We maintain our forecast for 2013 construction industry real growth of 4.8%. This view is premised upon increasingly buoyant activity we are witnessing in Dubai in particular; and the expectation that Abu Dhabi will follow suit. This is despite a large revision in historical data by the UAE authorities last quarter. 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 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:
- 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 throughout 2013 and beyond as the UAE, most notably Dubai and Abu Dhabi, positions itself as a global business and tourism. Major projects, such as the Louvre Abu Dhabi, Guggenheim museum, the Bluewaters Island project in Dubai and the Meydan Sobha City development in Dubai, reflect renewed confidence in large-scale projects.
- Large scale mass-transit projects are underway across the UAE, with the first sections of the Abu Dhabi metro and light-rail network awaiting to be awarded and the extension of Dubai's metro expected to enter construction in 2014. 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. The first phase is expected by the end of 2013
- Though the nuclear power project in Abu Dhabi has been plagued by project delays and cost inflation, the second reactor is now under construction and plans to start on the last two are under way.
- The UAE continues to make headway with its push for renewable energy. The first phase of the Shams 1, 100-megawatt solar plant was inaugurated in March. However, showing the importance of fuel price dynamics, in August, state-owned Dubai Electricity and Water Authority (DEWA) launched a tender for the construction of a new 1,200MW coal-fired power plant. What is particularly notable is it could potentially be the biggest clean coal-fired power plant in the Gulf when it is completed in 2021. With plans in place to deploy carbon capture and storage technology, which has not been developed in other regions in light of low coal prices, we note that the captured carbon could be used in Enhanced Oil Recovery (EOR). As a consequence, if the plant can be brought online, it would not only prove to be environmentally friendly, but may also help the UAE achieve a considerable return (by enabling the emirate to extract more oil) on the significant investment that would be needed to bring such a large-scale CCS project online.
- 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. This sentiment 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)..
Downside risks to outlook:
- 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 among 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. Oversupply and funding constraints will continue to weigh heavy on investor appetite.