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The Saudi Investment Authority is looking to invest US$750 million in an infrastructure fund for development in India. What does this mean for GCC efforts to grow the construction industry beyond the Arabian Peninsula?

August 20, 2012 2:16 by

“Discharged cargos of construction goods are above their 2008 average levels, while Japanese exports of construction services have picked up noticeably, which bodes well for construction activity,” according to a Bank of America Merrill Lynch study. “The credit environment has improved with continued signs of a pick-up in private sector growth. [Saudi Arabian Riyal] liquidity is adequate, interbank rates remain low although they have increased moderately since October due to a back-up in LIBOR and on the back of regional tensions. Banks have continued to draw down their excess reserves in 2012 after a large reversal late 2011. Credit to the private sector was up by 12.1 percent [year-over-year] in February, the highest since April 2009. Nevertheless, credit by specialized funds continues to be made available, and is likely to accelerate in 2012 on the back of the large capital injections into real estate, credit funds or the housing authority in our view.”

Rapid urbanization is what’s behind much of India’s heightened demand for construction services. A recent Dun & Bradstreet analysis stated that respondents to a company survey said they expect domestic demand and rapid urbanization to be the key factors driving construction industry growth this year. “With a score of 0.77 and 0.72 respectively, these two demand drivers have received the highest rankings among the major industry growth drivers,” according to D&B.

But challenges do lie ahead. According to the economic survey, construction firms continue to face the unpredictability of the commodity markets. “The industry expects rising raw material prices to be the most critical challenge,” according to Dun & Bradstreet. “The industry also expects rising fuel [and] transportation costs to be another major challenge facing the industry. Rising market competition and financing of business operations have emerged as the other major anticipated challenges.”

Indeed, investment in infrastructure accounts for nearly 12 percent of India’s gross domestic product. And with GCC firms better suited to deal with the complexities of rising commodity prices, the subcontinent is a natural fit for their expansion. Dubai development giant DAMAC Properties has long invested in India. So have other Emirati firms such as Nakheel and Dubai World, which followed a number of prominent North American private equity and real estate investment companies keen on profiting from India’s infrastructure boom.

So whether it’s that first mile of railway to be built since 1947, or roads, bridges, tunnels, power plants, oil refineries and ports, the promise of the vast and largely untapped Indian marketplace is providing GCC investors with a lucrative investment opportunity for decades to come.

-By Jay Akasie

*First published on Aficionado

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