The pipeline of Qatar's construction sector takes it through 2022 and beyond

As Qatar’s construction industry heads into 2020, there is a strong focus on what is to come beyond the 2022 FIFA World Cup, which has dominated the sector for much of the past decade. There are signs that Qatar’s economy has begun to rally, and while the country continues to rely on hydrocarbons revenue, the construction sector is playing an important role in increasing diversification. According to the most recent data available from the Planning and Statistics Authority (PSA), the construction sector accounted for 14% of GDP, at QR23bn ($6.3bn), in the second quarter of 2019. Additionally, the construction industry represents the country’s largest employer by volume. The PSA’s “Labour Force Sample Survey 2018”, published in June 2019, shows that of the country’s total workforce of 2.1m, just over 50% were employed in construction positions.

From a sizable deficit in 2017, the central government recorded a budget surplus of approximately 2.3% of GDP in 2018, a trend which continued into 2019, when the surplus was expected to reach QR4.3bn ($1.2bn). Following its annual visit to the country in June 2019, the IMF predicted real GDP growth to reach 3.2% in 2020, up from its 2.6% estimate for 2019 and 2.2% for 2018. The decline in oil prices that began in early 2020, coupled with the outbreak of Covid-19, will impact Qatar’s growth in the year ahead. At the end of March 2020 Brent crude was trading below $30 per barrel.

Furthermore, nearly all Qatari companies have developed effective solutions that have allowed them to mitigate the impact of the regional blockade. Many note that the blockade has in fact increased manufacturing and trade opportunities for local businesses, strengthening the economy overall.

New Developments

Following a slight rallying in energy prices in early 2019, Qatar increased spending in its 2020 budget by 1.9% from QR206.6bn ($56.7bn) in 2019 to QR210.5bn ($57.8bn) in 2020, the highest expenditure has been since 2015. Revenues, however, are expected to remain stable, at QR211bn ($58bn). This was based on a estimated average oil price of $55 per barrel for 2020, the same as the previous year, though $10 higher than 2018.

Beyond the 2020 budget, the country’s project pipeline has more than 1000 planned developments worth $150bn that have yet to be awarded. About $80bn of this is destined for new projects in the construction sector, with planned infrastructure projects accounting for a large portion of overall investment. Projects include the expansion of Hamad International Airport, scheduled to start in 2020, and extensions to the Hamad Port and the Doha Metro.

In efforts to diversify the economy, Qatar opened its first two economic free zones in 2019, attracting more than 50 companies from around the globe and more than QR1.5bn ($494.4m) of investment. The 400-ha Ras Bufontas Free Zone is located next to Hamad International Airport, and the 4000-ha Umm Alhoul Free Zone is situated near Hamad Port. The ongoing development of several free zones as well as a new law that permits 100% foreign ownership have been steps towards greater ease of doing business. However, some regulations still lack clarity, and a recent regulation requiring all written communication from ministries be in Arabic may create challenges for international companies.

Structure & Oversight

There are several bodies responsible for regulating Qatar’s construction sector and projects. The main regulator is the Ministry of Municipality and Environment, which, among other duties, grants approvals for project planning and building permits. Some projects may require additional permits or approvals from Qatar General Electricity and Water Corporation, the Ministry of Interior and the Communications Regulatory Authority.

The procurement arrangement for the majority of projects in Qatar is a traditional split procurement, whereby a client will employ a consultant to design a project, and will then award a separate contract for the actual construction. This arrangement is particularly common for local, small-scale projects. Local contractors and consultants will often transact as single legal entities for small-scale projects, with limited liability companies (LLCs) being the most common corporate structure in this case.

Large-scale, international projects are often undertaken through a design-and-build contract, through which a contractor will assume responsibility both for a project’s design and construction. Contractors for these kinds of major projects are generally a mix of local and international companies that combine to form a consortium. These consortia are typically incorporated as a single LLC, particularly when contracted on a publicly tendered contract, though local firms may retain majority control.

Public Private Partnerships

While public sector projects have historically been funded by the government, the introduction of a public-private partnership (PPP) law in 2019 (see analysis) is likely to increase the use of PPPs for state projects.

One such project under the new PPP scheme was unveiled in January 2019 when the government announced the construction of 45 public schools, requiring investment totalling QR4bn ($1.1bn), and projected to be delivered between 2021 and 2023. The private sector will be responsible for financing, building and maintaining the schools, while the government will take charge of their management.

Contracts with the public sector frequently see a heavy transfer of risk from the employer to the contractor. As a result, contractors may find it more difficult to seek an extension to a project deadline.

Performance

Qatar’s considerable investment in infrastructure related to the 2022 FIFA World Cup initially drove significant growth in the construction sector. Recently, however, growth in the sector has started to level out as projects for the tournament have largely been awarded.

There was some concern for the industry in August 2019 when Fitch Solutions revised its growth forecast for the sector from 8.2% in its previous analysis to -0.3%. This comes on the back of repeated and dramatic fluctuations in the price of oil, as well as the ongoing embargo imposed by several neighbouring states and a global economic slowdown.

Fitch stated that the adjustment came in response to the release of data for 2018 that was below expectations, as well as a 1.2% contraction of the sector during the first quarter of 2019. The sector grew by 4.5% in 2018, substantially lower than the preliminary estimate of 12.5%, and Fitch predicts additional contractions in 2022 and 2023.

While the industry may indeed be going through a contraction, many working in the sector consider it as beneficial. “I see this as a healthy correction,” Ferass Anwar Al Qawasmi, deputy managing director of local firm Ramco Trading and Contracting, told OBG. “While we are all suffering from the decrease in the number of new projects, this will allow the more robust entities to continue operations.”

Despite the slowing performance, there is cause for optimism for the construction sector. The added value of all industry activities – which includes construction – as a percentage of GDP increased from its low of 53.2% in 2016 to 61.1% in 2018, though still short of its 2013 value of 71.8%.

One of the major concerns expressed by Fitch was a predicted narrowing of the project pipeline following the completion of projects related to the 2022 FIFA World Cup. However, nearly QR60bn ($16.5bn) has been allocated for infrastructure and real estate investments over the next decade as part of Qatar National Vision 2030, which should offset falling 2022 FIFA World Cup-related spending.

Many local companies, however, have maintained a positive outlook. “I do not predict a downfall within the construction industry,” Junu Kurian, director of strategy and implementation at local construction firm Coastal Group, told OBG, citing the company’s 120 construction projects that are currently under way as cause for optimism. While much of the firm’s current work is focused on the 2022 FIFA World Cup, Kurian said it is working on several projects that are not related to the tournament.

Additionally, Al Qawasmi notes that the correction period in the construction sector has resulted in a drop in real estate prices, which could provide opportunities in that sector. “It is healthy right now to build,” he told OBG. “People are beginning to have more choices. They will leave older neighbourhoods with less developed infrastructure and move to newer neighbourhoods if given the opportunity.”

Building Materials

When the construction boom was at its peak in 2016, Amsterdam-based design, engineering and consulting company Arcadis ranked Doha as the most expensive city for construction in the MENA region, the primary reason being the many materials that need to be imported. Since the blockade, however, the country has developed its capacity for both stockpiling and manufacturing materials locally. In February 2019 Qatar National Cement Company completed a 5000-tonne-per-day clinker production plant, taking the country’s capacity to 16,000 tonnes per day.

Solutions

Companies in the country were quick to find solutions to work around the blockade, and learned to plan ahead and anticipate lead times to a greater extent than they previously had. Steel, for example, must now be sourced directly from producers in India. “There have not been any major negative effects from the blockade on the construction sector,” Osama Hadid, CEO of Al Jaber Engineering, told OBG. “This is because a lot of the materials that were pre-ordered as a usual practice were just rerouted through countries like Oman. While these materials were being rerouted through other countries, alternate arrangements were being executed to mitigate delays.”

The contraction of the construction industry has resulted in a reduced demand for building material, which has, ultimately, lowered costs. The cost of concrete, however, remains high compared to some neighbouring countries. The price of 30-megapascal concrete for a 1500-cu-metre job reached $96 in 2019. However, other materials, such as 16 mm reinforcement bar for a 120-tonne job dropped significantly, from $820 in 2018 to $679 in 2019.

The high cost of building in Qatar is not only due to the availability of materials, according to Al Qawasmi. A major driver of the price is the fact that Qatar demands very high specifications for its buildings. As OBG reported previously, new regulations implemented in early 2015 put Qatar at the forefront of GCC construction standards.

2022 FIFA World Cup

With two of the 2022 FIFA World Cup stadia already completed, and the remaining six quickly approaching the final stages of construction, the landscape of the industry is sure to see changes in 2022. The stadia and associated infrastructure have been a key driver of construction growth since 2013, and the sector will now begin to adapt to a narrowing project pipeline.

The first game-ready stadium was the Khalifa International Stadium. Initially completed in 1976, a renovation contract was awarded to Brussels-based Six Construct, whose renovation job included rebuilding the 44,000-sq-metre external shell of the stadium and adding nearly 11,500 seats, raising capacity to 40,000. The stadium reopened in May 2017, with the total value of renovation work amounting to €307m. The renovation equipped the stadium with the latest in energy-efficient cooling technology, and following its reopening, Khalifa International became the firstever stadium to receive a four-star rating from the Global Sustainability Assessment System.

The second stadium to come on-line, the 40, 000-seat Al Janoub Stadium, formerly Al Wakrah Stadium, officially opened in May 2019. The stadium required investment of €587m and was built as a joint venture (JV) between Midmac, Six Construct and PORR Qatar, which is the main contractor for the project. Zaha Hadid designed the stadium, which will become a sports and entertainment centre with a reduced seating capacity of 20,000 following the tournament.

Al Bayt Stadium features a traditional tent design and will have capacity for 60,000 spectators upon completion. It is being jointly developed by Galfar Al Misnad and Italian firms Cimolai and Salini Impregilo Group. Construction work was completed in early 2020, and the stadium is expected to open before the end of that year. Like Al Janoub Stadium, capacity will be reduced after the 2022 FIFA World Cup, and Qatar will donate 28,000 seats to developing countries.

Construction for the 40,000-seat Education City Stadium, of which the main works contractor is JPAC JV, was completed in December 2019. Following the final engineering and design aspects, the stadium is expected to open in 2020. Following the tournament, capacity will be reduced by half and it will become a sports, leisure and social centre for the surrounding Education City student community.

The remaining four stadia – Al Rayyan, Al Thumama, Lusail and Ras Abu Aboud – are all at various stages of completion. The 40,000-seat Ras Abu Aboud Stadium, still in the early stages of construction, will be partly constructed using the shipping containers that transported its building materials. After the 2022 FIFA World Cup the stadium will be completely dismantled, with many aspects destined for reuse.

Energy

Despite the 2022 FIFA World Cup attracting the most attention for the country’s construction sector, projects are emerging elsewhere, and other segments are also promising. “Almost all of the projects that are currently being put on the market are related to the 2022 FIFA World Cup,” Chakib Nayfe, CEO of Medgulf Construction, told OBG. “Most companies are anxious to know what is going to happen after 2022, however, the oil and gas sector will continue booming long past the 2022 FIFA World Cup.”

The construction sector can anticipate major energy projects in the years ahead following new discoveries in the South Pars-North Dome gas field. In late 2019 Saad Sherida Al Kaabi, the minister of state for energy affairs, announced plans for an additional two liquefied natural gas production plants requiring an estimated minimum investment of $60bn.

Road & Rail

With the 2022 FIFA Cup stadia on track for delivery, officials are now focusing on making sure the country’s infrastructure will be ready to accommodate the massive influx of visitors when the competition kicks off in 2022. Despite regional and global challenges, road construction continues apace: the country’s highway network expanded to 750 km since the blockade was imposed, following the construction of new roads like the Doha Expressway and the Lusail Expressway. Several other road projects like the QR7.6bn ($2.1bn) Al Khor Expressway, undertaken by Turkey’s Tekfen Construction, are expected to be completed in 2020. Many projects built in anticipation for the 2022 FIFA World Cup have been delivered ahead of schedule.

Qatar Rail is the government authority overseeing the country’s rail development and expansion projects, which experienced significant progress in 2019. The country’s rail network consists of the three-line Doha Metro, the Lusail Tram, and the long-distance passenger and freight railway. Much of the first phase of the Doha Metro is already finished, with the Green Line and the Gold Line entering operation in late 2019, and all but one station on the Red Line operational, which is expected to open in mid-2020. When fully completed, the $36bn project will consist of four lines and more than 300 km of track.

The €2bn Lusail Tram is being developed in a JV between Qatari Diar and France’s Vinci Construction. The four-line, light-rail network is expected to partially come on-line in 2020. The long-distance passenger and freight rail will connect cities in Qatar with the planned GCC rail network. The four-phase project is expected to finish in 2030.

Hospitality

Another industry gearing up for the large influx of visitors for the tournament in 2022 is the hospitality sector. Officials expect to see around 96,000 visitors per day during the 28-day 2022 FIFA World Cup. Qatar already hosted a number of warm-up events throughout 2019, including the 2019 FIFA Club World Cup, the 2019 World Athletics Championships and the ANOC World Beach Games.

FIFA has stipulated that 60,000 hotel rooms must be available for visitors during the 2022 FIFA World Cup. In its 2019 report, the Qatar National Tourism Council recorded a 6% increase in the number of hotel rooms from the previous year. The country has current stock of more than 27,000 rooms, with an additional 22,000 under development between 107 different projects that are set to be completed before the start of the 2022 FIFA World Cup. One of these projects includes a collection of 16 temporary floating hotels that will be located off the shore of Qetaifan Island North, near Lusail Stadium. Developed by Finland’s ADMARES, the project will add approximately 1616 rooms to the country’s stock. When the tournament is over, the hotels will be able to lift anchor and sail to a new coastal location.

The influx of visitors will be a boon for the sector, which was initially impacted by the blockade. Arrivals from the GCC region declined by nearly half, though visitors from the rest of the world remained steady. According to real estate services firm DTZ, hotel construction took a corresponding hit.

Air & Sea

In October 2019 Hamad International Airport announced it would begin a major expansion project, which is set see annual passenger capacity increase from 24m in 2019 to 53m in time for the 2022 FIFA World Cup. A second phase, planned for completion in 2023, will then increase capacity to 60m passengers per year. Design and engineering is to be provided by Singapore-based Meinhardt Group.

Qatar’s sea ports are also gearing up for increased traffic. The blockade has led to a greater volume of shipments by sea. In November 2019 Hamad Port recorded year-on-year growth of 9%. Fittingly, the end of 2019 saw the start of construction of the port’s 404,000-sq-metre second container terminal, set to be designed, developed and operated by QT erminals.

Outlook

Despite some concerns for Qatar’s construction industry surrounding a narrowing pipeline for 2022 FIFA World Cup-related projects and a more general global economic slowdown, there is much reason for optimism within the sector in the years ahead. Qatar’s 2020 budget demonstrates that there will be plenty of investment opportunities going forward, especially regarding infrastructure projects. Though the tournament’s flagship projects, such as the stadia, are nearing completion, Qatar still has a solid line-up of infrastructure and hospitality projects to prepare itself for the large influx of visitors in 2022.