22/02/2018 05:19 AST
The GCC region's construction sector boasts a robust pipeline of projects currently in the planning stages, thus indicating there is still demand for construction projects, said a report by leading consultancy and advisory firm Deloitte.
These projects are mainly driven by social needs, initiatives associated with economic transformation plans, government’s commitment towards investment in infrastructure, as well as tourism related projects, stated Deloitte in its eighth edition of the GCC Powers of Construction report, which provides an overview of the construction industry performance in the gulf countries.
The report highlights the importance of greater private sector participation to improve the delivery of social services, including healthcare, education, transportation and utilities infrastructure.
Cynthia Corby, the audit partner and infrastructure and capital projects leader for Deloitte Middle East, said: "The use of different forms of private sector participation in the Gulf economies, such as public-private-partnerships, attracting foreign direct investment through the easing of restrictions and privatization of state-owned assets, are key elements to achieve the GCC leaders’ visions for socio-economic reform and fiscal balance."
"In the current economic environment, investment into construction projects by governments, regional private and international investors is less aggressive than it used to be," she stated.
Construction companies also face challenges in raising debt as GCC banks remain risk-cautious on the sector, added Corby.
Kosta Georgiadis, the head of debt advisory at Deloitte, said: "The banking system in the UAE and Saud Arabia, the two largest real estate development markets in the region, has maintained a healthy level of deposits from both the public and private sector and there continues to be appetite to deploy much of this liquidity back into the market."
"Local banks are able and willing to avail financing to feasible projects based on acceptable debt and equity levels (usually 60 to 70 per cent loan to construction arrangements), provided that developers are capable and prepared to stand behind the project with additional equity and debt servicing support should the project experience any unanticipated delay or softening in revenues," he stated.
The Deloitte report also examines the challenges associated with the recent introduction of a Value Added Tax (VAT) in the UAE and Saudi Arabia, suggesting options to mitigate related risks through adopting appropriate processes and controls.
"The challenges to a successful implementation of VAT cover 3 main areas – that is financial, commercial, and operational. On the financial side and in an industry operating on thin margins, one of the biggest areas of concern would be the planning for cash flow impacts," said Bruce Hamilton, the indirect tax partner at Deloitte.
"It is crucial that developers and contractors perform a comprehensive impact assessment to determine the additional cash flow needs, as this will have an effect on their working capital requirements. The other important issue is understanding when the time of supply (the tax point) arises, so that you can ensure it is not inadvertently triggered in a way that brings forward your VAT liability," he added.
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