BMI View: We expect the UAE's construction sector to perform well over the coming years as 2013 saw the reactivation of numerous delayed projects and the awarding of numerous new ventures. Additionally, Dubai's real estate market is looking strong and Abu Dhabi's seems to have bottomed out. That said, in light is released data, we are downwardly revising our forecast for 2013. We highlight the potential for further downgrades, but believe that the second H213 will have been stronger than the first. We have also upgraded our medium term growth forecasts in light of Dubai winning the 2020 Expo.
Factors Driving Construction Industry Growth:
- We continue to see increasing opportunities in the hospitality and tourism sectors. Tourism and tourismrelated projects has provided a welcome source of value for the construction industry over recent troubled years in the residential sector. We expect this to continue throughout 2014 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.
- 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.
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 heavily on investor appetite.