Iraq Infrastructure Market

Residential Building
Date: June 29, 2019

Project activity in Iraq's residential and non-residential space will remain heavily focused on industrial projects relating to the country's oil industry, reflecting the hydrocarbon heavy nature of the country's economy. Investment in Iraq's residential space will be driven by robust structural demand, as the government seeks to bridge a persistent housing shortfall.

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In part reflecting the toll of armed conflict and displacement over the past decade, Iraq continues to suffer from a significant housing shortage. Accordingly, the government continues to facilitate the construction of additional housing - it was announced on July 5 2017 that it had sanctioned a project to construct 3,812 houses in Maysan Governorate, with financing to come from the private sector.

The prominence of the US in Iraq ensures that it is a key source of construction contracts. The US Department of State has awarded construction firm BL Harbert International a contract to build the US consulate complex in Erbil, with the USD600mn project expected to become the largest US consulate complex in the world.

Illustrating the critical role that hydro-carbon related industrial infrastructure plays in driving construction sector growth in Iraq, it was announced in May 2017 that Iraq's oil ministry had authorised the construction of a refinery in Kirkuk at a cost of USD5bn..

Structural Trends
2018-2027: Mixed Outlook, Challenges and Opportunities
Project activity in Iraq's residential and non-residential building space will be relatively well diversified across subsectors over the short term, though given the prevalence of hydrocarbon extraction in Iraq's economy, industrial infrastructure associated with oil and gas will remain preeminent. Growth in Iraq's residential and non-residential building sector will rest upon a relatively well diversified foundation, with residential, commercial and industrial building accounting for 39%, 34% and 27%, respectively, of project value currently in the pipeline, according to our Key Project Database.

Residential Slated For Slow Recovery
Despite additions to the raft of large housing developments announced in 2013 and 2014 and the optimism engendered by the announcement of numerous construction projects in the Karbala and Baghdad regions of Iraq, growth forecasts are being tempered by the deteriorating political and security environment. As such, our outlook for Iraq's residential and non-residential construction industry as a whole remains bearish over the short to medium term. Industrial construction surrounding the oil and gas industry is the only (very dim) bright spot in the construction sector, although we highlight the risk that international oil companies could postpone the development of new fields, particularly in light of falling global oil prices and the country's constrained ability to pay for production, delivery and export fees to private firms.

On the upside, considering we forecast the security situation to improve throughout the country in 2017, investment into infrastructure reconstruction will return. Much of the fighting in the past two years has taken place in urban areas of the country, and has resulted in widespread destruction of infrastructure. The international community, and in particular the World Bank and the IMF, has already pledged preferential loans and direct aid earmarked for reconstruction projects in future. Although high levels of corruption and the current institutional crisis in the country will delay reconstruction efforts, we still expect to see investment levels pick up substantially in 2018.

Iraq's housing market has a substantial deficit of stock, estimated at a shortage of 2-3mn homes. There is a particular shortage at the lower- and middle-income bracket. This shortage of housing stock has contributed to substantial price rises, making entering the sector even more challenging. Despite the announcement and tendering of several mega-projects in the housing sector the deficit is likely to remain substantial in the short- to medium term.

In an attempt to satisfy massive demand, Iraq's housing sector as a whole is the target of government support, with USD32bn of the USD186bn National Development Plan (announced in July 2010) being directed at housing, construction and services, USD4bn of which was to be spent by 2016, a target doubtlessly missed, given the weakened security situation and the fall in oil prices.
Nevertheless, a landmark legal amendment in 2009 - allowing foreign ownership of land solely for developing real estate projects -should eventually provide a major boost to the sector. A large number of housing projects are in planning, however, few are moving forward successfully. One project was completed in Najaf in mid-2014, adding 500 units. Most other projects are subject to ongoing delays.

The government is also looking to support the development of housing through the Iraqi Housing Fund. The fund provides housing loans to individuals and projects. However, we do not expect the housing sector to gain significantly from the fund in the short term. In April 2015 the foundation stone was laid for a IQD108bn (USD92mn) development of 716 apartments in Dhi Qar, after delays due to land disputes. The Kashmara-1 project, scheduled for completion in 2018, is being driven by state-owned Al-Mansour Company for Constructional Contracts and the UK's Sections Contracting & Trading Company. Dhi Qar Governor Hameed Al-Ghazi said the local government also plans to build a second residential complex adjacent to Kashmara 'on an investment basis'.

Iraq's National Investment Commission (NIC) is promoting several 'new city' mega-projects in Baghdad and Karbala similar in scope to the under construction Bismayah development, upwards of 70 other housing sector opportunities listed on its website. The many problems facing such projects are severe in a country such as Iraq and include security, corruption, bureaucracy and material supply. But the country has a desire to move away from its heavily centralised governance structure to incorporate a more free-market model, mirroring the skyscraper boom of neighbours the UAE and Qatar, which have instigated drastic image changes over the past few decades.

Bloom Properties, a subsidiary of UAE-based National Holding, has signed on to build two of these large housing projects. In March 2013, the company signed a deal to develop 40,000 units near Karbala. The 20sq km Shores of Karbala development on the banks of Lake Razaza will include social and commercial developments. In September 2013 Bloom signed a deal to develop properties in the USD4.5bn development near Baghdad. The company confirmed it has secured the required approval and completed all design work for project. The housing plan is reportedly divided into four districts and includes hotels, offices, markets, clinics, schools and mosques.

However, it was reported in November that Bloom Properties had slowed its plans for the Shores of Karbala due to worsening conflict in the country. 'We will not move before we are sure that the project is safe and the area is safe', said Imad Mroueh, Director of Construction Imad Mroueh. Indicative of the problems facing the industry as a whole, and projects of such scope in particular, are the delays that have beset the USD7-8bn Bismayah New City housing mega-project. Yet while there was a genuine threat the project - being built by South Korean firm Hanwah Engineering & Construction - could prove to be a white elephant, work as of January 2017 is on track with the project 30% complete, according to Hanwha. The company noted about 5,000 households have moved into the first town so far. Yet one of the biggest challenges has been the failure to attract interest in the units, despite the widespread housing shortage. The development will comprise 100,000 units, but the design of the project - an apartment style complex - is not appealing to Iraqis, who favour detached houses. There are also public concerns, albeit unfounded, regarding contamination from the defunct Osiraq nuclear reactor 6km away, which was bombed by the Israelis in 1981. Despite all this, construction is pressing ahead with a 2019 deadline. Hanwah even won the USD2.12bn contract in January to build the city's 300 schools, hospitals, firehouses and police stations and received a USD200mn pre-payment in March from the government.

Another megaproject was announced in November 2015 - The Bride in Basra would be the world's tallest building at 230 storeys and 1,152m high and possibly the world's first vertical city. UK-Iraqi architects AMBS released designs of the four tower mixed-use project that would feature residences, office space and retail areas. A project of such scope is not usually expected in Iraq, but the architects point out that Basra is over 600km away from the IS-related fighting and oil money is available to the local government to invest in infrastructure and turnkey projects. However, while the announcement is welcome in that it frames Iraq in a different light against the usual news of violence, we remain sceptical, given the difficulty of financing and stimulating projects of all sizes throughout the country.

More in line with the demand picture in Iraq's residential market, The Harwal Group has signed a contract to build a factory in Basrah to produce the company's new pre-fabricated low-cost housing system. The company has an initial contract for USD170mn to supply houses to go towards meeting the Basrah government's target of 600,000 new homes to be built over the next two years.

Despite government efforts, in September 2013 Iraq's minister for Construction and Housing admitted that only around 5% of the 2.5mn homes needed by 2016 will be built. 130,000 homes are set to be built according to the minister, 30,000 by the government and 100,000 by the housing sector. The fact that the majority of homes are being built by the private sector with international funding is a positive sign for the market, but considering the demand for houses, the poor performance is indicative of the high risk levels.

Mortgage availability is also an issue, with the state-run Real Estate Bank only having an annual budget of USD43mn, which is roughly enough to cover 1,000 homes a year. That said, in September 2014 it was announced two government banks, Rasheed Bank and Rafidain Bank, would increase their capital available for housing loans from USD23mn to USD360mn.

Tourism An Unlikely Investment Destination
Although Pakistan's agricultural output has declined steadily in recent years, it is still the largest source of foreign exchange earnings and employs close to half the total number of workers in the population. The industry continues to face challenges, notably the fragile security situation, the risk of flooding and inadequate power supply. However, we expect the industry to remain a government priority, and the state has taken steps to ease tariffs and taxes on key inputs, and improvements to irrigation systems and to the energy sector will help create much-needed certainty for farmers.

We forecast continued strong growth in the agricultural industry's gross value added, in nominal rupee terms, averaging just over 11% a year. As a percentage of GVA, we forecast it to rise slightly from 25.13% in 2018 to 25.44% by 2022.

Over the long term, we expect the dairy, poultry and wheat industries to benefit the most from increased investment. However, despite the existing network of irrigation systems across the country, significant improvements in infrastructure and better supply chains are necessary in order for the country to reap the full benefits of its fertile soil.

The disputes over sugar stocks, sugar exports and government buybacks affecting the Pakistani sugar sector highlight the harmful fissures within the industry. Unless the bureaucratic barriers are resolved and a workable compromise is set, we foresee more challenges for the industry.

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