Construction inflation forecast to reach 8-9% in 2015

by  — 7 April 2015

In conversation with The Edge, Terry Tommason, partner and general manager at EC Harris Qatar, focuses on a broad range of issues affecting the increasing construction inflation and the impact the depressed international oil price is likely to have on the increasing construction costs in Qatar.

Terry Tommason, partner and general manager at EC Harris Qatar

Please tell us about yourself, your experience, etcetera.

I am a partner at EC Harris and currently lead the Qatar business as its general manager. In addition, I serve as the Doha city executive for the Arcadis Big Urban Client programme. With extensive experience across the Middle East, I lead all major programmes and projects across Qatar and am also responsible for the strategic development and project management of building projects across the Middle East. Prior to joining and setting up the Qatar business in 2010, I worked for most of my career as a property developer and investor in the United Kingdom and Europe.

Construction inflation for Qatar is expected to rise this year. How will the increasing construction costs affect the investor sentiment?

According to our internal reports, we forecast that at peak levels of activity, and without appropriate mitigating actions, there is a risk that inflation between 2016 and 2019 could reach 18 percent per annum, but in 2015, Qatar construction inflation is forecast to reach eight to nine percent. This could be further suppressed by the price of oil and the ongoing spending reviews. Investors will inevitably be cautious around the regional market, predominantly due to the oil price projections. Notwithstanding this, overseas investors have historically ‎been cautious of Qatar. The inflation challenge in Qatar will unquestionably compound as we near the 2022 World Cup and we expect that most investors will be keen to mitigate their exposure by forward planning around their supply chain and starting their projects sooner rather than later. Investors will need to choose their targets very diligently during these years ahead and have a clear route of entry and exit with a robust risk plan.

What are some key reasons behind rising construction inflation in Qatar? Can you talk about those, other than the 2022 World Cup?

Qatar is a small country relative to its planned expenditure on built assets. It has the need to import much of its materials and labour and is constrained from a logistics perspective. Regardless of the 2022 World Cup, peaks have historically massively challenged countries in the Gulf Cooperation Council (GCC) in construction activity as a consequence of bottlenecks in accessing materials and labour. Qatar is not an exception in this regard and will have many extraordinary challenges to overcome in order to attract and retain the necessary resources and secure the enormous volume of materials it requires across the infrastructure and buildings sectors. The issue is exacerbated by the recovery in the United Arab Emirates (UAE) market and Saudi Arabia’s aggressive social infrastructure aspirations.  Global demand for the best resources and base construction materials is also increasing and serves as a reminder that Qatar is not alone in its challenge to deliver large and complex programmes of work.

Where do you foresee Qatar’s construction costs going after the 2022 World Cup?

It is very difficult to predict what will happen post-2022 but we need to bear in mind what I stated earlier – the 2022 World Cup is not necessarily the primary driver for construction cost inflation ‎in Qatar. The challenges were comparable in the lead up to the 2006 Asian Games in Doha and the subsequent real estate boom. As Qatar relentlessly strives towards realising the goals laid out in the Qatar National Vision 2030, I would anticipate the country to continue to face inflation challenges as it invests heavily in construction projects that develop its infrastructure for future generations post-2022. This is the beginning of that journey and certainly not the end.

How will the increasing costs impact the current contractors in Qatar’s construction sector?

The principal impact on contractors will be the constraints it places around their own supply chains.  Securing resources and materials with a view to locking them down for the construction duration against a fixed price will not be for the faint hearted. Competition for resources and materials will be intense and contractors are unlikely to bear the burden of the risk as they have done to date. This will drive changes in how clients currently select and engage contractors, since the likelihood is that contractors will either no-bid or heavily risk price their tenders as the market warms.  Successful contractor engagement is therefore crucial to ensuring that Qatar is ready for 2022 and will require a quantum leap in trust and approach from all
parties concerned.

If at all, how will the ongoing dip in oil prices impact Qatar’s construction inflation?

It is very difficult to predict the future trending of the oil price in the region and the impact that any protracted volatility will have on the market. Currently we are witnessing increased levels of concern from some clients, particularly within the public sector where funding is tuned to oil and gas revenues. We have examples of projects being deferred and in some cases being cancelled. If this trend continues it will of course reduce demand for resources and materials in the region which will, to some degree, suppress the rate of construction
cost inflation.

However in the case of Qatar, it is more likely that this impact will be short term as the 2022 World Cup deadline is immovable with major projects that are critical to the tournament. This is not just about stadia; it is about delivering some of the largest infrastructure and building projects in the world to facilitate the greatest show on Earth. Hence I’m afraid the challenge of inflation is not going to disappear anytime soon in Qatar although it may take slightly longer to bite deep.

Which aspect of construction takes the biggest chunk of overall costs in Qatar and Gulf? Which aspect is showing most transition?

The biggest impact on construction cost in Qatar, and the Gulf, is derived from the cost of the materials, which are dependent on the prices of the commodities (metals etcetra) that make up this quantum. Labour, whilst less significant, is an important component and the ability to get skilled labour into the Middle East will continue to face big challenges.

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