This has been conﬁrmed by Abu Dhabi’s sovereign credit rating being reafﬁrmed as AA. That’s not to say there aren’t challenges. The economy is still growing, but there is uncertainty and in the construction industry, growth isn’t overly evident in H1.
With the backlog of work for the UAE construction market having shrunk by around $17Bn in 2016, we’ve seen a decrease in market size. The quantum and value of projects planned or being delivered is broadly ﬂat, although major announcements such as Marsa Al Arab and Emirates Towers Business Park are keeping the pipeline more promising.
H1 saw an improvement in awards across the Emirates compared to H1 2016. We’ve seen c.$22Bn of awards to date, which is in line with expectations of a full year of $45Bn, if not slightly ahead. 2016 yielded a full year of $43Bn and was the most difﬁcult year since 2012. Given that the Emirates, similar to other GCC states, has historically back ended awards inQ3 and Q4 there would appear to be some cause for optimism, especially when combined with the time is has taken for liquidity to move into the broader economy. The drag on certain parts of the market is the downward trend in real estate prices, with between 4-10% decline year on year depending on asset type. However, with the cyclical nature of these prices, certain parts of the market will look to progress schemes forward based on positive market expectations.
When reviewing this year’s awards, it is evident that mega projects are a rarity, making up a small percentage of the values compared to previous years. The stand out schemes in real estate that moved to site are Nakheel’s Deira Mall ($1.14Bn) and ICD’s One Zabeel (around $1Bn.) The reduction in mega schemes can be broadly explained by a level of high selectivity by developers, constrained funding and a bias towards areas where the masterplan is complete and therefore infrastructure burden is minimised (e.g Downtown, Business Bay). As funding issues start to ease, we expect new masterplans will move through to construction.
Such is the diversiﬁed nature of development in UAE that the number one developer isn’t dominating the market – Nakheel are the most active by value and one of the few to award a mega project. For the rest of 2017 and early 2018, the industry is looking at Dubai Holdings and its plans. If their schemes move swiftly, signiﬁcant growth could return in the short term.
With major infrastructure schemes such as Abu Dhabi Metro and Al Maktoum Airport still in the pipeline, different funding models are being examined carefully. We’ve seen Export Credit Agency’s engage with Al Maktoum already - UKEF have a $2Bn offer on the table. However, these mechanisms do take time. With global liquidity in growth mode, it is reasonable to expect further interest in these schemes.
Tender price pressure is still being exerted in the UAE even though the market for awards has improved compared to 2016. We’ve already seen this year that major international players have withdrawn from the market and others have been caught out ﬁnancially. There is continued evidence of unsustainable low tender pricing, which will no doubt require some future management through the supply chain.
The Ministry of Finance has clariﬁed the VAT exemptions and as expected the majority of goods and services in construction are included in the non exempt items. Furthermore, ﬂagged previously, residential real estate is conﬁrmed as exempt. This may yet pose a point of difﬁculty for real estate developers as the point at which the VAT ‘chain’ stops is with them and the 5% levy on construction cannot be passed on. Given the downward pressure on sales prices across the Emirates, this could cause certain schemes feasibility issues which may require replanning. On a positive note, with the expected revenue of 12Bn AED in 2018 from VAT, the federal government will have further ﬂexibility to invest in social infrastructure - such as schools, hospitals and roads – which should act as a boost to the market.