Infrastructure report

Residential/Non-Residential Building - Outlook And Overview

BMI View: 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.

Latest Updates

• 
  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

2017-2026: 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 2017 and 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

Iraq, not for want of historical and cultural appeal, has not been synonymous with tourism for some time. Yet even decades of violence and instability have failed to completely wipe out investment in the tourism sector - a long-term play. Lebanese company Hariri Construction and Contracting Company (HARCO) was awarded the USD80mn Luluat Al-Amarah (Pearl of Amarah) contract in late 2014 and started site excavations in March. The project in the well-developed Maysan governorate in the south east, on the border with Iran involves construction of a five-star 16-storey hotel with 192 rooms, a mall with 400 shops, a 25-storey office building, a multi-storey car park, cinema, chalets and other facilities. The project is being executed on a 50-year investment basis on 27,500sq m.

Meanwhile, in May 2015 construction was under way on the Ibn Hayyan Hospital complex in Baghdad. The 58,700sq m complex is being developed by Luxembourg-based General Mediterranean Holding (GMH). The development will have 360 beds, clinics, an apartment block and a staff building. GMH also plans to include a college in the complex. Healthcare planning, architectural and engineering services consultancy Mebex Consultants has designed the hospital, while ATK Construction is responsible for construction. The hospital is scheduled to open later in 2015.
Further, in November 2016 Rotana Hotel Management Corporation announced it would open 15 new hotels in the Middle East in 2017, including two in Iraq. The company plans to open five hotels in the UAE, four in Saudi Arabia, two each in Turkey and Iraq and one each in Oman and Iran. The new properties will add 3,756 rooms to take the company's total portfolio to 19,450 rooms in 75 hotels.

Kurdish Promise Dulls

Kurdistan will struggle to recover economically amid low oil prices and political unrest, in the KRG and with its relationship with the Iraqi central government. Nevertheless, besides the hydrocarbons infrastructure sector, the region does hold opportunities for residential and non-residential construction, if not as emphatically as we had once expected.

Dubai based Emaar Properties, in partnership with the construction arm of the Kurdish Faruk Group Holding, reportedly signed on to construct a new tourist development. The USD2bn project near Dukan Lake, Sulaymaniyah Governorate will include hotels, restaurants and residential areas as well as cinemas and casinos, according to Herish Muharam Mohamad, chairman of Kurdistan Regional Government (KRG)'s investment board. The UAE said it remains committed to investing in projects in the Kurdish region, even in the current situation.
Often seen as a stable and investment friendly region of an otherwise turbulent Iraq, the Kurdish region had experienced a boom in construction activity, buoyed by demand driven by the developing oil sector. As such the Kurdish government is currently in talks to overhaul the regulatory environment for residential construction in order to clarify legislation for housing guidelines and licences. In tandem with business demand, the Kurdish region has also seen its tourist numbers grow at astonishing rates, with Turks and Iranians crossing the border to take advantage of new shopping malls in Erbil and tourists from Iraq's south wanting to enjoy the relative calm that the region offers. This demand has attracted the attention of hotel majors Sheraton, Marriot, Hilton and Best Western, who all have new developments underway in the regional capital Erbil.

Oil And Gas Infrastructure Robust

Bottlenecks in infrastructure are limiting both the revenues the Iraqi government can make and the profits of international oil companies. While the major risk to the oil and gas infrastructure sector is the ongoing dispute between Baghdad and Erbil, which means investors may be hesitant, infrastructure is still going to see major inflows to boost Iraq's production of oil and gas. BP alone has committed to investing upwards of USD2.85bn annually to boost its Rumaila oil field from 1.35mn b/d to 2-2.8mn b/d by 2016.

Furthermore, despite ongoing security problems, humanitarian challenges and low oil prices, the Iraqi oil sector has remained resilient. Production over 2016 averaged nearly 4.5mn barrels per day (b/d), almost 600,000b/d higher than the 2015 average of 3.9mn b/d. Exports from the southern region of Basra have been the key driver of production since late 2015. This followed a successful year for the region of Kurdistan, which was a significant growth driver in Iraqi oil output over 2015. The key reason behind growth in 2016 was more consistency and confidence in receiving oil revenues from the government. The Iraqi central government and KRG have put payment obligations to oil and gas companies as a high priority as they aim to maximise oil revenues while prices are weak.
Financing is currently the major obstacle to project progress in the country, with the government budget battered by low oil prices and inflated spending on security. Indeed, we have increased our short-term deficit outlook to reflect this scenario - we have revised our forecasts for Iraq's budget deficit to 8.1% in 2017 and 8.2% in 2018, from 7.8% and 6.5% previously.
However, a return to positive fixed investment growth should begin in 2017, as we foresee the oil price returning to an upward trend, albeit a mild one, and oil companies once again turn investments towards Iraq's hydrocarbons sector. Below we highlight the various projects gaining momentum:

• 
  Iraq's Oil Ministry began soliciting investment for the planned 300,000 bbl/day refinery in the FAO area of Basra in March 2017.
  

• 
  Qaiwan Group in November 2016 selected Mott MacDonald to provide engineering, procurement and construction management services for the Xarajyan oil terminal in Iraqi Kurdistan. The facility will have storage capacity of 140,800 cubic metres and will handle gasoline, diesel, aviation turbine fuel, kerosene, fuel oil and liquefied petroleum gas. The terminal is expected to open in Q218.
  

• 
  In July 2016 Drake & Scull International won a USD61.5mn engineering, procurement and construction (EPC) contract from Zubair Project consortium owner ENI Iraq for the building of a water injection network installation project at the Zubair oil field in Basra.
  
• 
  Gazprom Neft Badra commissioned its tenth production well at Iraq's Badra field in July 2016, bringing daily production at the field to 67,000 barrels. This comes after three wells were commissioned in H116,
  

while construction of oil and gas infrastructure has been ongoing at the field, with work towards commissioning the first line of an associated petroleum gas treatment facility now 60% complete.

In an effort to re-energise delayed projects and diversify trade routes, the government is courting foreign investment into the energy sector. Development of the Halfaya field is being led by PetroChina, which is planning to double output from the existing 200,000b/d to nearer 400,000b/d in 2018 (see more below). Alongside this the potential second phase development of Shell's Majnoon field could also begin development in 2017 if given final investment decision. ExxonMobil and Petrochina are also reportedly being courted by the oil ministry to lead an expansion of the Antwai and Nahr Umar oilfields.
The country has approached PetroChina and Exxonmobil for a sizeable investment to drive a large-scale integrated south project, which consists of building oil pipelines, storage facilities and a seawater supply project to inject water from the Gulf to maintain pressure and enhance oil recovery. The south of Iraq has been relatively unaffected by the violence to the north and west of the country, but sizeable investment is needed to boost oil production and secure essential export revenues. Investment would also go towards raising production at larger oil projects in Zubair, Majnoon and West Qurna.
China National Petroleum Corporation (CNPC), parent company of PetroChina, has begun work on the second phase of its Halfaya development, the company's landmark oil project in the south east Missan province. The second phase will see the construction of a crude oil pipeline stretching 272km from the Missan province to the port of Faw. In September 2014, the Missan Oil Company announced an agreement with CNPC to reduce the final production target for the Halfaya oilfield from 535,000 b/d to 400000 b/d, extending production from 20 years to 30 years.
In December 2016, Petrofac won a USD75mn contract from Iraq's state-run South Oil Company (SOC) for a crude oil export expansion project. The one-year contract, which comes with a one-year extension option, was awarded after a competitive tender. Petrofac will support the expansion of a crude oil export facility 60km off the Al-Faw Peninsula in southern Iraq. The UK firm's key role is to provide operations and maintenance services for the export facilities, comprising the central metering and maintenance platform and four single point moorings, and the loading of the tankers for onward transportation.

Industrial Projects Increasing

FLSmidth in November 2016 signed an engineering, procurement and construction contract worth more than USD200mn with Iraq Cement to establish a cement production line in the Al Muthanna region. The

facility is expected to have capacity to produce 6,000 tonnes of cement per day. The contract includes the supply of equipment, construction, together with commissioning and training.

In addition to building up cement capacity domestically, the development of refined industrial metals is also expanding. In January 2013, Iraq's National Investment Commission approved a plan from India's Welspun to build iron welded pipe manufacturing factory in Basra. The project is estimated to cost USD450mn.

Also, the Iraqi government has approved plans to build a USD472mn industrial city in Anbar governorate. While the region is currently experiencing major unrest, should the project ever find the environment suitable, it will be dedicated to small and medium enterprises (SMEs), and cover three square kilometres, with extensive facilities including a housing complex, schools and a five-star hotel. The project is being designed by Malaysian consultants and USD52mn has already been allocated, with the remaining funds still be sought. The Anbar province is the scene of escalating violence in the struggle against IS, however, and as projects such as this are unlikely to gain any traction in the short term.

It has also been reported Karbala governorate is planning an industrial city to attract local and foreign capital into its manufacturing sector. The province allegedly signed an agreement with the Ministry of Industry to create the infrastructure. Karbala's government is to allocate the land for the project, while the ministry will install the infrastructure including roads, sewage, water and electricity.

What, on the face, of it looks like a positive development in the country's downstream oil sector, a USD6.5bn deal for the construction and operation of an oil refinery in Iraq's Missan province with capacity of 150,000 barrels a day, is expected to begin operating in 2019. It broke ground in February 2016. A deal for USD6bn was initially signed in 2013 between the Iraqi oil ministry and Swiss-registered firm

Satarem, before Chinese company Wahan later came on board. A new company has been set up to manage the project - Missan International Refinery Company - and represents Satarem's 15% and Wahan's 85% stakes. The project has reportedly received backing from the China Development Bank and the Import- Export Bank of China.

However, reports in the Iraqi media have, since the initial deal in 2013, questioned the sense and validity of a deal the price of which appears over-inflated, involving companies with negligible experience in the oil and gas industry, and with little known or easily discoverable backgrounds. So while on the surface it is good news for Iraq, it may end up highlighting the ongoing challenges to the country's operating and investment environments.

Table: Major Projects - Residential/Non-Residential Construction And Social Infrastructure




Project Name

Sector Value (USDmn)

Size Unit Companies Time-

frame Start

Time- frame End

Status Status Notes



Bismayah New City Project (BNCP),

Baghdad

Residential Construction

8000 100000 units Government of

Iraq[Sponsor]

{Iraq}, Hyundai Elevator[Equip ment]{South Korea}, Hanwha Engineering and Construction Corp[Construct ion]{South Korea}

2013 2021 Under

construction

March 2016 - Construction underway with slow progress due to power shortages; April 2015 - USD2.12bn

awarded to build the social infrastructure for the project; October 2014

• 
  Hanwa received the fourth deposit of USD387.5
  

million for the construction

Karbala Oil	Industrial	6040	140000	b/d	Nexans[Equip	2014	2019	Under	June 2016 -
Refinery,	Construction				ment]{France},			construction	Work halted
Karbala					Technip[Consu				on the
					ltant/Project				project;
					Management]				Nexans
					{France}, State				awarded
					Company for				contract for
					Oil				providing
					Projects[Opera				low-voltage
					tor]{Iraq}, SK				cable
					Engineering &				system;
					Construction				February
					Co.				2014-
					Ltd[Constructi				Construction
					on](25){South				started
					Korea}, GS
					Engineering &
					Construction
					Corporation[Co
					nstruction]
					(37.5){South
					Korea},
					Hyundai
					Engineering &
					Construction[C
					onstruction]
					(37.5){South
					Korea}

Madinat Al	Residential	4500	30000	units	Bloom	At planning	November
Mustaqbal/	Construction				Properties[Constru	stage	2015 -
City of the					ction]{United Arab		Project is on
Future					Emirates},		hold;

Project Name Residential	Sector	Value (USDmn)	Size	Unit	Companies Time- frame Start Government of	Time- End	Status	Status Notes September
Project,					Iraq[Sponsor]{Iraq},			2013 -
Baghdad					Al Handal			Project will
					International			be
					Group[Operator]			completed by
					{United Arab			2020 and to
					Emirates}			be built in
								phases;
								Project will
								include
								30,000
								residential
								units, 5
								shopping
								centres, 18
								schools and
								12
								kindergartens
								, many
								commercial
								buildings, a
								hospital,
								police
								station, a
								mosque and
								also a health
								centre;
								Project cost
								IQD 16.6bn
Arbat	Commercial	3000	12140600	square	Sulaymaniyah		At planning	September
Industrial	Construction			metres	Investment		stage	2013 -
Town					Commission[Spons			Governor of
Project,					or]{Iraq}			Sulaimaniya
Sulaimaniya								plans to
								begin the
								construction
								soon;
								January 2012
								- Plans for
								the project
								announced;
								Project area -
								3000 acres
Downtown	Commercial	3000	541000	square	Emaar (UAE) 2013	2017	Under	June 2016 -
Erbil,	Construction			metres	[Operator]		construction	Emaar
Kurdistan					{United Arab			declined to
					Emirates}			comment on
								the status of
								the project;
								May 2014 -
								Construction
								underway;
								October 2013
								-
								Construction
								is expected
								to last for five
								years over

Major Projects - Residential/Non-Residential Construction And Social Infrastructure - Continued



frame



Major Projects - Residential/Non-Residential Construction And Social Infrastructure - Continued



Project Name

Sector Value (USDmn)

Size Unit Companies Time-

frame Start

Time- frame End

Status Status Notes

three phases; Project will include include residential apartments, hotels and a shopping centre

Where blank = not available. Source: BMI Key Projects Database