The recently announced Federal, Dubai and Sharjah budgets show a large increase in expenditure from 2017 (Federal + 5.4% to AED 51.4 Billion, Dubai + 19.5% to AED 56.6 Billion and Sharjah + 6% to AED 22.1 Billion) with significant increases in project funding. The three budgets commit $6.9 Billion to infrastructure and capital projects across the Emirates. The biggest increase is in Dubai which in preparation for Expo 2020 has upped its infrastructure spend by 46.5% to form 21% of total expenditure for 2018. This is positive news for the construction industry.
Although less exposed to oil price fluctuations than most of its neighbours, the price stabilisation and recent increases are welcome events for UAE, enabling greater certainty over budget break even and relative certainty that the Emirates won’t run a budget deficit. Furthermore, given the requirements of oil and gas investments after three years of underinvestment, it gives greater surety for the investment decisions.
Q4, which historically has been the busiest quarter of the year for contracting awards, turned out to be relatively inline with expectations, but not as strong as some previous years. For 2017 we recorded just under $36 Billion of new awards versus an expected $45 Billion. The primary reasons for this have revolved around a lack of liquidity at the levels the market requires as well as a certain level of economic and geopolitical uncertainty. Moving into 2018 as the UAE is traditionally a regional ‘flight to safety’ for capital, this could well be of benefit to the real estate and infrastructure development businesses. The outlook for 2018 is generally much brighter as we see growth in many areas from the requirement to invest in capital projects in the oil and gas sector, to the previously mentioned increases in government expenditure and some key note private sector clients known to be greatly increasing their portfolios in the new year.
With known budgets at client entities and government spending commitments aggregating at close to c.$30 Billion for 2018 and further growth expected in oil and gas as well as other developments coming to market, the forecast for awards is expected to be robust at c.$42 Billion. Buildings and associated infrastructure are expected to be a significant contributor of upwards with 40% of the net awards, including significant developments in mid range and affordable housing as well as continuation of funding for the National housing programme. Certain schemes are expected to move ahead in the new year that have experienced delays, be it funding, approval or other industry related reasons. With expected strong economic growth, regional banks - traditionally one of the main sources of capital, should be able to be more active in the market. Unlike many previous years, there has been a relative lack of awards in mega projects across the country with the stand out projects being the $3.9 Billion Dubai Solar Energy contract and Nakheel’s Deira Islands Mall. No one developer dominates the list of contracting awards subsequently. There has been a significant trend towards ‘plot filling’ - in essence, completing vacant areas in established masterplan developments.
Tendering activity is starting to pick up in the UAE although any delays in awarding works remain a concern. Moving into mid 2018 we expect to see a meaningful return of the oil and gas sector in country as years of constrained investment mean upgrades are required by oil companies and their partners.This can be supported by the historical procurement of major schemes by oil majors at the bottom of the market (as in 2008/9 when major schemes were awarded). Given the drop in awards, to survive the backlog drop, the industry needs to address its productivity and utilisation as there is little room for movement in the current competitive landscape with low margins. We expect 2018 to be a significant year in moving through the innovation cycle for construction as the industry has to adapt and adopt leaner processes and procedures with a focus on utilising analytics and new systems to enhance the performance of delivery.
With lower than expected awards in 2017, inflation in the industry moved little. When compared to general inflation the actual effect is one of small contraction. This also plays into a slight contraction in the percentage the industry contributes to GDP. With backlogs for most of the industry shrinking or under pressure - with nearly $15 Billion leaving work to be complete this year, a rapid period of awards is required to move the industry from a contracting state to an even keel or expansionary period. The signs from central and Emirates level government are encouraging although for the private sector, further funding is broadly required - although there are several, bankable organisations. With further fiscal uncertainty with Brexit it is expected that European ECAs will become a greater contributor to deal making in 2018 and 2019.
We expect inflation to be a little lower than previously forecast this year as the industry backlog has contracted greater than expected. However, commodity prices are still expected to be firm, so these costs will have to pass through.