Karbala Project Not To Improve Housing Outlook
BMI View: Following an agreement made last year, Bloom Properties have signed a deal with the Iraqi government to begin working on the initial phases of a major new urban development project in Karbala, showing a willingness to commit to large-scale projects in Iraq. Although this is a positive development and confirms BMI's expectation that housing contracts will continue to be awarded in 2013, the obstacles facing the construction sector in Iraq remain largely in place. As such, we anticipate real growth in the construction sector to remain at an annual average rate of 7.8% between 2013 and 2017, compared to 23.9% over the 2008-2012 period.
Bloom Properties, a subsidiary of Abu Dhabi based National Holding, has signed on to the Shores of Karbala project, one of the largest housing project deals in Iraq. Whilst a master plan is still to be submitted and approved after initial surveying, the Shores of Karbala project is expected to create 40,000 housing units over a 20km square plot on the banks of Lake Razaza by 2016 . Alongside the residential development will be hotels, offices, markets, clinics, schools, mosques, public parks, social and sports facilities as Karbala continues to focus attention on its infrastructure development.
We believe that Karbala continues to show good scope for infrastructure and residential investors. This is because the city has suffered from decades of underinvestment and as a holy Shi'te city, has been a target for Sunni radical Islamists over the past years. In 2012, the Karbala Provincial Council announced plans to invest IQD35bn (US$305mn) in local infrastructure as well as numerous transportation links being opened throughout the year, including a US$14mn million passenger terminal at Karbala airport.
In an attempt to satisfy massive demand, Iraq's housing sector as a whole is the target of government support, with US$32bn of the US$186bn National Development Plan (announced in July 2010) being directed at housing, construction and services. This is part of the government's commitment to increase the housing stock to reduce the estimated 2.5mn shortfall.
In line with this target, there have been numerous small to medium sized housing developments awarded to Turkish, Emirati and South Korean firms, who have been exploiting their high-risk tolerance and regional knowledge.
Despite this relatively high level of participation from foreign companies, we note that the limited number of major foreign players active in Iraq's construction market should temper ideas of it becoming a prime investment target. The lack of suitable legal protection in a number of areas for foreign investors remains an area of great concern. The progress on the Karbala development is promising, but previous large-scale projects should serve as a warning to the Shores of Karbala developers to ensure market research is undertaken. For example, the Besmaya housing mega-project on the outskirts of Baghdad, worth an estimated at US$7bn and planned to include 100,000 units is reportedly in trouble due to a lack of interest despite a demand for housing.
Whilst the scale of the new project will help alleviate pressure on housing stock which has been a major source of resentment towards the government, it will only do so at a regional level. This will likely improve the overall business environment in the Karbala region, but Iraq as a whole will still suffer from a major housing deficit and therefore the grievances held by the population towards the government will remain, adding to a negative business environment overall.
|Volatility In Industry Growth|
|Iraq Construction Industry Forecast|
The major challenges facing the Shores of Karbala involve ensuring that the project continues with this momentum and avoids coming to a halt like many other projects in Iraq (e.g. Besmaya). This will be a challenge due to the size and diversity of the Shores of Karbala project. The project will need numerous contractors that could an impact on a regional and even perhaps a national level.
This is in addition to the risks which continue to hamper growth of the construction industry in Iraq. Locally, Karbala's security situation remains bleak with a suicide bomber striking a shrine this week. Nationally, some of the risks are:
A weak bureaucracy, which undermines progress on projects;
The security outlook which remains varied but generally bad;
Political relations within the government are still poor and are subject to sectarianism which heavily affects regional projects;
There is a lack of institutional capacity and regulation to carry projects through to completion.
Opportunities Not Guaranteed
Looking at the broader construction sector, the soon to be voted on Iraqi federal budget for 2013 which has IQD 55.1trn earmarked for investment, a large portion of which will be on infrastructure, may appear to be attractive to investors, but it is unlikely when considering these risks that the potential of that money will be realised. These challenges to construction growth are seen in BMI's construction industry forecasts as over the next five year period and we predict a continued slowdown as companies adopt a 'wait and see' strategy as they look for a better business environment. This is reflected in our forecasts, where we anticipate real growth in the construction sector to remain at an annual average rate of 7.8% between 2013 and 2017, compared to 23.9% over the 2008-2012 period.
The long-term prospects for the construction sector are bullish as oil revenues increase and the risks affecting the industry are slowly remedied through better legislation, improved security apparatus and increased government capacity. However in the short to medium-term, even large projects such as the Shores of Karbala only slightly dent the regional demand for housing if they are executed correctly and that is only if the projects come to fruition, which given the political, legislative, bureaucratic and security obstacles is not a given.