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Despite Dubai Recovery, Some Firms Look Beyond Burj

Dubai's recovery is happening, at least that's what stakeholders and data points are showing. And yet, for some an overreliance on Dubai before the crisis means that if one lesson has been learned, it's that more geographical diversity is key.

Photo Source: AP

The Prime Global Rental Index, published by Knight Frank earlier this month, showed that rents in prime locations in Dubai rose by more than three percent during the first half of the year bolstered by steady economic growth.

The International Institute of Finance (IIF) expects Dubai to lead economic expansion in the United Arab Emirates (UAE) with gross domestic product (GDP) growth of 4.2 percent in 2013.

Among the largest construction companies in the Middle East and North Africa (MENA) is Arabtec Construction, a wholly-owned subsidiary of Dubai-listed Arabtec Holding. It is also a firm that had considerable exposure to Dubai, having been involved in the creation of some of its central landmarks, including the world's largest tower, the Burj Khalifa.

"When the global crisis and the global turmoil hit everywhere, Dubai was one of the natural places to suffer simply because of the tremendous growth that was taking place here," Riad Kamal, founder and chairman of Arabtec Construction, told CNBC's "Access: Middle East" in an exclusive interview.

The local equity market, has gained some 20 percent so far this year, making it the second-best performer in the region after Egypt's EGX30 benchmark. Arabtec Holding's stock has more than doubled over the course of one year, compared to gains in excess of 50 percent for the sector.

Kamal has stuck to his forecast that Dubai's property glut will be absorbed in the next two years. And yet almost three years after the property crash and Dubai World's near-default sent ripples through global markets, Arabtec is still struggling with receivables.

"Arabtec and its exposure to Dubai was quite large when the bust actually happened," Saleem Khokhar, head of equities at the National Bank of Abu Dhabi (NBAD), told CNBC.

"The repayments of those receivable is a significant issue for them. What we're seeing in the market at the moment is actually positive, and I do expect the trend will continue to improve," he added.

While some are still betting primarily on Dubai, Arabtec is shifting its focus slightly. Abu Dhabi's sovereign wealth fund Aabar bought a 20.76 percent equity stake in the company in May. That could mean more contracts for Arabtec from the oil rich emirate of Abu Dhabi.

Analysts have described the change in strategy as "the right move" for Arabtec; securing a one billion dollar role in the construction of the new midfield terminal building at Abu Dhabi International Airport is cited as just the beginning.

The prospects for the remainder of the region may not be much rosier however, as the industry as a whole faces lower margins in light of tighter competition.

"Arabtec is used to an average net income margin of 10-12 percent in the good years. Since 2009, it has dropped to between 4-6 percent," Samer Darwiche, Associate at Gulfmena Investment, told CNBC.

But that does not worry Riad Kamal, who is confident of a return to profitability in the second half of 2012 and achieving 15 percent growth per annum over the next three years.

"Everybody is trying to enter the [Gulf Cooperation Council] market and therefore the competition is more than the supply of projects. We are having to content ourselves with lesser margins at the moment, but there is still plenty of work and reasonable margins to be had," he added.

Apart from Abu Dhabi, that regional push encompasses Qatar, Saudi Arabia and even Morocco. The exceptions, rather than the rule, are projects such as the construction of Europe's largest office building in St. Petersburg.

"We have been competing with our global peers in the region and we have no intention…to go and compete with them in Germany or in U.K. That will be a disaster for us because we don't know enough for these markets. Certainly it's not going to happen in my generation".

This week on "Access: Middle East": An exclusive interview with Riad Kamal, the chairman and founder of one of the region's largest construction companies, Arabtec. Tune in to see what he has to say about Dubai in the early days, building the world's tallest tower, and mistakes he's made over the years.

Yousef Gamal El-Din is CNBC's Middle East Correspondent and contributes to the channel's flagship shows, as well as analysis for CNBC.com.

Stay in touch with him on Twitter at http://www.twitter.com/youseftv @youseftv

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