We maintain our forecast for 2013 construction industry real growth of 4.8% and see upside risks to our forecasts for 2013 and 2014, stemming from the buoyant activity we are witnessing in Abu Dhabi and Dubai. Significant public spending, a growing tourism sector, increased direct foreign investment and an improved business environment are all driving activity in the construction sector.
However, we are now seeing a more moderated scale of future projects, in line with a more realistic demand picture. We believe this outlook will be supported by ongoing or re-started projects, rather than a stream of new construction contracts.
Factors driving construction industry growth:
- The commencement of construction of the long-delayed Louvre Abu Dhabi and the EPC tender launched in March 2013 for the Zayed National Museum in Abu Dhabi indicate that stalled flagship projects are once again moving through the construction pipeline, reflecting the resumption of activity throughout the sector.
- The UAE is spending US$58bn on roads and bridges projects, the cost taken up by projects currently under way or in the planning phase. The significant figure - which is more than any other Gulf Cooperation Country (GCC) country - accounts for nearly half of the regional spend.
- The second phase of the US$11bn Etihad Railway Network - also part of the US$100bn GCC Railway Network - has entered the tendering phase. Construction is scheduled to start early 2013 and will provide a significant boost to the construction industry.
- Progress is being made on flagship multibillion dollar projects, such as the expansion of Dubai and Abu Dhabi international airports. These projects sustain industry activity, though they are also seeing delays and downsizings, such as those experienced at the Al Maktoom International Airport (Dubai).
- We continue to see increasing opportunities in the hospitality and tourism sectors. Tourism and tourismrelated projects provided a welcome source of value for the construction industry and wider economy in 2011. We expect this to continue through 2013 and beyond as the UAE, most notably Dubai and Abu Dhabi, position themselves as global business and tourism hubs. Major projects, such as the Louvre Abu Dhabi, the Bluewaters Island project in Dubai and the Meydan Sobha City development in Dubai reflect attention to the area.
- Though the nuclear power project in Abu Dhabi has been plagued by project delays and cost inflation - the cost estimate has risen by a staggering US$10bn since its initial announcement, taking the total to US $30bn - we have seen significant steps forward during the second half of 2012. US$3bn worth of contracts to provide, convert and enrich uranium has been awarded, and a frame-work contract has been signed with Canada, enabling the latter to export its technology.
- The UAE continues to make headways with its push for renewable energy. The first phase of the Shams 1, 100-megawatt solar plant was expected to come online by the end of 2012.
- The UAE was the only country within the GCC to successfully raise its position on the World Bank's Ease of Doing Business Report 2013. A sentiment that was reinforced by data confirming that the UAE was one of the biggest recipients of direct foreign investments during 2011, lending credence to the more positive attitude (since the Dubai property crash in 2009).
- Asian banks are playing a larger role within the GCC, especially in the hydrocarbons and petrochemicals sectors. The latter is also encouraging both trade as well as export of technology. The most bullish figures estimates that UAE and China trade could treble over the next few years, reaching a staggering US $100bn.
Downside risks to outlook:
- While certain large-scale projects are still ongoing, the pipeline for new mega-projects is thin, with the Hassyan independent power project (IPP) - though facing undetermined delays, following a halted bidding process in April 2012 - being the last of the big-ticket projects on the agenda.
- We are mindful of a 'funding cliff' that is coming in 2014 for the UAE, with US$48.7bn worth of Abu Dhabi and Dubai sovereign and quasi-sovereign debt maturing. Due to the legacy of the 2009 Dubai debt crisis, we believe that any jitters in 2014 could have a negative effect on market confidence and as a result could prompt a renewed slowdown in activity, especially amongst the large developers. (see '2014 Funding Cliff Looms Large', November 13 2012) .
- The UAE has certainly benefited from the revolutions sweeping the Arab world, as tourist numbers have risen and businesses seeking a more stable political situation have increased. Oil-fuelled-cash at a time of global financial turbulence has largely shielded the country from much distress. However, previously overdone and oversized investments have created their own problems - as seen from the repercussions following the crash in 2009. Whilst the government has the financial muscle to buy its way out of most trouble, increased social spending is good for the short run, but not great for increasing skills and productivity in a country seeking to diversify and transform its oil-dependent economy.