The UAE is the GCC’s most active construction market, with nearly $715bn-worth of construction projects under way or planned, according to MEED Projects. Construction is the third-largest contributor to the UAE economy after oil and trade, accounting for some 6 per cent of the nation’s gross domestic product (GDP).
Two years ago, more than 20 per cent of the Middle East’s construction activity was taking place in the UAE and a fifth of the world’s cranes were stationed in Dubai alone. Private real estate developments inflated the market, construction costs spiralled and contractors struggled to find materials and skilled labour.
|Value of construction projects by country ($bn)|
|Source: MEED Projects|
But the market is changing. Dubai in particular has seen a brutal reversal of fortune. In November 2009 state-owned Dubai World announced it could not repay its $26bn debt and the subsequent crisis ended Dubai’s decade-long construction boom. Projects ground to a halt and the local real estate market slumped to half its former value.
Drop in demand for UAE construction sector
Industry sources report a 25 per cent drop in demand for construction management-related jobs in the UAE this year. Some UK construction firms have cut their Dubai workforce by nearly a third in the past year. Construction salaries have fallen by 15-25 per cent and remuneration packages by about 40 per cent, ending a decade of inflated earnings.
In February this year, UK contractors, construction firms and suppliers were struggling to recoup an estimated $2bn-worth of unpaid bills in the wake of the property crash.
Dubai’s troubles served to highlight which players are in the market for the long haul.
“The market has become more realistic,” says Dominic James, director of UK export adviser British Expertise. “During the boom a lot of companies were making money that probably should not have. These have now disappeared, leaving quality players to stick it out.”
The industry has shifted its focus to the federal capital, Abu Dhabi, which is investing heavily in transport, infrastructure and industrial projects to diversify its economy. In 2007 it unveiled Plan Abu Dhabi 2030. The $182bn plan anticipates a threefold increase in resident population to more than 3.1 million and a fourfold increase in annual visitor numbers to 8 million by 2030. Under the plan the UAE federal government will invest $272bn in infrastructure over the next five years, opening many of the largest projects to private-sector participation through public-private partnerships. The government will cover 40 per cent of the plan’s costs.
“A lot of new construction is concentrated in areas such as ports and airports,” says Paul Taylor, head of the Middle East team at UK Trade & Investment (UKTI).
Tourism construction has proved resilient. UK-based tourism consultancy STR Global reports 29,292 hotel rooms under construction in the UAE this year. Of these, 16,768 were in Dubai and 8,479 in Abu Dhabi. Studies by Indian consultancy RCNOS suggest the UAE will account for 85 per cent of the Middle East’s tourism investment by 2018.
State-led construction projects have proved resilient, too. The UAE plans to invest $5bn in new universities and a further $5.3bn in hospitals and healthcare projects.
RCNOS says relaxed regulations, economic reform and liberalisation will boost new construction from 2012, helping the UAE regain its status as the region’s leading business hub. The federal drive to reduce dependence on oil will drive new investment in infrastructure, industry, healthcare and retail.
Sustainable building is a growing market niche. Abu Dhabi is building Masdar City, a carbon-neutral community near Abu Dhabi International Airport that will house up to 50,000 people. It will be completed in seven phases by 2020 and will source its power needs from renewable sources. With this and other projects Taylor anticipates new demand from Abu Dhabi’s energy sector, both from the hydrocarbons segment and from alternative energy sources. Opportunities will also come from the UAE’s planned civil nuclear capability and the planned Gulf-wide rail network.
Health and education sectors emerging in the UAE
For small and niche market players, new opportunities will come from UAE-wide investment in health and education projects.
UKTI advises companies to take a long-term view of UAE prospects. It expects construction to recover in the mid- to long term and advises UK companies to prepare for that recovery now, building the right relationships and securing the right permits and approvals.
Outside the UAE’s free zones, foreign investors need a local partner to enter the market: foreign ownership is capped at 49 per cent.
Government departments favour contractors with an established market presence. This has traditionally worked to UK firms’ benefit, but today historic links are not enough. High oil prices have brought in new international players and competition for contracts is stiff.
The UAE and UK governments have pledged to increase bilateral trade by 60 per cent until 2015, an increase in value from £7.5bn ($12bn) to £12bn. Construction will make up a “significant” element of that new business, Taylor says, particularly when it comes to consultancy and other services.