Construction Intelligence Report: UAE Update

David Clifton
As Organization of the Petroleum Exporting Countries (OPEC) looks to have agreed an oil production cut and with Kingdom of Saudi Arabia (KSA) bearing the brunt of the scaling back, the UAE's balance sheet should show more robustness in 2017.

Oil rising above $55 per barrel will mean achieving budget break even at a federal level should be more achievable, providing OPEC holds to the promised deal (not something that has occurred historically, so this does present a risk to finances).

Government and government related sectors are showing signs of growth. However with the continued softening of real estate prices, certain private sector schemes, especially mixed use, will undergo reprioritisation and revaluation as liquidity continues to tighten.

For 2017, the UAE government is broadly keeping its projects investment at 2016 levels, with $900m allocated to federal projects within the budget and $325m for government housing. Dubai's budget at $12.9Bn (and a 0.6% deficit), has an expected 27% increase in infrastructure spending to support the commitment from government for Expo 2020 works. However, Abu Dhabi is likely to slow schemes again for 2017.

The global economy is still slow on growth and not forecast to pick up until 2018. 2017 will therefore present challenges for the construction industry as the market is still significantly below 2014 and 2015 levels. However, with a forecast return to growth next year, the industry needs to position itself for the regional recovery. We expect growth to show signs of picking up as alternative financing – such us utilising Dubai's new public private partnerships (PPP) law - looks to be effectively utilised in the market.

Tendering activity picked up in the later part of 2016, although with some delays to some larger portfolios. This will mean Q1 2017 will be slightly busier than previously expected. Q1 2017 will also see a reasonable quantum of other awards as Expo 2020 related schemes and those with resolved liquidity issues go to site. The previously forecast 5% increase in awards for 2017 looks realistic in the current market for contracting.

Q4 2016 confirmed what we, and most in the industry had forecast for the GCC rail network. The scheme's completion is now delayed until 2021 - and this could easily be pushed back much further as governments examine aspirations vs requirements. Other schemes are also expected to be delayed or cancelled.

2017 will see continued strength in contracting awards in Dubai as the critical path to Expo 2020 starts to be met for numerous schemes committed to completion prior to the event. Sharjah is also emerging with the Emirate approving its largest ever budget (22bn AED) with infrastructure development at its heart.

2016 construction inflation was broadly flat with certain schemes increasing and others being able to be procured at a discount. Due to certain material prices rising in early 2017 but with labour costs still under pressure, underlying inflation is expected to be flat. However, the Ministry of Finance has confirmed VAT implementation from 01/01/2018 and thus we expect pricing of this to be partially priced in by the industry. 2018 will see the remaining VAT implications priced and as the market for awards recovers, a ‘normalisation’ of inflation will occur.