This is underpinning federal level surety in the budget forecasts. With significant local and overseas reserves as well as prudent budget allocations, the UAE's fiscal position remains positive.
Overseas real estate investment was down 41% from 2015 to 2016 which has meant sale prices have been under sustained pressure. This is partly due to the strong dollar (that the Dirham is pegged to) which has led to numerous schemes being slowed. 2017 is beginning to see a small increase in investments which will start to drive growth, especially when combined with new funding streams coming to market.
The start of 2017 (Q1) has been poor in terms of contracting awards in the UAE and the wider GCC, with some of the lowest volumes on record. However, the pipeline and sentiment in general is more positive. With Dubai committed to 11Bn AED of awards for the Expo 2020 site and the private sector likely to take a positive view on this, Q2 should see improvements. The danger of delays to contract awards is compounded by the approach of Ramadan and the summer months of low activity. This could see our $45Bn forecast of awards for the year compressed into Q3+Q4, constraining construction capacity and possibly delaying some schemes.
With the commencement of Brexit, we have already seen the visits of senior ministers to the GCC from the UK seeking new trading opportunities. We expect to see the availability and promotion of Export Credit Agency funding, certainly from the UK, but also from some of the larger EU member states as they look to diversify their economy's exposure and promote wider Gulf engagement. This is especially true of the UK. Subsequently, numerous government and private sector developers should see funding options when combined to overall increasing liquidity.
Although Q1 hasn't seen the quantum of tenders that the end of 2016 saw, we expect awards to increase in the near future. The industry has already resized and may have to undergo further scaling if these awards were to be delayed. This is not expected to be the case with recent government announcements and commitments. A significant amount of 'smaller' and mid-sized schemes will move ahead this year to meet our $45Bn award forecast as regional appetite for mega infrastructure struggle to gain traction in Government budgets, meaning that 2018/19 will be a more likely roll out date.
Whilst tender prices have been under pressure due to a lack of work and falling backlogs, inflation is building in the system. Looking at iron ore, we’ve seen an increase from $47 per tonne in June 2016 to $80 today. This will take 3-6 months to feed into the supply chain, but certain materials will feel price increases accordingly. A further potential impact is China's declaration that it is looking to reign in industrial production to move its economy towards becoming more services-driven. Unless other developing nations can pick up the supply side, further pressure could be added to inflation for product and materials consumed in the UAE construction market.
As we start to see more details around the implementation of VAT, organisations will start to commence the roll out of the required staff, training, processes and systems required to invoice, collect and pay the tax. There is concern over cashflow issues once VAT is implemented due to expenditure in the industry normally preceding revenue, especially when combined with the fact that the VAT payments and refunds won't necessarily match with client and supplier payment terms. This will require significant mitigation planning. Notwithstanding the above, our construction inflation forecasts remain unchanged from the previous quarter.
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