The GCC projects market wobbled in the first half of 2012 with just $ 55 billion worth of projects awarded or a drop of 10 percent compared to the same period last year - the worst performance overall since 2005, MEED Insight said in its latest report.

The comparatively weak performance means that the market will struggle to match the $ 130 billion worth of contracts awarded in 2011, which itself was also the lowest annual total since 2005.

"We are seeing quite a drastic slowdown in contract activity in Saudi Arabia as the government - by far the largest client in the market - struggles to process the hundreds of major projects it has planned," said Ed James, Head of MEED Insight.

"Because the kingdom’s projects market is as large as all the other GCC markets combined, any reduction in activity has a major impact on the overall health of the market."

On a more positive note, the projects markets in the UAE and Qatar performed better in the first half of the year compared with the same period in 2011 as the latter started accelerating its 2022 FIFA World Cup infrastructure spending and the former saw a return to life in the Dubai market.

"The UAE and Qatar markets have seen small pick-up in activity in the first half of the year, which is encouraging," James said. "However, the advances have not been enough to offset the fall in Saudi Arabia."

Separately, Alpen Capital said in its latest report on the region’s construction industry that oversupply remains the biggest challenge for the construction and real estate sector across the GCC, which has led to cancellation of several projects in the recent past. This has resulted in a decline in prices as well as rentals of residential and commercial office properties in most of the GCC member countries.

Investor sentiment is expected to be weak in the near-term due to tightening credit conditions. Numerous large projects were cancelled across the GCC in 2010 and 2011 due to weak investor sentiment and lack of funds.

Weak investor sentiment is expected to act as a hurdle in the growth of the residential and commercial properties market across the GCC
The GCC residential and commercial construction market is highly competitive and fragmented, marked by presence of several small and big players across the value chain. The increased competition within the sector is likely to result in competitive bidding by the players which is expected to drive down the margins of construction companies further. The margins of the players in the construction sector are highly sensitive to the prices of the building materials.

The GCC construction markets are less transparent compared to their global peers, thereby having an adverse effect on FDI inflows in the sector.

High attrition rates among expatriate labor workforce remains a hurdle for the GCC construction sector, as the skilled expatriate workers are drawn towards their home countries due to better job opportunities. This is likely to act as a major barrier for the labor-intensive construction sector. Demand for affordable homes is set to increase significantly in the long term, which will force the construction companies to put extra emphasis on the affordable homes segment.

All the nations under the GCC have developed their own green building standards through their councils and are actively reviewing and adopting these mandates in the new building laws. The region is likely to witness increasing number of registered green buildings in the future. The increasing number of registered green buildings in the GCC is likely to transform the construction sector in the region and boosted the creation of healthy buildings.

Foreign companies, having capabilities of handling large and complex projects entered the GCC construction sector either in partnership or joint venture with established local players. The partnership or the joint venture model mitigates the business risk of both the partners significantly.

In pursuit of expanding their top line and geographical presence, the established construction and real estate companies are looking to grow both organically as well as inorganically (through M&A route).