region to work in China and India.

White collar professionals are also in short supply.

"Finding the right people is very challenging," says Tamer Bazzari, head of investment banking at the Dubai-based investment bank Rasmala Investments. Local houses such as Rasmala face increasing competition from the likes of Morgan Stanley and Deutsche Bank, which are building their operations, particularly in Dubai but also across the region.

Despite these problems, supply bottlenecks appear to be easing. Ms Malik says that construction costs in the Gulf should increase about 10 per cent this year - still high, but slower than in the previous two years.

Chris O'Donnell, CEO of Nakheel, the Palm Island developer, says supply shortages are beginning to work their way through the system. "We are finding that the bottlenecks that have been experienced previously in Dubai are starting to ease."

Ms Malik says there is little prospect that construction delays will derail a booming regional economy while oil prices remain at about $60 a barrel.