Turning the tide: New regulations and regional cooperation pull the sector forward

The year 2011 was a period of mixed fortunes for the construction industry. Although residential development was in strong demand – boosted by incentives such as government exemptions on property registration fees – construction work in other segments was less forthcoming. Government capital expenditures were restricted and banks remained risk-averse following the regional crash in property markets. Yet a revival via several new foreign investment initiatives spurred activity in the country’s largest projects, which appeared to be picking up in late 2011 and early 2012.

SECTOR PERFORMANCE: In terms of contribution to GDP, the construction sector shrank in real terms by 6.6% year-on-year in the first three quarters of 2011, according to the Central Bank of Jordan. However, throughout the course of 2011 it grew steadily, such that the third quarter saw marginal real growth of 1.3% year-on-year. Much of this demand came from the residential sector, which was boosted by government exemptions on registration fees.

Even so, many of the contractors and developers OBG interviewed reported that 2011 was a tough year. This is in part due to the reduction of government capital expenditure in 2011 and continued low budget levels in 2012. “There have also been relatively few options in the private sector,” Walid Bidoun, the deputy secretary general of the Jordanian Construction Contractors Association (JCCA), told OBG.

Despite difficult conditions, some firms managed to secure profitable contracts in the past year, and not just in the residential property segment. “We had a good year in 2011,” said Mecheal Deir, the general manager of Habash-Deir Contractors. “We’ve completed our part of the skeleton work on the expansion of the Queen Alia International Airport, as well as the external works on the Crowne Plaza at the Dead Sea and the Jordan Museum. We also won a JD28m ($39.3m) contract for the construction of skeleton works on the mall in the Abdali downtown development.” Airport work was done in collaboration with J&P International of the Channel Islands, while work on the museum was undertaken with the Singaporean firm Jurong International.

PUBLIC SPENDING: Following a decline in government capital expenditures in 2011, the 2012 budget – described by Prime Minister Awn Khasawneh as the most austere fiscal plan in Jordan’s history – also stipulates a modest JD995m ($1.4bn) in capital spending. This is considerably lower than the JD1.45bn ($2bn) set aside for capital expenditures in 2009, according to the Department of Statistics. “The government is being pressured into increasing regular outlays at the expense of capital expenditure, and this is not conducive to growth in our industry or in the economy in general,” said Yousef Batshon, the CEO of United Jordanian Contractors, in an interview with OBG.

Financial constraints in both the public and private sectors have caused delays in payments to local contractors. In October 2011 the president of the JCCA, Ahmad Tarawneh, said that local construction firms were owed JD136m ($191.1m) by the government for work on a number of projects, including the King Abdullah bin Abdulaziz Al Saud housing city in Zarqa and the Amman Ring Road Project, as well as by the developers of several large projects throughout the country. Some of these fees were subsequently paid, but outstanding dues have extended into 2012. For instance, as of March 2012, Tarawneh said that contractors had yet to receive the JD50m ($70.3m) owed to them by the Ministry of Water and Irrigation.

RESIDENTIAL: Residential property development has been driving demand in Jordan’s construction sector. The total annual construction area for the residential sector increased by 26% to 12,133 sq metres in 2011, following an increase of 6% in 2010 and surpassing the 9105 sq metres recorded for 2007. In 2011, 64% of this activity was in Amman, which continues to be the Kingdom’s economic powerhouse, while significant activity was also seen in Irbid and Zarqa.

“In 2011,there was an over-demand for construction of low-middle-priced residential units,” said Ahmad Abd Al Halim, senior vice-president at Arab Bank. This is good news for private-sector developers such as Taameer Jordan Holdings. “We have seen a 30% increase in transactions over the last year in small apartment buildings,” said Rami Adwan, the deputy CEO at Taameer.

INCENTIVES: Government incentives have provided a more immediate boost to demand for residential construction. From June 2010 until the end of 2011, the first 150 sq metres of apartments sized 300 sq metres or less were exempted from registration fees, both for development and for resale schemes. Overall registration fees were also reduced to 5%. However, starting in 2012, the fees rose to 9%, which “is likely to impact growth in the shorter term,” said Al Halim.

Private-sector developers may therefore decide to reduce the number of projects they undertake, as these firms anticipate reduced activity in the real estate market. Indeed, there was a 23% fall in total residential areas under construction between December 2011 and January 2012. On the positive side, the Department of Land Survey has felt the benefits of the restored fees, with its revenues jumping by around 40% in the first two months of 2012, year-on-year.

However, Zuhair Omari, the president of the Housing Investors Society, explained that because the residential development industry helps support at least 30 other industries in Jordan, removing construction incentives will ultimately have a negative impact on government revenues and the economy as a whole. Omari is among those pushing for them to be renewed. Jordan’s 9% registration fees are now significantly higher than the Middle East and North Africa average, which the World Bank estimates to be 5.8% as of 2011.

In spite of this uncertainty, the feeling from a number of contractors was that there is clearly long-term potential for residential construction in Jordan. “There is a basic need in the country for continued building in the non-commercial sector; we need around 20, 000-25,000 new units every year simply to keep pace with an annual population growth of 2.3%,” said Al Halim.

FINANCING: Given the steady demand, residential construction has enjoyed relatively easy access to funding from banks. “Financing residential developments is straightforward and well-secured. Banks like to finance property development and then the purchases of individual units by homebuyers,” explained Al Halim.

Financing continues to be less forthcoming for nonresidential construction, and especially for Jordan’s large mixed real-estate developments. “We are hesitant to involve ourselves in the financing of these projects because they often depend on pre-sales of around 20-25% of the development, and these are not always realised,” Al Halim said. Indeed, in the wake of the 2009 global downturn and regional crash in property markets, banks have become more cautious. Wael Al Jaabari, the owner of the Abdoun Real Estate Company, which has been operating in Jordan since 1988, told OBG, “banks in Jordan have become very risk averse, which has slowed down the market considerably.”

Many of Jordan’s ambitious touristic and mixed real estate developments have witnessed their funding sources dry up. On the other hand, with new investor interest and construction activity picking up with a number of projects in late 2011, the outlook for contractor work in 2012 and beyond has improved. Yet with contractors still waiting on much of their dues from developers, the construction industry is not beyond its troubles just yet (see analysis).

ROAD: Road work is also the target of a number of construction projects. The Amman Ring Road, which forms part of the Amman Development Corridor, is a 40-km highway designed to alleviate increasing congestion resulting from north-south traffic in the country. The Ring Road project, begun in 2006, is divided into three sections, each receiving international loans for its construction. Sections two and three – financed by the World Bank and the European Investment Bank, respectively – were inaugurated by the king in February 2012.

Construction on the first section, which is being funded by the Arab Fund for Economic and Social Development, had been delayed but is now back on track. The entire Ring Road is due to be operational by the second quarter of 2012, according to a December 2011 World Bank report. The project, which has involved three international contractors, has also given a significant boost to the local economy, employing more than 1000 Jordanian workers and engaging local construction companies in its design.

Work continues apace on the $1.1bn rehabilitation of the Queen Alia International Airport (QAIA) road, which requires adding new lanes, as well as the construction of a new services road and pedestrian bridges and tunnels. In January 2012 the minister for Public Works announced that 72% of the two-stage project had been completed, and officials expected 2012 to usher in the finalisation of the project. The first stage of the project was completed in 2011, with the services road being opened to traffic.

RAIL & AIR: Beyond roads, major plans are in the pipeline for the construction of a light rail between Amman and the nearby city of Zarqa. The project has long been in the planning stage, but now looks set to become a reality. After unnamed Qataris declared their interest in investing in the project in October 2011, the Jordanian authorities accepted a proposal for the design of the project by TaherInvest, a Jordanian investment group, in February 2012. Several key components have yet to be defined, as TaherInvest disagrees with the government on where exactly the rail line should end. Yet the developments of 2011 and 2012 are the most significant in the project’s history.

A larger railway construction project, which is to link Amman with Aqaba at a cost of around JD2.9bn ($4.1bn), is currently being evaluated for its potential as a public-private partnership. Dubbed the Jordan National Railway Project, it includes around 1080 km of track, as well as 12 terminals and two depots. Construction is also soon to begin on a $675m expansion of the international airport, which is being redeveloped by the Airport International Group, a consortium of Emirati, Kuwaiti, Jordanian and Greek investors. The project will see more than $1bn in foreign investment and create over 23,000 jobs, according to the World Bank.

ENERGY & WATER: As policymakers look to address urgent shortages in national water and energy resources as matters of urgency, they have attracted billions of dollars in private-sector investment. Foremost among these is the $10bn Jordan Red Sea Project initiative, which aims to transport water from the Red Sea to the Dead Sea and involves the construction of a large canal, as well as desalination facilities. Feasibility studies submitted by two consortia are currently under consideration, and results due to be announced by the middle of 2012. The government was also due to select a bidder for the construction of a $5bn nuclear reactor in early 2012. These are but two examples of a host of ongoing and upcoming projects providing work for the sector (see the Energy and Agriculture chapters).

BEYOND JORDAN: Although there are new signs of life in the local construction industry, larger Jordanian contractors will continue to seek opportunities beyond Jordan’s borders. Regional instability has made this more difficult, observed JCCA president Tarawneh in March 2012. Yet recent months have given Jordanian contractors cause for hope. In January 2012 the Iraqi government invited Jordanian construction firms to involve themselves in reconstruction work for which it has set aside $40bn in 2012. Deir spoke optimistically about the development, telling OBG that “the minister promised that some projects would be reserved for Jordanian contractors, and said that Iraq would accept Jordan’s pre-qualification standards.”

To the south, even greater opportunity may lie in store. Following the eruption of regional political unrest in 2011, Saudi Arabia announced that it would spend an extra $110bn on infrastructure and welfare projects, many of which are likely to involve Jordanian contractors. In particular, the two governments have been in discussion over the involvement of Jordanian contractors in the construction of 500,000 housing units in Saudi Arabia over the next five years.

This announcement was followed in March 2012 by the Saudi government finalising a JD170m ($238.9m) grant for the rehabilitation of the Azraq road in southern Jordan, which connects with the Saudi border. Jordan’s Department of Public Tenders was slated to begin the tendering process in April 2012. Although the main contractor is to be Saudi, the project will also involve two Jordanian firms. “The Saudi Development Fund regularly provides soft loans for Jordanian construction projects,” United Jordanian Contractors’ Batshon told OBG. At a time of increasing Saudi investment, it seems likely that more funding will come from this direction.

Jordan also hopes its contractors can partake in the large-scale reconstruction work in Libya. A delegation to Libya in early 2012 included not only the Jordanian prime minister but also the president of the JCCA, said Bidoun. “We hope Jordanian contractors will get a large share of Libya’s new opportunities,” he told OBG.

RAW MATERIALS: Although not as cheap as in 2009, raw materials continue to be sufficiently low priced for developers to cite them among central incentives for construction work. “Now is an excellent time to build in the region, given the decrease in prices for construction materials,” Peter Titus, the general manager of Emaar Properties, a major UAE-based developer, told OBG. “The economy is cyclical, so firms can develop properties now when things are inexpensive as they wait for the markets to recover.”

As of early 2012 contractors said steel bar costs around JD600-650 ($843-913) per tonne, up from the JD415 ($583) per tonne recorded in late 2009, but still notably less than the JD1031 ($1448) per tonne in June 2008. With Jordan’s cement market suffering from oversupply, cement prices are still low at around JD90-95 ($126-$133) per tonne in early 2012, albeit higher than the JD85 ($119) per tonne recorded in late 2009.

The rising cost of energy will likely put upward pressure on the cost of raw materials as energy accounts for around 70% of cement production costs. “Thanks to the government fuel subsidies, prices for steel and cement have remained stable over the past year,” Batshon told OBG. Yet this safeguard could disappear over the course of 2012 should the government follow through with a plan to remove the subsidies.

REGULATION: The construction industry operates in a regulatory environment that has improved in recent years, according to the World Bank. Jordan is one of five Middle Eastern economies – along with Bahrain, Morocco, Qatar and Saudi Arabia – to have introduced a one-stop-shop window for obtaining construction permits. This may partly explain why obtaining a permit in Jordan takes only 70 days, compared to an average of 141 days in the Middle East and North Africa region.

Permits aside, developers continue to face challenges. According to George Amireh, CEO of the Abdali Development Corporation, construction costs are high in comparison to regional costs, hurting the feasibility of some mixed-use projects. Moreover, he notes costs change frequently, creating uncertainty. “A firm may invest heavily in feasibility studies, only for the exemptions and energy costs to change overnight, which means everything must start from scratch,” he said.

SKILLS SHORTAGE: Also of concern to many of the contractors interviewed by OBG is the shortage of Jordanian labour in the construction industry. “The majority of the country’s unskilled labour is not Jordanian, and amongst our skilled workers fewer than half are Jordanian nationals,” said Deir. Importing labour is inefficient; “One of our members,” said Batshon, “is forced to import Filipino workers for the operation of large mining equipment. To be able to do so, the firm must demonstrate to the Ministry of Labour that the work cannot be sourced locally, which takes time and costs money.” As Jordanian engineers are considered to be among the region’s best, many of them leave for higher-paying jobs in the Gulf. One positive upshot of this, however, is the remittances that Jordan receives from this population and economic exchange.

The government has also intervened to address the shortage. In 2007 the government attempted to boost the local supply of construction labour through a collaborative effort between the Jordan Armed Forces, the Ministry of Labour and private sector institutions. The programme begins with military training, followed by sector-specific vocational training and ending with placements of up to six months with a company in the private sector. “The programme provides training in carpentry, steel fixing and other tasks related to construction work,” the JCCA’s Bidoun told OBG. Among the participating companies to have signed up in late 2010 was Al Maabar Aqaba, the UAE-based developer of the Marsa Zayed project. “At the moment, uptake potential in the private sector remains limited, but in the long term Jordan’s construction industry definitely needs to foster this sort of skilled labour,” said Bidoun.

OUTLOOK: At a time of serious fiscal constraint, the 2012 budget has kept its capital expenditure down, meaning fewer opportunities for Jordanian contractors. However, considerable work is currently under way in the transport, energy and water sectors. Although still subdued in the wake of the 2009 global downturn, demand amongst private sector developers appears to be picking up, with mixed real estate projects involving foreign and local contractors. As for residential construction, population growth suggests that demand will remain strong over the long term, although an increase in registration fees at the start of 2012 may depress building activity in the short term.

Jordanian contractors continue seeking for new opportunities to boost their workload throughout the region. With an eye to new construction projects that may arise as a result of the Arab Spring, the Engineers Business Council launched a special market intelligence unit in late 2011 to evaluate demand for reconstruction work in the region. The government is working to secure new opportunities in countries such as Libya and Iraq, although political instability in these markets could yet prove an obstacle. “Jordanian contractors are highly regarded, but in general they take a cautious approach to expanding abroad,” Batshon told OBG. Closer to home, the industry looks set to benefit increasingly from Saudi funding and development opportunities.