Saudi Arabia had led the way, but Abu Dhabi has now tapped the markets with a $10Bn offering. Given their credit worthiness (AA), we've seen this oversubscribed by three times. Bond issuances have the potential to be partially utilised for government construction projects which may bode well for 2018 and beyond. It is expected that this won't be the last engagement with the bond market for Abu Dhabi.
Recent market launches showcased the Northern Emirates with schemes such as KBW's Arada, the Sharjah Airport upgrade and the continued investment in needed infrastructure upgrades. These may see a little more balance added to the work mix other than the usual focus on Dubai and Abu Dhabi, although these schemes will still require significant, and possibly alternative funding.
With Q3 falling during the quiet summer months, award activity has been steady but behind the annual forecast. UAE has achieved nearly $26Bn of awards in the year to date but Q4 will have to see significant agreements signed now to achieve the full year forecasts of $45Bn. Q4 historically is the busiest time for awards, primarily driven by government or semi government entities whose financial year runs from January to December. There are some large schemes out to tender in the market at present. If a significant amount of these are not converted this year, 2017 could see a contraction from 2016 (itself a significant fall from 2015) and see the backlog deplete even further than the $17Bn lost last year.
While there has been some relief in funding issues regionally and in country, we are seeing liquidity attracted primarily to sovereign debt and corporate high grade debt issuances or looking towards the expected regional IPO's. This is despite a global liquidity glut from years of quantitative easing. The impact is felt as traditional project financing and lower grade debt issuances are not attracting major investors to the market, thus throttling back the ability to develop schemes. From a regional standpoint this is evidenced by international banks wishing to enter the market at a senior corporate level but are looking to exit the traditional roles in their regional partner banks.
As opposed to other GCC countries, the number one UAE developer in the year to date doesn't dominate the market, demonstrating the diversified nature of development in the UAE. Nakheel has been 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.
Tendering activity is starting to pick up in the UAE although delays in awarding works remain a concern. Moving into mid 2018 there is expectation of a meaningful return of the oil and gas sector, as years of constrained investment mean upgrades are required by oil companies and their partners. Historically the sector has seen procurement of major schemes by oil majors at the bottom of the market (as in 2008/9 when major schemes were awarded).
Even though tendering activity has been picking up, the push to cut costs in schemes has intensified. Underlying factors include the slump in current retail, commercial and residential sales and rental prices as well constrained access to funding. There is still a lack of affordable residential units and while the market has commenced addressing this, using traditional methods and squeezing margins just isn't sustainable. New methods and technologies are required to be implemented to improve productivity and efficiency to keep costs down.
Although industry inflation has been broadly low relative to international increases, headwinds are likely to be felt through the supply chain as we have seen lower production of materials globally and price rises are being seen at significant levels - for example the near 7% factory gate increase in rebar. The primary reason behind this flux has been China's decision to reign in production at factories as it looks to diversify its economy. The upward trend is likely to continue should this policy endure post the party conference. This will place pressure on price increases in the market which is already suffering from historically very low margins and a changing landscape where major international players are withdrawing or tapering their involvement in the industry.