• A construction boom is now underway in the Middle East, with over 2,100 projects either planned or underway in the Gulf region in 2006. These projects amounted to US$1 trillion, of which the UAE and Saudi Arabia made up 29% and 20%, respectively.
  
  
• With 15-25% of the world's construction cranes in operation, Dubai will remain the "construction capital" of the Gulf. Yet Abu Dhabi is set to be "the next Dubai", while Jeddah is benefiting from Saudi Arabia's development of its western region.
  
  
• Due to the construction boom, construction costs in the Gulf Cooperation Council (GCC) are estimated to have surged by more than 20% since 2003. The buoyant construction sector in the UAE and Saudi Arabia has whetted an astonishing appetite for building materials and related items, as well as relevant services providers and workers.
  
  
• Though generally on sound financial footing, UAE and Saudi construction companies are looking for building materials that can offer greater variety, trendier design, as well as better value-for-money. In this regard, Hong Kong's construction-related products, such as doors and window frames, are well-regarded in the UAE and Saudi Arabia.
  
  
• With more high-rises being built and planned, Dubai and Jeddah are places where Hong Kong's expertise and experience in high-rises can bear fruit. Extensive marine projects in Abu Dhabi, on the other hand, will offer abundant opportunities to Hong Kong construction companies to showcase their strengths in marine work.

Oil-fuelled economic growth, coupled with favourable demographic fundamentals, growing commercial prominence and booming tourism, has led to an unprecedented construction boom in the Middle East, with the UAE and Saudi Arabia being the star performers. Other key catalysts include repatriation of investment funds from the US after the 9/11 incident, governments' encouragement to private investment in the construction sector, as well as liberalisation of laws regulating foreign business activities and property ownership.

According to one estimate, there were over 2,100 construction projects either planned or underway in the Gulf region (i.e. six GCC states - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE, plus Iran and Iraq), with a total value exceeding US$1 trillion in 2006. Out of this US$1 trillion, the UAE and Saudi Arabia accounted for 29% and 20%, respectively. The total project value continues to increase in 2007, and has exceeded US$1.47 trillion in May.

Having some 15-25% of the world's 125,000 construction cranes in operation, Dubai has been the "construction capital" of the Gulf. Despite speculation that Dubai's property market may slow down drastically, the short to medium-term market outlook remains positive amid sustained favourable demographic and commercial fundamentals. Riding on Dubai's success, Abu Dhabi, the capital of the UAE, is poised to become "the next Dubai", while Jeddah of Saudi Arabia is benefiting from the Kingdom's plan to quicken the development of its western region.

Due to the construction boom, construction costs in the GCC have increased by more than 20% since 2003. In light of the unprecedented level of construction activity and insufficient local production (in terms of quantity, quality and variety), the UAE and Saudi governments, as well as property developers, are increasingly interested in sourcing competitive and quality building materials, furniture and interior products from all over the world, with China being one of their prime targets.

Indeed, the construction boom has not only caused a shortage of materials, but also of manpower. In addition to US and European construction services providers, companies from Japan, South Korea, Singapore, Malaysia, Indonesia and China are striving to increase their presence in the two countries. Quite a few UAE and Saudi companies have also started recruiting construction professionals from Egypt, Jordan and Lebanon, and hiring general construction workers from Asian countries such as China, Nepal, the Philippines and Vietnam.

While Hong Kong's presence in the Middle East is not significant, most UAE and Saudi companies recognise Hong Kong's edges, including its world-class construction expertise and extensive construction experience in infrastructure, high-rises and marine work. With more high-rises being built and planned, Dubai and Jeddah are places where Hong Kong's expertise and experience in high-rises can be an advantage. Extensive marine projects in Abu Dhabi, on the other hand, will offer plentiful opportunities to Hong Kong construction companies to showcase their strengths in marine work.

Some UAE and Saudi companies also contend that they don't mind paying a premium for Hong Kong products and services given their superior quality, variety and design. Many UAE and Saudi companies are inclined to source Chinese products via Hong Kong, and believe that Hong Kong can serve as their risk manager in trading with China by providing better assurance on quality, delivery and payment. Leading products include building materials, interior furnishing products and household goods.

For their part, Hong Kong exporters and services providers should watch out for competition from other Asian countries. On the regulatory front, although both the UAE and Saudi Arabia are opening up, certain protective measures prevail, and some laws and regulations may change from time to time. Moreover, cultural and climatic differences must also be addressed. Hong Kong companies should thus put a stress on personal relationships and respect for religious practices, while paying attention to the very hot and dry weather there.

To be successful, new-to-market Hong Kong companies are advised to clearly identify their niches, find a good local partner or agent, adapt to the differences in the two countries as compared to other overseas markets and, as a rule of thumb, familiarise themselves with the markets before placing their 'bets'. For both the UAE and Saudi Arabia, Hong Kong companies are advised to start their business with a good local partner or agent, who can help Hong Kong companies to operate in these relatively difficult but lucrative markets.

1. Backdrop

The UAE is composed of seven emirates. In addition to its souks, desert safaris and camels, the UAE raises people's eyebrows with its mega-iconic buildings of modern architecture and state-of-the-art infrastructure. With around 330 buildings under construction and 10 super-tall (higher than 300 metres) skyscrapers being built, the UAE currently has the most high-rises under construction in the world. While Burj Al Arab is still known as one of the best hotels on the planet, Dubai is going to be the home to the world's tallest building (the Burj Tower) and biggest shopping mall (the Dubai Mall). Abu Dhabi, the capital city of the UAE, has also been catching up fast in recent years. It is going to be the home of the Middle Eastern branch of France's Louvre Museum and the venue for Formula One Grand Prix from 2009. With the development of its 218 natural islands, Abu Dhabi is set to become "the next Dubai" via developing itself into one of the most sought after tourist destinations in the region.

Being the largest economy in the Middle East and the world's leading oil exporter, Saudi Arabia is accelerating its pace of economic diversification under its eighth five-year economic development plan. Among many government initiatives, six mammoth economic cities have been planned, including the King Abdullah Economic City (KAEC), which will be the first 'Smart City' in the world with the most advanced ICT facility upon completion. All these new and aggressive development projects are destined to further increase the economic prominence of the Kingdom in the region. With its traditional commercial port status being rejuvenated and superb location being better utilised, Jeddah will be a hot spot of development that Hong Kong companies should not overlook.

2. Why are the UAE and Saudi Arabia Lucrative Markets?

(i) Making the Most of the Oil Price Boom

The construction sector in the UAE and Saudi Arabia has been on an upswing during the oil price boom of recent years, when oil prices surged to almost US$80 per barrel in 2006, though slackening somewhat recently, from US$11 in 1999. With over 65% of the world's oil reserves and 39% of the world's proven gas reserves, the oil windfall has flooded both the private and public sectors with liquidity, and fuelled economic diversification in the Middle East.

However, it is not unsurprising to see that some areas in the region such as Dubai, which do not have great oil reserves, have also been developing amazingly fast in recent years. Thanks to forward-looking and vigilant government officials and planners, Dubai has developed into a paramount trading platform and tourist destination in the Middle East, consequently reducing its dependence on oil. As an example, Dubai's non-oil sector comprised 94% of its GDP in 2005. In fact, surrounding emirates and countries have shown an interest in adopting the Dubai model in formulating their own economic development policies. Economic diversification and development of the non-oil sector have become top priorities in the economic policy agenda of most Middle Eastern governments.

On the back of strong oil prices, the UAE is expected to have a GDP of US$163 billion in 2006, enjoying real growth of 8.9% compared to 2005. On the other hand, Saudi Arabia is forecast to have a GDP of US$347 billion in 2006, representing 4.2% in real growth compared to 2005. The continuing strong economic performance in the two countries has not only led to increasing demand for residential and commercial real estate, but also generated a high derived demand for supporting infrastructure.

(ii) Favourable Demographic Fundamentals

The UAE and Saudi Arabia have one of the fastest growing population rates in the world. The population of the UAE and Saudi Arabia is forecast to grow by around 2% per annum through 2025. The UAE and Saudi Arabia are forecast to reach a population of 6.9 million and 37 million in 2025, compared to 4.5 and 23.9 million in 2006, respectively. In the face of this rapid population growth, demand for further infrastructure support and housing is expected to continue growing unabatedly. The fast-growing population, paired with the oil and gas windfall, has created a dynamic high-growth economy in the two countries. In addition to new housing demand, more and more home owners are demanding bigger and better accommodation.

Seen from another angle, the huge young population looking forward to establishing families will create tremendous opportunities for residential property developers.

Thanks to ever-increasing commercial activities, the large influx of expatriates represents another driving force boosting residential and commercial real estate demand in the UAE and Saudi Arabia. This is particularly prevalent in the UAE, where nearly 80% of the population is composed of non-nationals.

(iii) Growing Commercial Prominence

The UAE and Saudi Arabia are located at the crossroads of Europe, Africa and Asia, covering three continents, 136 nations and more than three billion people. According to industry estimates, over 120 shipping lines and 105 airlines connecting to more than 145 global destinations are currently operating in Dubai, making it a highly cosmopolitan city in the Middle East. With existing and ongoing infrastructure projects in transportation, telecommunications and finance, Dubai is set to maintain the UAE's reputation as the paramount trading platform and gateway to the Middle East. This is again supported by the large proportion of expatriates in the UAE's total population. As surrounding emirates and the other Gulf countries are eager to pursue the Dubai development model, continuously increasing demand for advice and consulting services will increase and further strengthen Dubai's essence in the Middle East business world. Meanwhile, Abu Dhabi is another major destination for foreign business and job seekers in the UAE. Planning to bolster the commercial sector, the Abu Dhabi government is striving to learn from Dubai's success and develop itself into the "next Dubai".

Saudi Arabia, on the other hand, is also playing catch-up across all aspects of economic development. As per its eighth five-year economic development plan, the Saudi government has adopted a comprehensive development strategy, supported by appropriate policies and organisations to diversify the economy. The Saudi government has commissioned numerous mega projects to accelerate the development of its non-oil sector. At the heart of the Saudi government's economic development plans and initiatives, six mega economic cities are planned to be built across the Kingdom. Together with other upcoming projects such as the forthcoming Saudi-Egyptian Causeway, Saudi Arabia is gaining momentum in attracting international investors and businesses.

(iv) Booming Tourism

Many Middle Eastern countries are targeting tourism to boost economic growth, making tourism development a top government priority. As a result, massive investments in hotels and shopping malls have been carried out across the UAE and Saudi Arabia. The UAE's tourism authorities have set aggressive targets to boost tourism. For instance, the Abu Dhabi Tourism Authority (ADTA) has targeted increasing tourist numbers by three-fold by 2015, while Dubai hopes to attract 15 million tourists in 2015, compared to 6.5 million visitors in 2006.

The World Travel and Tourism Council (WTTC) forecasts that the tourism sector in the UAE will grow at about 5% each year between 2007 and 2016, one percentage point higher than the global average. Obviously, Burj Al Arab, Ski Dubai and many other attractive tourist spots have made Dubai one of the tourist havens of the world, not to mention other iconic tourism projects in the pipeline. The tourism sector now shares 30% of Dubai's GDP, generating more revenue than its oil sector. The US$55 billion Bawadi project, featuring a cluster of 51 hotels, including the 6,500-room Asia Asia Hotel, is expected to outpace the MGM Grand Las Vegas (5,044 rooms) and become the world's largest hotel by 2016. With its current paramount share of GDP, tourism is expected to continue playing a leading role in helping Dubai achieve its target of a GDP of US$108 billion by 2015 (compared to US$37 billion in 2005), as set in the Dubai Strategic Plan (DSP) 2015.

Being the wealthiest emirate and the capital city in the UAE, Abu Dhabi has also committed to strengthening its tourism infrastructure. Notably, it is going to build the Middle Eastern branch of the Louvre Museum and to host Formula One Grand Prix from 2009. Together with the 218 natural islands offering enchanting holiday experiences to international visitors, Abu Dhabi is fast developing into one of the most sought after destinations. By developing world-class tourist destinations such as the Saddiyat Island and Al Raha Beach, the Abu Dhabi government has demonstrated its readiness and willingness to open up Abu Dhabi to international business and leisure travellers.

Saudi Arabia, on the other hand, is fast developing its western part along the Red Sea coast in a bid to boost tourism. New resorts and hotels are being established and planned in areas along the Red Sea coast, especially in Jeddah - the "Bride of the Red Sea". On the religious tourism front, the two holy cities - Makkah and Medinah - are estimated to attract millions of pilgrims to Jeddah each year. The forthcoming US$3 billion Saudi-Egyptian Causeway, providing a road link between Saudi Arabia and Egypt across the Red Sea, is expected to raise Saudi Arabia's attractiveness to Islamic and non-Islamic visitors from Africa.

Apart from attracting tourists from other parts of the world, thanks to continuously strong economic performance and resulting higher income levels in the Middle East, inter-regional and domestic tourism has become more popular in the UAE and Saudi Arabia. In light of this, the UAE and Saudi Arabia have recently signed an agreement allowing their nationals to travel freely between the two countries using identity cards instead of passports. The deal came into effect in June 2007, covering travel by land, air and sea.

(v) Other Key Catalysts

Another important factor contributing to the thriving construction sector in the UAE and Saudi Arabia includes the repatriation of investment funds from the US after the 9/11 incident, endowing the public and private sectors in the Middle East with sufficient financial muscle to fund various elaborate construction projects involving long payback periods. On the other hand, by contracting out more construction projects via private-public-partnership (PPP) and other forms of project financing such as build-operate-own (BOO), build-operate-transfer (BOT) and build-operate-own-transfer (BOOT), Middle Eastern governments are encouraging and attracting domestic and foreign private investment. Further liberalisation of laws regulating the practice of foreign business activities and property ownership has helped boost local and international investors' confidence in the real estate market in the UAE and Saudi Arabia.

3. How Big is the Construction Sector?

According to MEED projects, there are over 2,100 projects either planned or underway in the Gulf in 2006. The total value exceeded US$1 trillion³, compared to US$700 billion in 2005. Of this US$1 trillion, the six GCC states made up about US$880 billion, breaking down into US$560 billion of planned projects and US$320 billion of construction work at various stages of development. Despite its small population relative to Saudi Arabia, the UAE accounted for US$294 billion (33%) of the US$880 billion and Saudi Arabia for US$211 billion (24%). This demonstrates the pre-eminent position of the UAE and Saudi Arabia in the Middle Eastern construction sector.

Described as the "construction capital" of the Gulf, Dubai continues to dominate the UAE's construction industry. It is estimated that about 15-25% of the world's 125,000 construction cranes are operating in Dubai. On the other hand, at the heart of Saudi Arabia's development plans and initiatives, there are six mega economic cities due to be built near the areas of Tabouk, Medinah, Rabigh, Jazan and Eastern Province. These six economic cities are expected to create 1.3 million jobs and accommodate a population of 4.8 million, contributing US$150 billion to the GDP and raising Saudi Arabia's per-capita GDP from US$15,000 in 2006 to US$33,500 by 2020.

4. What are They Building?

(i) Infrastructure

Middle Eastern governments have channelled a significant portion of their oil windfall towards upgrading and building new infrastructure in recent years, increasing the region's attractiveness to both local and foreign investors. Large-scale infrastructure investments have been made in various fundamental sectors, including energy, utilities, transportation, education and health care. It is estimated that the value of infrastructure projects in the GCC exceeded US$360 billion in 2006.

With this fast-growing business activity, people working in Dubai always find themselves jammed in traffic. Better road networks are therefore needed to ease congestion. For example, a new junction is planned to be built on the Sheikh Zayed Road (an important highway in Dubai, stretching from the World Trade Centre roundabout to the border of Abu Dhabi), to ease chronic traffic congestion. In fact, as Dubai can no longer rely solely on road transport to deal with its escalating traffic, mega public transportation systems such as railways are under development. As described by Dubai Roads & Transport Authority (RTA), Metro Dubai will become the single largest automatic driverless metro system in the world when it is completed in 2010. In Abu Dhabi, the government is focusing on the development of its 218 islands. More bridges, roads and other supporting infrastructure are needed for linkage between the islands and the city centre.

Meanwhile, buoyed by the increasing tourism and commercial activity, the UAE has experienced a boom in its aviation sector. To deal with this, the UAE government has a series of plans to develop new airports and upgrade existing aviation facilities. Projects announced in the UAE reached US$19 billion, 64% of which is to be spent on the two airports in Dubai, namely Dubai International Airport and Dubai World Central (at Jebel Ali), while another 36% will be spent on the new Abu Dhabi International Airport to support the government's plan of developing Abu Dhabi as "the next Dubai" in the UAE.

For Saudi Arabia, the government is shifting its development foci from the east to the west. Four out of the six mega economic cities planned are nestled in the western part of the Kingdom. Supporting infrastructure, such as independent water and power projects (IWPPs), roads, railways, airports and seaports, is in need of a wholescale upgrade and new development. This is particularly true for Jeddah - the major commercial port and trading hub in Saudi Arabia and the entrance to the holy cities, Makkah and Medinah.

In order to better bridge the two sides of the Kingdom, a modern freight and passenger railroad network, including a 950-km line linking Jeddah and Riyadh and a 115-km line linking Dammam and Jubail, is to be built. Following years of discussion and the ferry tragedy in February 2006, a Saudi-Egyptian Causeway is also expected to be built across the Red Sea, providing a road link between Ras Humaid in Tabouk and the Egyptian port of Sharm Al-Sheikh.

On the aviation front, industry experts have estimated that investment totalling US$1.5 billion will be directed at developing and upgrading airport facilities in Jeddah over the next few years, fostering the trading and tourism industry in Saudi Arabia. Major projects include the development of the new Jeddah International Airport, which is expected to offer four new terminals upon completion.

Furthermore, among the six economic cities due to be built, KAEC, which has been named after The Custodian of the Two Holy Mosques King Abdullah bin Abdulaziz al-Saud, is considered the single largest private sector investment in Saudi Arabia. Emaar, The Economic City - the master developer of the KAEC, has collaborated with the Massachusetts Institute of Technology (MIT) to develop the economic city as the first truly IT-driven 'Smart City' in the world, offering the most advanced Information and Communication Technology (ICT) facility.

(ii) Hotel Accommodation

As per the latest available figures, there are around 2,200 hotels operating in the GCC, offering about 180,000 rooms. According to industry estimates, approximately 80% of the hotel supply and 60% of the rooms are of a three-star standard and below. This indicates huge potential for branded hotel chains to expand their operations in the region. According to TRI Hospitality Consulting, 128 new hotels will come into operation in the GCC in the period through 2009, delivering nearly 42,000 new rooms to the market. International hotel brands such as the Four Seasons and Ritz Carlton are consolidating their businesses in the Middle East, while other hotel chains like Ibis and Holiday Inn Express are establishing footholds in the Middle East market. According to industry sources, other hotel chains, such as Conrad, Nikko and Banyan Tree, are also considering entering the Middle East.

According to the UAE's Ministry of Finance and Industry, the number of hotels in its seven emirates increased from 290 in 2005 to 306 in 2006. For Dubai alone, there were about 285 hotels and 135 serviced apartments by the end of 2006, offering nearly 35,000 rooms. Meanwhile, many new hospitality initiatives have been planned in the UAE, particularly in Dubai and Abu Dhabi. Among many projects in the pipeline, the 6,500-room Asia Asia Hotel in the US$55 billion Bawadi project in Dubai is considered the most stunning. Upon completion, it will outpace the 5,044-room MGM Grand Las Vegas and become the world's largest hotel. For the Bawadi project as a whole, a cluster of 51 theme-based hotels will be built, offering an additional 60,000 hotel rooms. For the UAE as a whole, additional 86,000 hotel rooms are expected by 2012.

For Saudi Arabia, as revealed by the Tourism Development Strategy of the Red Sea, an estimated US$40 billion is to be spent on the development of new tourism destinations along the Red Sea coast. These destinations include Ras Al-Shiekh Humaid in Tabouk Province, Al-Huraidah in Aseer Province and Farasan in Jazan Province. The capacity of these destinations, including resorts, hotels, and serviced apartments, will exceed 557,000 rooms.

(iii) Retail Space

Retail activity in the Middle East is undergoing both qualitative and quantitative changes. The market has undergone a transformation, with the old style street shops replaced by sophisticated shopping malls featuring leading chain stores and shops selling international brand products. Thanks to the fast-growing population, rising tourist arrivals and higher consumer spending, the retail market is moving upscale, with more shopping malls offering an escape from the desert heat for shoppers. In addition to new construction, existing shopping malls are in need of regular renovation and facility improvement to maintain their competitiveness and attractiveness to shoppers.

The spending in the GCC retail sector is forecast to have reached US$18 billion in 2005, accounting for about 3% of the region's GDP. In 2005, total retail space in Dubai and Abu Dhabi was 13 and five million square feet in terms of gross leaseable area, respectively. These figures are expected to increase to 30 and nine million square feet, respectively, by 2010. Meanwhile, the expected total retail spaces in Jeddah will reach 15 million square feet by 2010, compared to eight million square feet in 2005.

With the young population in the UAE and Saudi Arabia, the demand for retail space will be further strengthened as a large proportion of the population will become consumers in the near future. A review of the per-capita retail space also indicates scope for further development as the Middle East region has a relatively low per-capital retail space compared with that of Asia and the US. The long-awaited Dubai Mall and the magnificent retail zone in the Bawadi project are set to entice more local and international shoppers to visit and shop in the region. This will in turn further boost the already very buoyant retail market in the Middle East.

(iv) Office Space

Buoyed by the pro-business attitude of the UAE government, the rapid influx of businesses has led to a severe shortage of office space, driving up rents and resulting in high demand for the construction of new offices. According to CB Richard Ellis, one of the world's leading commercial real estate services firms, annual prime office rents in Dubai were around US$95 per square foot in the first quarter of 2007⁴, demonstrating a 25% year-on-year growth. As surrounding emirates and countries develop using the Dubai model, the demand for Dubai's services as a business centre, providing business advice and consultancy services, is on the rise, so is the demand for commercial space. According to Colliers International (Real Estate), there are over 27 million square feet of commercial office space under development in Dubai, putting Dubai second in the world in terms of commercial building development.

Although at a slower pace and a more conservative manner, Abu Dhabi is following Dubai's lead. Increasing commercial activities have led rents for commercial space in Abu Dhabi to increase drastically in recent years. As reported by CB Richard Ellis, prime office rents in Abu Dhabi were approaching US$70 per square foot per annum in the first quarter of 2007, which was 108% higher than that in the same period of the previous year. In light of the high demand for commercial space, more investments have been directed to the commercial real estate sector. For instance, work has commenced on Abu Dhabi's tallest tower - the Sky Tower, which will become the fifteenth tallest building in the world upon completion in 2008.

Given the increasing demand for commercial space, more traditionally uncommon high-rise buildings and office towers are being built in Saudi Arabia (especially in the western part of the Kingdom, where the government is shifting its development foci). More importantly, the six economic cities due to be built in Saudi Arabia will provide much new commercial space, offering advanced information technology and comprehensive infrastructure support. Out of the six economic cities planned, four have been commissioned. Each has different foci of development and specialisation.

(v) Residential Space

A fast-growing and young population, coupled with an increasing number of expatriates working in the region, has driven housing prices and rental rates in the Middle East to record high levels. According to some industry estimates, the GCC real estate and property market was worth an estimated US$150 billion in 2006, with Dubai leading the majority of the expansion.

In Dubai, housing completions rose from 42,000 per annum in 2004 to 45,000 in 2005, and are expected to have reached 48,000 in 2006. Although the new supply of residential property has been increasing in recent years, residential rentals in Dubai have doubled over the 1996-2006 period according to a study recently conducted by property consultant ECA International⁵.

For Abu Dhabi, among many other residential projects, work has commenced on the city district project (US$15 billion), which will be built on 6.8 million square metres of reclaimed land at Al Raha beach. Upon completion, it can accommodate a resident population of 120,000.

On the other hand, Saudi Arabia's housing sector comprised 75% of all real estate activity (in value term). Thanks to its fast-growing population and increasing commercial prominence, industry sources forecast that total new real estate construction will amount to US$129 billion by 2010 and US$320 billion by 2020.

It is worth noting, however, that despite the importance of housing in the economy, the market for housing financing or mortgage loans is rather underdeveloped in the Gulf region. According to the World Bank, the stock of housing-related financial assets (mainly mortgage loans) in the Gulf region ranges from less than 1% of GDP to around 11%, which is very insignificant when compared with more than 60% in the US and around 40% in Hong Kong. For Saudi Arabia, mortgage debt accounts only for about 1-2% of GDP. Although the mortgage market is more prosperous in the UAE, particularly in prime real estate segments such as Dubai, the figure is still considered very insignificant when compared with other emerging Asian economies.

5. Three Cites in Focus

(i) Dubai - "The Gulf's Hong Kong"

For years, Dubai, dubbed as "The Gulf's Hong Kong", has been spearheading the construction boom in the Middle East. With more and more projects being planned and carried out in the emirate, Dubai's leading role does not seem to be tapering off, at least in short to medium-term, despite speculation that Dubai's property market may cool significantly. As long as favourable demographic and commercial fundamentals continue to exist, Dubai will continue to be the "construction capital" of the Gulf.

For now, new projects span the full spectrum of construction disciplines, covering residential and commercial buildings, hotels and infrastructure. This reflects both an expanding non-oil economy and a fast-growing population in the emirate. On top of the increasing demand for residential dwellings from the growing population (nationals plus expatriates), commercial buildings and corresponding infrastructure support such as roads and rail systems are also in high demand due to Dubai's ever-increasing commercial prominence in the region. Hotel accommodation and tourism infrastructure such as shopping malls and theme parks are also in great need as existing accommodation has been working at virtually full occupancy amid rising demand for vacation and shopping. Comprising 30% of Dubai's GDP, tourism will certainly remain one of the important driving forces underpinning the emirate's economic diversification and growth in future. In fact, after successfully developing itself into a major international trading platform, tourist destination and regional logistics hub in the Middle East, continuing buoyant real estate and infrastructure developments are now being widely considered a matter of routine in Dubai. With around 330 buildings under construction and 10 super-tall (higher than 300 metres) skyscrapers being built, the UAE will remain a prosperous market for Hong Kong construction companies specialising in high-rise and skyscraper construction.

(ii) Abu Dhabi - "The Next Dubai"

Concerning the capital city of the UAE, the government has planned to develop Abu Dhabi into an international tourism spot. For instance, Abu Dhabi is going to host the Formula One Grand Prix in 2009 and build the HK$15 billion Louvre Abu Dhabi. Among many other initiatives, the government has planned to build 100 new hotels by 2015, including resort hotels and the development of 218 surrounding islands off Abu Dhabi, where Al Raha Beach and Saadiyat Island are the two major ongoing projects, among many others. Special marine work and infrastructure such as bridges, roads and tunnels will be needed for the work due to be commenced and transportation between the islands and the city centre.

To catch up with its neighbouring emirate, Abu Dhabi is in need of a wholescale upgrade of its infrastructure. However, in the process of doing so, the Abu Dhabi government is striving to maintain a "slower-than-Dubai" pace, allowing more time and effort for better planning and execution. As Abu Dhabi is the capital city of the UAE, the government is more cautious in its development plans. Many feel that by learning from the success of and problems experienced by Dubai, Abu Dhabi can have better planning beforehand and avoid unnecessary chaos such as construction delays in the future. In fact, as many believe, with huge oil reserves (i.e. Abu Dhabi controls over 9.5% of the world's proven oil reserves, which are forecast to last at least for another 150 years), Abu Dhabi does not have to force itself to build as fast as Dubai (whose oil reserves are going to be depleted soon), and can therefore afford more time in planning. From the launching of the world's first zero-carbon, zero-waste city project - Masdar City - we can appreciate the determination of the Abu Dhabi government in sustainable development and environmental protection. In the meantime, the Abu Dhabi government has prescribed more open spaces and a low-density urban environment in its master urban plan 'Plan Abu Dhabi 2030'.

On the competition front, as many international companies have established a presence in Dubai, but not in Abu Dhabi, competition tends to be less fierce in the latter. Also, as most local and international construction companies in Dubai are already running at full capacity, not many have spare capacity to staff projects in Abu Dhabi. New-to-market firms are therefore advised to explore the potential of Abu Dhabi and not to overlook the excellent opportunities offered by the capital city.

(iii) Jeddah - "Bride of the Red Sea"

Jeddah, lying on the shore of the Red Sea, was once the capital of Saudi Arabia, and remains now a major trading hub in the Kingdom. In addition to the construction of the most prestigious economic city, KAEC, railways linking the eastern and western part of the Kingdom are due to be built to work in line with the government's plan to accelerate the development of the western part of the Kingdom. These moves favour the development of Jeddah, which has traditionally been a trading hub and vacation spot, as well as the entrance to the two holy cities in the Muslim world, namely Makkah and Medinah. It is estimated that Jeddah receives over two million pilgrims in the annual pilgrimage to Makkah each year.

Jeddah embraces more than 90% of the tourism facilities and development projects along the Red Sea, providing multiple construction opportunities. During the Arabian Hotel Investment Conference 2007, Prince Sultan, Secretary General of the Supreme Commission for Tourism in Saudi Arabia, unveiled a series of initiatives that aim to spur tourism in the Kingdom. In addition to applying for UNESCO (United Nations Educational, Scientific and Cultural Organization) World Heritage status for Jeddah, the construction of new tourism destinations along the Red Sea coast (estimated to cost US$40 billion) and the renovation of historic sites in several Red Sea ports are at the heart of Saudi Arabia's tourism vision. Many tourism resources have been directed at encouraging Saudis and other Arab nationals from surrounding countries to spend their holidays in the Kingdom, while millions of non-Saudis residing in the Kingdom have constituted a strong demand for domestic tourism.

Traditionally, Saudi people do not feel the need to build high-rise buildings, but this situation has changed amid the increasing demand for office and residential space in the Kingdom. A good example will be the Lamar Towers, a US$533 million residential and commercial project in Jeddah, comprising two residential towers of 58 and 65 levels, and a 13-storey commercial building offering office and retail space. Another good example showing the increasing trend of high-rise and skyscraper construction would be the Kingdom's tallest tower (400 metres high) to be built in Jeddah by the Kingdom Holding Company under its US$13 billion Jeddah real estate development scheme.

6. Sources of Financing

Fuelled by high oil prices and the repatriation of investment funds after the 9/11 incident, the construction sector in the UAE and Saudi Arabia has been generally flooded with liquidity. Yet, in the meantime, Middle Eastern governments are striving to make the most of the oil windfall and the resulting budget and current account surpluses to boost private investment. More and more construction projects are now being contracted out in the form of PPP, BOO, BOT and BOOT.

On the other hand, foreign direct investment (FDI) is generally not a major source of financing for construction projects in the UAE and Saudi Arabia. According to a recent survey of global FDI flows by the United Nations Conference on Trade and Development (Unctad), FDI into the Middle East was US$43.3 billion in 2006. This amount, when compared to the value and size of the construction projects in the UAE and Saudi Arabia, appears rather insignificant. In both the UAE and Saudi Arabia, construction companies are mainly looking for suitable overseas partners to share expertise and resources such as machinery, instead of contributing money capital.

7. Sources of Materials and Manpower

Although, in general, UAE and Saudi construction companies are on a sound financial footing, they are looking for building materials that can offer greater variety, more modern design, as well as better value-for-money. In recent years, as a consequence of the construction boom, imports of building and construction materials have surged dramatically in the UAE and Saudi Arabia. Local manufacturers have managed to meet part of the rising need for building materials, yet local products are usually inferior to imports in terms of quality, variety and design. Hong Kong's construction-related products, such as doors and window frames, are well-received in the UAE and Saudi Arabia. For example, one of the biggest building material suppliers in the UAE has indicated that the variety and quality of wooden doors which have been imported from Hong Kong are good, and it is willing to buy from Hong Kong other building and construction materials which are of high quality, variety and trendy design⁶.

Indeed, the construction boom has not only caused a shortage of materials, but also manpower, leading to increases in prices of construction materials and manpower in the region. There has been a widespread increase in construction costs, which are estimated to have surged by more than 20% since 2003.

Evidently, the buoyant construction sector has generated a strong demand for building materials and hardware, including machinery, furniture and furnishing products, interior products, home textiles and sanitary fittings. It is estimated that the market for building materials in the UAE was worth about US$5 billion in 2005, with an estimated average annual growth of 15% over the next three years. On the other hand, Saudi Arabia's imports of building materials increased from US$4.3 billion in 2003 to US$6.9 billion in 2005, recording a compound annual growth rate (CAGR) of 27%. Since local production of building materials is quite limited (with limited variety) in the Middle East, most of the building materials are imported from overseas, including Turkey, South Korea, Indonesia, Malaysia and China.

Also worthy of note is the market for furniture and interior products in the UAE and Saudi Arabia. Leading products include general furniture, fabrics and floorcovering, lighting and ceramics. The total imports of furniture and interior products in the UAE and Saudi Arabia reached US$3.6 billion in 2005, registering a growth of 15%. Dubai, acting as the regional trading centre, has traded more than 40% of furniture and interior products imported in the GCC. According to the latest available statistics, the major exporters of furniture products into the UAE and Saudi Arabia are Italy, China, the US and Malaysia. Alongside robust import demand, there is an upward trend of local production of furniture in the two countries. Imports of raw materials such as sawn wood and wood panels in the UAE and Saudi Arabia recorded growth of more than 20% in 2005.

The minimum trade barriers against imports such as the 5% flat customs duties on most construction and building materials imported into the UAE, and 5-20% customs duties on relevant imports into Saudi Arabia, have given added impetus to foreign imports of building and construction materials. By looking at the trade statistics, we can see that Hong Kong products have been well-received in the UAE and Saudi Arabia amid the construction boom in recent years.

On the services front, many US and European construction services providers are working in the UAE and Saudi Arabia. Companies from Japan, South Korea, Singapore, Malaysia and China have also been striving to increase their presence and share in the two countries amid the construction boom, while at the same time more and more developers have started to recruit from Egypt, Jordan and Lebanon in the face of continuous price hikes in recent years. As per GulfTalent.com, a leading job site in the Middle East, the construction sector in the GCC recorded higher-than-average salary increases in 2005 and 2006, indicating a robust demand for professional construction services in the region.

For blue-collar workers, India, Pakistan and Bangladesh are currently the main sources for the UAE and Saudi Arabia, while there is also an upward trend for Chinese workers as more and more companies in the region have been impressed by the efficiency of Chinese construction workers⁷. Nepal, the Philippines and Vietnam, on the other hand, are new sources from which the UAE, Saudi Arabia, as well as other Middle Eastern countries recruit general construction workers.

8. Hong Kong's Competitive Edges

(i) World-class Construction Expertise

With the iconic construction projects particularly in the UAE, many of the top international construction contracting companies are locally represented in Dubai. However, thanks to the full-spectrum construction boom and the resulting shortage of construction-related professionals such as architects, engineers, surveyors and contractors, Hong Kong can tap into the market with its expertise in architectural design, engineering support and project management, and strong records of compliance with international building and construction standards. Besides, Hong Kong construction services providers are familiar with the legal arrangements that prevail in the international construction market. For instance, Hong Kong companies are familiar with contractual arrangements such as FIDIC Conditions of Contract - the most widely used standard forms of contract in international construction and the ICC International Court of Arbitration - which are gaining popularity in the Middle East. This will certainly enhance Hong Kong companies' attractiveness to Middle Eastern developers and contractors.

(ii) Extensive Construction Experience

Hong Kong's experience in timely construction of quality high-rise apartment blocks and office towers is internationally renowned. Most companies in the Middle East believe that Hong Kong companies can build high-quality buildings. In the UAE and Saudi Arabia, contractors and consultancies generally welcome Hong Kong companies and recognise Hong Kong's successful development as a cosmopolitan city. Many Middle Eastern companies are amazed by the high construction density in Hong Kong, and agree that efficient road and rail networks are important keys to the success of such a cosmopolitan development. Hong Kong's tunnels and bridges are also of world-class quality and up to international standards, while airports and container terminals are among the busiest and most efficient in the world. Also, Hong Kong has tremendous expertise and experience in marine construction work, as it is surrounded by many islands and therefore has a long coast line.

With more high-rises being built and planned, Dubai and Jeddah are places where Hong Kong's expertise and experience in high-rises can bear fruit. Extensive marine projects in Abu Dhabi, on the other hand, will offer abundant opportunities to Hong Kong construction companies in showcasing their strengths in marine work.

Furthermore, innovative, futuristic and environmentally friendly architectural designs are certainly important competitive edges of Hong Kong construction companies in the Middle East. Successful examples include James Law Cybertecture International, a firm specialising in the design and strategy formation of cybertecture projects, and the designer of the iPad apartment in Dubai. Other than the aforesaid, facilities management, property management and maintenance, for which demand is on the rise in the UAE and Saudi Arabia, are also among the skills of Hong Kong companies.

(iii) Close Ties with China

Hong Kong has close ties with the Chinese mainland, where many construction materials are produced and sourced. Indeed, there is an increasing trend for the UAE and Saudi Arabia to source from China. Hong Kong companies can make use of their business contacts on the Chinese mainland to help Middle Eastern companies to locate suitable manufacturers or suppliers.

For their part, UAE and Saudi companies are looking for innovative construction materials of high quality and greater variety with competitive prices; they generally claim that they are willing to pay a premium for variety and quality. Hong Kong suppliers can tap into such a market by utilising their design capacity and manufacturing facilities in China.

Hong Kong companies can further act as a risk manager for Middle Eastern companies to ensure payment, delivery and quality of construction materials sourced from China. On the other hand, Hong Kong can provide assistance, such as importing labour from China to fill the shortage of manpower, as there is strong demand for construction workers and technical staff in the UAE and Saudi Arabia.

9. Risks and Challenges

(i) Competition

Not surprisingly, many foreign companies have already found their way to the booming Middle East construction market. Companies from Singapore, Malaysia, Indonesia, Japan, South Korea and China have started projects in the UAE and Saudi Arabia. Some are also major exporters of various major construction materials such as wood and construction machinery to the two countries. Quite a few UAE and Saudi businesspeople have criticised Hong Kong companies for their indifference towards business invitations from the Middle East.

Nevertheless, some Hong Kong construction companies such as China State Construction Engineering (Hong Kong) Ltd and P&T Architects and Engineers Ltd are doing very well in Dubai. The latter has also started a new branch in Abu Dhabi after winning a consultancy deal for the Reem Island Project - the new heart and metropolitan centre in the capital city of the UAE. They both advise new-to-market Hong Kong companies to target projects in Abu Dhabi instead of Dubai to avoid facing intense competition with well-established local and international companies there.

(ii) Laws and Regulations

Although both the UAE and Saudi Arabia are opening up, certain restrictive measures prevail in the two countries. For instance, although in the process of liberalisation of ownership laws, foreigners are generally not allowed to own freehold property except in certain designated areas in the two countries⁸, while companies with 100% foreign ownership usually enjoy less preferential treatment from the government and face more regulatory scrutiny and requirements. Meanwhile, in the process of economic liberalisation, some laws and regulations may change from time to time, and they may vary from city to city even within the same country.

(iii) Cultural Differences

Arabic businesspeople place much emphasis on interpersonal relationships. It is their practice not to close deals during first few meetings. They prefer long-lasting business relationships to one-time business deals. New-to-market companies have to spend more time and effort to cultivate a friendly business relationship and cement trust and confidence with their Middle Eastern counterparts. All in all, a hit-and-run strategy is deemed not feasible in the Middle East.

While both the UAE and Saudi Arabia are Islamic countries, the former is much more open than the latter due to different stages of economic and cultural development. In Saudi Arabia, women are seen wearing black abayas (i.e. long robelike dresses) and hijabs (i.e. headscarves) on top of their regular clothing as instructed by the Qur'an. Also, single women are generally not allowed to dine with single men in restaurants and work in retail stores in Saudi Arabia, where family sections and female-only shopping malls are set up. This is obviously not the case in the UAE, where many women are attired in fashionable clothing. Meanwhile, women and men dining and working in public places are also considered normal social activities in the UAE.

Muslims must pray in the direction of Makkah five times a day. The prayer times occur at dawn, noon, afternoon, sunset and evening. Shops close for the prayer period each time and it is not uncommon for meetings to break up when those who want to pray will leave the office.

New-to-market Hong Kong companies who do not have prior experience in the Arab world are advised to pay special attention to national holidays in Muslim countries, as they are radically different from those in Hong Kong. In the Muslim world, festivals are timed according to local sightings of various phases of the moon, and the Gregorian dates of the Islamic holidays are not fixed as they also depend on the sighting of the moon. During the month of Ramadan, Muslims fast during the day and feast at night - normal business patterns may therefore be interrupted. Many restaurants are closed during the day and there are restrictions on smoking and drinking. Hong Kong traders should avoid visiting the UAE and Saudi Arabia during this period⁹.

(iv) Climatic Differences

The Middle East contains the world's hottest deserts, so the climate there is very hot and dry. Hong Kong professionals working there must be prepared for the severe weather conditions. Meanwhile, manufacturers and traders should also pay attention to the unique climatic conditions and supply building materials that offer good heat and drought resistance. In addition, companies, especially those specialising in foundation work, should note the corrosive effect of salt in underground water in the Middle East, which calls for foundation waterproofing to stop water infiltration.

10. Recommendations for Hong Kong Exporters and Services Providers

(i) Find Your Niche

Obviously, there are many projects underway and planned in the UAE and Saudi Arabia, which Hong Kong construction companies can tap into. However, Hong Kong companies are advised to first find out the edge they might have and keep their focus on projects in which they have the most experience, for example, high-rises, infrastructure and marine work.

For the UAE market, Hong Kong construction companies can pay more attention to Abu Dhabi instead of Dubai as competition is less intense in the former. Also, the government's focus on the development of islands in Abu Dhabi provides numerous opportunities for Hong Kong's expertise.

For the Saudi market, Hong Kong companies are advised not to overlook the potential of Jeddah. Business activities in Jeddah are expected to be more buoyant upon the shifting of government's development foci to the western part of the Kingdom and the forthcoming wholescale upgrade of infrastructure. However, since Riyadh is the capital city of Saudi Arabia, most development plans and major construction projects, especially government projects, are formulated and contracted there. Therefore, new-to-market companies are advised to first establish good business contacts with relevant government departments and major developers in Riyadh before going straight to Jeddah, where construction projects will actually be carried out.

(ii) Find Your Partners or Agents

For both the UAE and Saudi Arabia, Hong Kong companies are advised to start their business with a good local partner or agent. In particular, the local partner or agent can help Hong Kong construction companies to bid for projects and deal with relevant government departments, or assist other services providers and materials suppliers to do business in these markets. Apart from administrative convenience, it is also required by law in the UAE and Saudi Arabia to have a local partner or agent (who must be a local national) for the establishment of a branch. For example, in the UAE, a foreign company establishing a branch outside the Free Trade Zones is required to have a local partner sharing 51% of the ownership of the company¹⁰. On the other hand, although foreign architects, engineers, management consultants and legal professionals are allowed to enjoy 100% ownership by obtaining professional licences in their fields, an Emirati must still be appointed as a local service agent.

(iii) Identify the Differences

In addition to cultural and climatic changes mentioned above, Hong Kong companies are advised to take into account different preferential treatments under different business arrangements. For instance, in Saudi Arabia, a foreign company may not have to pay profits tax if it operates in the form of a partnership with a local company, while a 100% foreign-owned company would have to pay profits tax of up to 30%.

(iv) Familiarise Yourself with the Markets

As a rule of thumb, before entering any new market, Hong Kong companies are advised to familiarise themselves with the Middle East construction market to enhance their chance of success. This can be done by conducting feasibility studies and field trips, as well as taking part in relevant exhibitions such as Cityscape Dubai, Cityscape Abu Dhabi and the Big 5 Exhibition.

As trade fairs are a means of effectively making contacts with agents and distributors in the Arab world, Hong Kong exporters and services providers are encouraged not to overlook the excellent opportunity they provide to meet buyers from the Middle East and surrounding regions, from joining trade promotion missions and showcasing their products and service track records in exhibitions organised by the Hong Kong Trade Development Council.

Appendix 1: Selected UAE Government Departments and Chambers of Commerce

Appendix 2: Selected Saudi Government Departments and Chambers of Commerce

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