How is the UAE construction sector performing at the moment?
Broadly speaking, we’re certainly seeing more positive sentiment in the UAE economy, but it is focused very much around certain core sectors. These include retail, hospitality and logistics. The price of oil has remained relatively buoyant, which has also helped.
In terms of the construction sector, we’re beginning to see the first few hotel projects and one or two residential projects beginning to move again. We’re not yet seeing that trickle into the building of factories, warehouses, or people taking long-term views on the country’s economy. When that confidence does come back, it will signal that the economy is on quite a strong growth pattern, but questions remain about is how long it will take.
Do you see any divisions between Abu Dhabi and Dubai?
Abu Dhabi’s economy is influenced more by the government and government spending. The priorities are traditional areas such as oil and gas, power, the military and infrastructure projects such as Etihad rail and the expansion of the airport. If you add that up, in 2013, Abu Dhabi is expected to spend about $50bn on projects. That is most of the budget allocated already.
In Dubai, we are starting to see a few infrastructure projects starting to progress – the Jebel Ali port expansion, for example. But the engine of Dubai is still the private sector, and that is what needs to get moving. One lesson we learned from what happened in 2008-09 is that the hot flows of money were the key cause of many of the problems. Dubai needs longer-term investors and if that can be encouraged, it could lead to a much more robust, long-term sustainable growth pattern.
What impact has been felt from the regional political unrest?
In terms of the general economy, it undeniably has been of assistance. UAE Central Bank data shows that liabilities grew by 15 per cent in the first half of the year, which is a material increase in an economy that is growing at a level of perhaps 3 or 4 per cent. It didn’t do a great deal of good for the construction sector. We saw closures in Libya, Syria and Egypt for a period of time. Those countries are essentially frontier markets, or opportunities, for many of the contractors based in the UAE. Dubai in particular is a regional hub and if you close off [Middle East] markets, then it is impacted.
What was very notable, however, was the speed with which contractors turned their businesses from being exposed to [unrest-hit] markets, to frontier markets such as Iran and, to a lesser extent, India. This realignment of business was much quicker than that seen in the global financial crisis – contractors are nimbler now, which is a very good thing for the industry.
Are contractors still struggling to raise finance?
It’s getting easier, actually. Historically, everything had to be project specific but we’re beginning to see some general financing for contractors come back in a very modest way. The terms are quite tough, but at least they’re coming back to the market, which is an encouraging sign.
What difference does the client make?
The client matters very much. [The financial crisis] provided visibility on who the good guys and bad guys are. To survive and prosper in this type of environment, you have to be a good firm. The clients that are favoured by banks, I would say sarcastically, are the profitable ones, in particular, those with management teams able to manage their businesses flexibly and robustly. The companies that [diversified] early on are now reaping the dividends.
Have contractors overcommitted themselves with tender bonds?
Yes. Because of the delay in awarding projects and the fact that tenders get rolled, as a contractor you have no choice but to play the game. I think the industry is deteriorating by allowing so many people to tender for the same project. If you look at some of the flagship projects that were awarded this year, you sometimes had 25 firms tendering for them.
Ideally, you should have five to seven firms tendering for a deal. But I don’t think we’ll see that again until the surplus capacity in the market starts to get used, and that won’t be for a minimum of two to three years in my opinion.
Is cashflow still an industry issue?
There are still delays, but these are getting shorter and cash is circulating again. Some of the longer-term issues are getting resolved, but not all the problems by a long way.
At some stage, the UAE has to stabilise and return to being a business-as-usual market. At the moment, it is still perfectly acceptable for the majority of contractors to delay payment for a material period of time. If you are an international company, or you want to do business internationally, you can’t behave like that and maintain credibility in the sector.
Are there any particular trends you expect to see in 2013?
My hot pick for something that will turn around in 2013 is warehousing and those involved in warehousing contracting as well. I think the logistics sector is primed for growth in the UAE and will become an important part of the contracting scene next year. Not perhaps a huge dollar value, but I think there will be a lot of smaller-volume contracts issued. The driver is trade; we’re expecting trade growth to outpace gross domestic product growth quite significantly in the UAE over the next few years.