With Expo 2020 on the horizon for Dubai, the Emirate is expected to outperform Abu Dhabi for construction awards in 2016 with a forecast total of $35 billion for the United Arab Emirates (UAE), with Dubai expected to award $22 billion and Abu Dhabi $8 billion and the Northern Emirates totalling $5 billion. There still remains questions around project financing for Dubai in the mid-term.
GDP is now expected to grow by 5.5% by the year end, having contracted 5% in 2015 due to the oil price colapse. Government expenditure is to remain stable, although cut backs in developments will be felt in the construction industry.
The UAE Federal Budget in 2016 is a 1.2% reduction from 2015 - 49.1 billion AED to 48.5 billion AED, a claimed zero defecit. We see a 10% deficit as most likely. Dubai has announced it's non federal budget for 2016 is 46.1 billion AED with a 3.4 billion surplus having increased 12% from 2015.
Projects in the UAE rely on regional instituational financing more than other markets in the Gulf Cooperation Council (GCC). With GCC governments withdrawing capital to cover budget deficits and deposit growth slowing and slowing / stopping of quantitive easing in the West, bank liqudity is tightening and the cost of borrowing is expected to rise. Combined with softening real estate prices, the viability of some mixed use schemes will become unfeasable.
There have been concerns over Al Maktoum Airport. However, with the rapid continued growth of Emirates, the demand and business case is strong. At $32 billion development value it, along with World Central, will almost singularly dominate development in Dubai. With alternative finance in place, such $2 billion UK export credit, progress could be swift, although a completion date of 2025 seems most feasable.
Abu Dhabi over the last two years has been re-evaluatiing its programmes. Outside of current oil and gas projects, there has been a stifling of awards in 2014 and 2015 which contributed to the 30% drop in UAE awards in 2014 and 5% drop from 2014 to 2015. A further 5% drop is forecast for 2016.
With consumer spending holding in part due to a strong disposable income per head and the UAE holding firm as a tourism destination, there are still opportunties for investment and development. These are primarily focused on mid-range hospitality and localised retail centres.
With disposable income forecast for 2016 of $52,500 per head, we expect consumer spending to stay strong.
With a net 37.5% fall in awards from 2014-2016, the next 12-24 months will be challenging for the construction and development industry with the mid-term horizon looking more promising. This peak and trough needs to be addressed with continued investment in infrastructure to maintain the industry in the UAE.
We expect construction inflation to go negative in H1 of 2016, picking up again 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 2018, inflation will pick up, mostly driven by rising labour cost, rising demand for material and the introduction of a 5% VAT rate in the Emirates in 2018.