Construction Intelligence Report: United Arab Emirates Update

David Clifton
The United Arab Emirates (UAE) maintains an interest, but is largely unaffected by the recent Brexit vote.

As circa 30 percent of gross domestic product (GDP) is oil based, there will be short term fiscal pain as capital adopts a ‘flight to safety’ - gold, US and German bonds etc. Oil is lower at present and in the short term likely to remain that way, although production has a much greater effect on price points, especially as markets overreact. The drive for Expo 2020 has yet to crystallise at the levels expected and numerous schemes are awaiting award, both in the public and private sector.

Abu Dhabi requires less in terms of capital support, but could yet yield benefits from developing and implementing its own bespoke strategy.

H2 is seen as the likely accelerator in development as the time for delivery starts to meet with the critical path for construction. Potential concerns relate to the Arab Emirati Dirham (AED) being pegged to the dollar, as the safety of the dollar is likely to drive a level of 'skewing' in the foreign exchange markets. This will make international products and services more affordable locally as the peg increases buying power.

International financing has markedly more liquidity currently than the regional financial institutions and the ratification of the Dubai public–private partnership (PPP) law and subsequent Union PPP roll out by the Road Transport Authority (RTA) indicates that the UAE has the basis to engage the markets effectively. Abu Dhabi requires less in terms of capital support, but could yet yield benefits from developing and implementing its own bespoke strategy.

The Economist GDP (US$ Billion)

Emaar's announcements around Dubai Creek Harbour are significant for late H2 and represent a potential skew in the market if launched concurrently as this will drive market sentiment and inflation. However, given Abu Dhabi's halt in awards, the market is still below levels expected to maintain the industry. A five percent drop in awards in the UAE is still forecast for 2016 even with Dubai's expected awards.

In the UAE as well as across the Gulf Cooperation Council (GCC) there are growing concerns around some of the mega infrastructure schemes such as the pan GCC rail network as budgets are squeezed and expenditure scrutinised. At the very least, these schemes are likely to see some significant delays or remodelling.

2015/16 Average Construction Materials Prices

Commodity prices are currently experiencing significant flux and are diametrically opposed to each other in some instances. There are inherent risks associated with this in the mid term. These can be balanced on larger developments by category buying and spot buying on the global markets where capacity is still available. Peaks and troughs are not being addressed at present in the UAE and there is a forecast feast to go with the recent famine. This is not yet certain, but does little to stabilise the development industry. As we see the application of the PPP law in Dubai, potential government partners will become a key driver to construction funding diversification.

As forecast, in Q1, construction inflation went negative by 0.48 percent. Once Q2 data is collated, we see this as negative too. There will be a pick up in H2 due to an increase in awards in the mixed use and transportation sectors, leading to a flat year. As Expo 2020 nears in 2017 and 18, inflation will pick up, mostly driven by rising labour cost, rising demand for material and the introduction of a five percent value-added tax (VAT) rate in the UAE in 2018.

General Inflation