Beyond homes: Large-scale projects are set to drive growth

The construction sector saw renewed growth in 2013 and indicators point to further expansion in early 2014, following a period of contraction in 2012. While housing accounted for the great bulk of construction activity, in terms of the size of licensed projects, large-scale real estate and tourism developments, as well as major infrastructure works, are set to drive most opportunities for large contractors. Challenges in the sector include a shortage of labour against a backdrop of recently tightened restrictions on foreign workers and comparatively high prices for raw materials.

Sector Growth

Sector GDP stood at JD1.06bn ($1.5bn) for 2013, up 10.3% in nominal terms from JD961.7m ($1.36bn) the previous year, according to data from the Department of Statistics (DoS). In real terms, sectoral GDP rose by 8.7%, with strong growth taking place in every quarter of the year, following a contraction of 1% in 2012. The industry accounted for around 4.4% of GDP at market prices. Growth is being driven by the country’s improved macroeconomic performance as well as factors such as significant aid inflows; for example, in 2011 the Gulf Cooperation Council (GCC) agreed to provide the kingdom with $5bn in aid over five years, much of which is being used to fund infrastructural improvements.

Despite growth in industry output, the number of new construction permits issued in 2013 fell to 34,311 from 35,371 in 2012 (though this represented a major increase on previous years) according to data from the Central Bank of Jordan. The combined size of the projects for which new permits were issued was also down, to 16.99m sq metres, from 17.34m in 2012 (though, again, the 2013 figure represented major growth on 2011 and previous years). Of the 2013 total, 14.4m sq metres, or 85%, was accounted for by residential construction. Of licensed construction, 11.4m sq metres, or 67% of the total for the year, took place in the capital, Amman. The number of registered construction firms stood at 238 as of October 2013, according to data from Bank Audi, down from 231 the previous year and 294 in 2009, suggesting significant consolidation in the sector since the 2008-09 international financial crisis and the Arab Spring.

Finance

The value of loans extended to the construction sector by Jordanian banks in 2013 stood at JD4.08bn ($5.76bn), up from JD3.68bn ($5.2bn) in 2012 and JD2.3bn ($3.25bn) in 2008, according to data from the central bank. Construction is a major driver of bank lending in the kingdom. Loans to the sector in 2013 accounted for 21.5% of credit to all industries and for just over a third of new loans made during the year. Around half of all contractor borrowing was for the construction of housing. For the first four months of 2014, lending to the sector stood at JD16.8bn ($23.73bn), up 12.6% from the same period in 2013, suggesting further growth in sector activity this year.

Housing Construction

The number of residential units completed by the private sector (including both owner-builders and housing companies), which accounts for the great bulk of housing construction in the kingdom, stood at 42,072 in 2013 (up from 36,789 the previous year), according to the Housing and Urban Development Corporation (HUDC). The corporation put the country’s requirement for new housing for the year at 33,777 units (more or less unchanged from previous years), including 12,996 units in the capital, suggesting that current levels of supply are more than adequate for the market’s needs. The corporation forecasts that the annual demand for new housing units will rise relatively slowly over the long term, to 38,044 units by 2025, suggesting that construction activity in the residential sector is likely to remain steady rather than increase substantially in the coming years. Amman will account for the largest share of the requirement, according to HUDC forecasts, around 38% of the total (14,337 units), followed by Irbid on 7947 units (21%) and Zarqa on 5351 units (14%).

However, Mai Asfour, senior director of housing policies at HUDC, said that such figures did not take into account the arrival of large numbers of refugees from the civil war in neighbouring Syria, meaning that demand may run higher than forecast in the short term. At least 50,000 additional housing units are needed to accommodate Syrians living outside of refugee camps in the kingdom, and refugees continue to arrive daily, providing the basis for robust growth over the coming years.

Affordable Housing

Sufficient provision of affordable housing remains a challenge. Approximately 25,000 affordable housing units come onto the market each year, which is around 15,000 less than required, according to the Jordanian Housing Developers Association (JHDA). “There is a gap between housing supply and demand; much of the current supply is at the higher end of the market, which many Jordanians cannot afford,” said Asfour. “High-end residential towers are too expensive for most Jordanians, so most growth in residential construction activity is likely to remain in the low-to-middle end of the market,” Ismail Hakki, business development and planning manager at Sigma Consulting and Engineers, told OBG.

The government’s housing construction strategy is primarily based around enabling activity by private sector developers and owner-builders, by, for example, dividing land up into parcels and making these available to developers as well as providing connections to infrastructure; however, in order to address the deficit in affordable housing, the government is currently in the midst of a project to build around 8400 residential units, known as the Royal Housing Initiative. Houses under the initiative are being built across the kingdom, with around half located in the capital. Loans for houses bought under the initiative are effectively subsidised by capping interest rates at 5%.

Asfour of the HUDC, which is managing the project, told OBG in April that just over half of the units had been sold, with around 1000 more to be put on the market annually until 2017, though she said the sales process was facing some difficulties. “The main problem is that people struggle to obtain finance,” she told OBG, adding that when the project is finished the organisation is unlikely to engage in further large-scale building projects but will instead return to its traditional role of enabling house construction by the private sector.

Major Players & Contracts

Most residential projects tend to be small scale and are built mainly by local contractors. As a result, some developers have brought in contractors from other parts of the region to work on larger-scale projects. For example, some contractors from the UAE and Saudi Arabia have formed joint ventures with local firms. Major contracts recently signed with such groups in the capital include a $197m deal for the construction of The St Regis Amman and The Residences at The St Regis Amman project, which will include a 260-room St Regis-branded hotel and a 79-apartment residential project, awarded in May 2013 by Al Maabar to Arabtec.

The capital has otherwise seen relatively few major construction contracts awarded in recent months. However, work continues on numerous projects within the first phase of the Abdali development in downtown Amman, with some of the contracts in progress by local firms. For example, local contractor Habash-Deir Contracting Company was awarded the contract for the construction of the second phase of the Abdali Mall in 2011. Plans to begin work on the second phase of Abdali should provide new opportunities in the capital in the coming years, with infrastructure works likely to start towards the end of 2014.

Aqaba Mega-Projects

While new large-scale residential and commercial construction contracts have been relatively few and far between in the capital in recent months, a number of contracts have been awarded in the southern city of Aqaba in relation to several major real estate and tourism development projects being built in the town. The largest such contract to date was the award in January 2014 to Arabtec for the construction of the 184-acre Red Sea Astrarium resort project in mountains near Aqaba. The $1.55bn project will include a man-made lagoon, four hotels ( comprising around 2000 rooms) and a Star Trek-based theme park, and is due to be completed in 2017.

Prior to that, in June 2013 another major development deal was signed, when the Saraya Aqaba Real Estate Development Company, which is developing a $1bn tourism and real estate project in Aqaba, awarded a $629m contract for the construction of the project’s first phase to a consortium consisting of Arabtec, Consolidated Contractors Company, and Drake & Scull. The works, which will include a man-made lagoon that will increase the length of Aqaba’s coastline by 1.5 km, is due to be completed in 2016. In June 2014 Drake & Scull also won contracts for the provision of mechanical, engineering and plumbing services to two hotels being built as part of the project and for the design, supply and installation of a cooling plant in the development, worth a combined $70.5m. In May 2013 Al Maabar awarded an $83m contract to build around 500 units in the Al Raha Village, the first residential neighbourhood of its Marsa Zayed project to local contractor Omar Abu Sa’ad and Sons (see Real Estate overview).

In The Pipeline

A number of large infrastructure projects are also set to increase opportunities in construction. In June 2014 the Jordan Valley Authority announced it would launch tenders for the first phase of the Red Sea Water Conveyance Project before the end of the year. The project, which is aimed at increasing water availability in Jordan and reversing falls in the Dead Sea’s water line, will be offered on a build-operate-transfer (BOT) basis and will be constructed at a cost of around $4bn. Elements of the project will include a water desalination plant in Aqaba with capacity of between 800m and 1bn cu metres per year and a 180-km canal linking the Dead and Red Seas. Construction is due to begin towards the end of 2015, and future plans envision the creation of residential and touristic areas in parallel with the completion of the project. Also in June, the government announced plans to launch two new railway projects, namely the construction of a railway line between Aqaba and the Chidya area, aimed at transporting phosphates from mines to Aqaba Port, at a cost of JD53m ($74.87m), and a link between Aqaba and Zarqa at a cost of JD97m ($137.02m).

Opportunities also abound in the energy sector, with a number of major energy-related construction projects already under way. Sahl Dudin, the managing director of Ayla Oasis Development Company, told OBG, “The renewable energy and energy sufficiency law has enabled more initiative to undertake renewable projects. This will not only save us on expensive operational costs, but will benefit the country as a whole.”

In December 2013 Attarat Power Company, which is building the Middle East’s first oil shale power plant in the kingdom, announced it had awarded the engineering, procurement and construction (EPC) contract for the facility to China’s Guangdong Power Engineering Company. Prior to that, April 2013 saw the launch of construction work for the third independent power project, or IPP3, which will be the largest tri-fuel power plant in the world when it is completed in autumn 2014. A consortium led by Wartsila was awarded the $552m EPC contract for the plant in October 2012. In January 2013 Wartsila also received an EPC contract for the IPP4 power plant worth some $244m.

Aqaba is in particular witnessing a large share of infrastructure construction activity. For example, in June 2014 BAM International announced that it had completed construction of a second four-berth port at Aqaba under a €65m contract, having completed work on a new container terminal the previous year. The company is currently working on the construction of a new liquefied natural gas (LNG) terminal in the city, for which it was awarded a $63.5m contract in November 2013. “Energy is an especially promising sector, in particular since the government approved large-scale photovoltaic projects, as are other forms of infrastructure projects such as water and sewage,” Raed Abu Soud, international affairs director of Sigma Consulting Engineers, told OBG. “The regional crises have led to an influx of Iraqis and Syrians which is leading to dramatic population growth, so the government is having to invest in expanding infrastructure generally.”

Looking Abroad

Some construction and engineering companies say outside of such government-backed infrastructure projects, opportunities in Jordan are becoming scarcer as projects, such as phase one of Abdali, begin to come on-stream. As a result, some firms are looking to neighbouring countries for opportunities. “When Syria stabilises there will be a huge need for reconstruction there, running into billions of dollars. Jordanians and Lebanese are already setting up companies to take advantage of this,” said Abou Soud. The kingdom could be a base for foreign firms seeking work elsewhere in the Middle East. “Jordan is a potential business hub for the region, in particular for firms looking to work in Syria and Iraq, as it offers stability and a good business environment,” said Hakki.

Activity is on the increase elsewhere in the region, creating potential openings for Jordanian firms. “The government in Saudi Arabia has a huge investment budget, the World Cup in Qatar is driving opportunities there, and there is lots of activity in Erbil as well, where the authorities are looking for alternatives to Turkish firms in order to increase competition,” said Hakki.

Workforce Issues

In 2011, 50,130 people were employed in the sector, according to the DoS, accounting for around 4.95% of total employment in the kingdom. A large proportion of the construction workforce is foreign: 17,835 non-Jordanians held permits to work in the sector in 2012, of whom the great majority (15,184) were Egyptian, according to Ministry of Labour data. “Many Jordanians are unwilling to work in construction,” said Abou Soud, explaining the high proportion of foreigners working in the industry, adding that Syrians are increasingly entering the labour pool.

Industry figures say that tighter visa requirements and stricter government enforcement on hiring rules for foreign workers is making recruitment in the sector a challenge, though some areas are harder hit than others. “The availability of labour is less of an issue in Aqaba as firms working there are allowed to employ foreigners for up to 70% of their workforce. However, in Amman the figure is 30% and for that you need permission from the Ministry of Labour,” Emad Kilani, CEO of real estate developer Al Maabar Jordan, told OBG.

The issue is not just one of numbers but also of expertise. “The government wants a minimum percentage of labourers to be Jordanian, which is problematic in some areas as few Jordanians have experience building towers,” Fahmi Saifi, sales and marketing manager at Abdali Investment and Development, told OBG. “The authorities have granted waivers in some cases and there has been knowledge transfer from foreign workers to Jordanians. However, there is still a need for foreign workers as many projects in the Abdali development are international in design. For example, the Rotana Tower uses specialised glass frames made in China that need to be installed by the production company workers who are already familiar with it.” He added, however, that there was little requirement for foreign workers at the management level. “There are plenty of Jordanians who have gained construction management experience in the Gulf and have subsequently returned to the kingdom,” he told OBG.

Construction Materials

Materials shortages are not a major issue in the sector. Indeed, the cement industry suffers from overcapacity, with domestic consumption running below local production capabilities, and with the exception of Palestine, Jordanian firms do not have large market shares in neighbouring countries. Total output of cement stood at 3.92m tonnes in 2010, according to the latest available data from the central bank. Of this, 1.7m tonnes was clinker, the output of which fell to 906,000 tonnes in 2013.

Nevertheless, materials can be costly, with the price of prime inputs being high in Jordan, largely due to developments being quite small and developers unable to negotiate on price. High local energy costs in comparison to other countries in the region also drive up the production cost of materials. Speaking to OBG, Asfour of the HUDC put the average cost of residential construction in Jordan at JD250 ($353) per sq metre.

Outlook

Infrastructure projects, as well as tourism and real estate mega-developments, are set to drive the bulk of large-scale construction activity and opportunities for major contractors in the kingdom in the coming years. Construction and engineering firms are also likely to use Jordan as a base from which to take advantage of other opportunities in the region, in particular in Syria, if and when the conflict there dies down.