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UAE construction sector builds on hope

Spike in new tenders raises confidence levels though payment delays remain an issue

Image Credit: Virendra Saklani/Gulf News
Workers at a construction site in Dubai.
Gulf News

Dubai: The UAE’s construction sector has shaken off the shackles imposed by liquidity worries and delayed contractor payments to put in a far better showing than was forecast at the start of the year. The combined value of tenders floated in the first three months alone crossed $10 billion (Dh36.7 billion) as against the $6.6 billion plus same time last year. The majority of the tenders — at about 65 per cent — related to infrastructure works as well as for the development of Dubai South — currently, the city’s biggest project site by taking up a massive 145 square kilometres. The same pace was maintained through the second quarter, the final tally of which will be known in the coming days.

And at some point in the second-half of the year, real estate related construction activity could pick up a gear or two. “It is highly likely that larger ticket sizes will start being issued at the masterplanned communities such as Dubai South, MBR City, Creek Harbour, Meydan, Mudon, Dubai Hills Estate, Akoya, Nshama and these move forwards towards completion in the next three to four years,” said Brian Kearney, Managing Director at Global Crushing Solutions, which operates a quarry in Fujairah and is part of GCP’s investment portfolio.

“Apart from base metals, prices have remained more or less stable with the market being relatively well supplied across the board. The overall construction cost index was down marginally (by less than 1 per cent) in the first quarter of 2016. The greatest volatility was observed in the price of steel, which showed a secular decline (falling by 20 per cent since 2011) but which in the short term has moved with considerable volatility in the international markets.”

Collective sentiments

UAE’s contractors will take it in any shape or form. After enduring a tough second-half last year, which was when the payment issue really started to hit their cash flow positions, many had no expectations of this year getting any better. In fact, collective sentiments during the first few days of January was at rock-bottom. It didn’t help that results put out by Arabtec showed up massive losses, and the real estate sector — on which project activity is so dependent — seemed in no mood to ramp up off-plan launches,

But it was then that silver linings started to show up. The Dubai Government confirmed that it will maintain a steady hand in terms of backing capital-intensive infrastructure projects. The Canal project was a visible manifestation of this and so were the round-the-clock activity in completing ambitious flyovers, bridges and road extensions. These were, at the same time, injecting a much-need boost of confidence into the sector.

“It’s right that the conditions, whilst still challenging, are certainly better,” said Sachin Kerur at the law firm of Pinsent Masons, which brings out an annual survey on confidence levels and other trending issues in the Gulf’s construction industry.

Alternative sources

“In general, we haven’t seen the large-scale cancellation of projects that was expected as governments have tried, where possible, to continue with their programmes through other sources of finance or alternative sources from the private sector. Governments can’t afford to have programmes massively impacted as they’re key to the diversification of the economy. That’s why we haven’t seen quite the dramatic effect that was anticipated.”

“For some such as the UAE, the fundamentals are somewhat stronger with capital still being invested and good investment opportunities. It’s not so much where regions are in their procurement cycles, it’s more about where they are on overall economic development. Certain markets will continue to attract a greater level of interest and investment ... so governments will be more bullish on continuing to develop areas of their economy.”

According to Global Crushing Solutions’ estimates, the total value of projects under construction in Dubai alone totals $53 billion, with a further $337 billion in the planning stage. For the construction industry, everything hinges on how quickly the planned works make the transfer from the drawing board.

Balance-sheets

Apart from projects, contractors will be hoping for some impasse to the payment issue. “Payment terms have been extended across the board ... and this is partly reflected not only in the balance-sheets of the publicly listed contractors, but also in the fact that developers have managed to extend considerably more favourable payment plans to end users,” said Kearney. “This trend is likely to persist for the rest of the year.

“It is hard to gain insight into the revision of contracts as this is largely a bilateral issue. What we know is that there has been downward pressure on margins for contractors, and this is unlikely to continue for much longer.

“This implies that for new contracts being issued, there is a “mean reversion” towards historical gross margins that will likely take place in the next year or so, as contractors restructure their cost base and adjust to longer payment plans.”

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