The average cost of construction materials and fuel increased by more than 7 per cent in the UAE between January and September, according to MEED Cost Indices, part of online project tracking database MEED Projects. Most construction materials rose in price during the period, reflecting the renewed vigour in the UAE’s projects industry, in particular Dubai’s real estate sector.

“Should Dubai be successful in its bid to host the Expo 2020, it might be the beginning of a perfect storm”

Reinforced steel bar (rebar) was one of the main drivers of the increase due to the higher volume of material consumed and increased cost. The mechanical, electrical and plumbing sector has also seen costs climb, with the price of copper cables rising by an average of 19 per cent since January. This is in contrast to the global copper price, which has remained relatively flat over the same period.

Economic growth

The UAE construction sector is enjoying its biggest year since 2010. With more than $10bn-worth of awards so far in 2013, it is probable that the country will exceed its 2012 total of $13bn. This is still some way behind the $19bn seen in 2010, but more significant is that the value of civil construction contracts scheduled for award over the next few years is estimated at $250bn – the highest level since the 2009 crash.

Dubai’s Department of Economic Development confirmed this month that the emirate’s economy grew by 4.9 per cent during the first six months of 2013, the fastest growth rate since the 2009 recession. This is set to continue through 2014, driven largely by trade, tourism and manufacturing.

With major developers now able to finance projects again, the impact on the construction market has, so far, been small, but nevertheless immediate and visible. The question now is, to what extent does this heightened activity stem from anticipation that Dubai will be selected on 27 November to host the Expo 2020. And what will happen if the emirate is unsuccessful in its bid.

Should the Expo 2020 be awarded to Dubai, it would be an international endorsement of the emirate’s position as a tourism and logistics hub, but it would not alter the fact that the UAE construction projects market has established a clear trajectory independent of the boost that the event would bring.

While many of the headline-grabbing projects such as local developer Meraas’ $1.6bn Bluewaters Island development and its five theme parks in Jebel Ali are geographically close to the Expo site, much of what is happening now is of no direct consequence to the anticipated award. A significant number of the projects that have been resumed over the past few quarters are connected to light industry, logistics and hospitality – sectors now at the core of Dubai’s economic recovery.

This heightened project activity, along with massive spending in Qatar and Saudi Arabia, is likely to have a significant impact on the cost of construction in the months and years ahead. Not only will it be a challenge to source much-needed raw materials, such as cement, rebar, aggregates, bitumen and so on, but the skills required to deliver such large projects will need to be secured. Clients are already demanding that senior project personnel must have Middle East experience and suppliers are struggling with this. A bidding war for engineers, project managers and quantity surveyors with the right skill set is likely, which in turn will drive up costs.

Qatar Primary Materials Company has started stockpiling key construction materials and the government in Doha has fixed the price of cement and bitumen to ensure construction costs do not spiral out of control. Whether this will keep costs down remains to be seen, but it is a start, nonetheless.

Escalation rates

Hyperinflation is not out of the question over the next three to five years. Several consulting firms have predicted double-digit escalation rates for most GCC countries. MEED Cost Indices predicts a conservative escalation rate of 5-15 per cent a year. Should Dubai be successful in its bid to host the Expo 2020, it might be the beginning of a perfect storm, in which escalation could potentially be driven even higher.

To put it into perspective, consider a $100m project to be built during the previous boom in Qatar, prior to the 2011 Asian Cup. If the indicated total cost at the time of estimating was $100m, then the total end-of-job cost would have been in the region of $124m; almost 25 per cent more capital would have been required. There are very few projects (even infrastructure schemes) that would be feasible if such a burden were placed on the project deliverables.

Key fact

$250bn-worth of construction contracts are scheduled to be awarded in the UAE over the next few years

Source: MEED

MEED Cost Indices tracks essential construction costs, such as labour, material, equipment and fuel. It also offers a building block index that tracks the actual price movement and volume of 32 items on site. For more information on MEED Cost Indices, please email customercare@meed.com, telephone (+971) 4 367 1302, or visit www.meedprojects.com/cost-indices.