Abu Dhabi's construction sector outlines ambitious medium- and long-term plans

Activity in Abu Dhabi’s construction sector contracted for the second year in a row in 2017 as the effects of the oil price drop beginning in 2014 were reflected in a narrower project pipeline. With major transport and energy projects approaching completion, the period of reduced investment across the wider UAE could continue to present challenges to contractors in the short term. However, several major large-scale developments are in the planning stage, and industry actors remain hopeful that project announcements are on their way, especially as the economic climate improves.

Performance

According to figures from the “Statistical Yearbook of Abu Dhabi 2018”, published by Statistics Centre - Abu Dhabi (SCAD), the emirate’s construction sector contracted for two consecutive years, shrinking by 3.5% in 2017 and 3.9% in 2016. Despite this, the sector remains the second-largest in Abu Dhabi (after the minerals sector) in terms of its contribution to GDP, with its share actually increasing due to lower oil rents since mid-2014. According to SCAD, the value of construction sector activity grew from Dh78.1bn ($21.3bn), or 8.4% of GDP, in 2013 to Dh82.3bn ($22.4bn), or 9.9% of GDP, in 2017. The sector also remains the second-largest in the emirate in terms of employment and wages, with 20.5% of the total working population involved in construction, contributing to an annual wage bill of Dh28bn ($7.6bn).

In terms of activity, a four-year high of 4126 buildings were finished in Abu Dhabi in 2017, up from 3789 in 2016 and 3698 in 2015, but still 25% lower than 2013 when 5582 buildings were completed. This activity looks set to continue in 2018, with SCAD reporting that 2183 buildings were completed in the first half of the year, compared to 2080 for the same period in 2017.

Short-Term Challenges

Although the UAE has fared better than its regional peers, in 2017 new contracts in the Gulf state slid to their lowest levels since 2012, according to a report by consultancy firm Faithful+Gould. A total of $35.9bn in contracts were awarded in 2017, below initial forecasts of $45bn. This comes on the back of below-average awards totalling $43bn in 2016, which was itself a four-year low. However, it is expected that awards will recover in 2018, with an estimated $42bn in contracts anticipated for the full year. On the emirate level, Abu Dhabi has had its own set of challenges. As a result of being more susceptible to low global oil prices, contract awards fell by 37.5% between 2014 and 2016, pushing Abu Dhabi-based construction firms to reduce profit margins in an attempt to attract projects. There were also concerns that the 5% value-added tax introduced in January 2018 could further affect contractor cash flows, particularly during the initial adjustment period.

Improved Prospects

Despite issues, the UAE’s construction sector is set to continue to outperform other regional markets in 2018, led by Dubai, which has allocated 21% of its 2018 total budget to infrastructure development in the lead-up to the World Expo 2020 event. Meanwhile, infrastructure development projects included in Abu Dhabi’s economic diversification efforts are expected to sustain the UAE’s construction sector beyond Expo 2020, according to a report issued by BMI Research in January 2018.

Abu Dhabi’s long-term development blueprint Plan Capital 2030 anticipates that the population of Abu Dhabi City will reach 3m by 2030, up from 1.4m in 2018. This rising demand should support the regional industry’s workflow over the medium to long term, according to the Deloitte report, which also pointed to a pipeline of over $2trn worth of projects in the planning stages as an indication of healthy demand. Within the oil sector in particular, potentially higher oil prices could allow energy firms to invest in upgrades after years of tight budgets, according to Faithful+Gould. In this regard, a significant development was a $109.9bn investment plan unveiled by the Abu Dhabi National Oil Company (ADNOC) in November 2017 to boost gas output and downstream activities from 2018 to 2023.

Cost

Construction costs in the emirate climbed steeply in the year to July 2018, with the SCAD construction cost index rising by 3.2% to 99.1 – its highest level since 2015. This trend was partly driven by steep materials cost growth in the wider UAE. Canada-based global commercial real estate firm Colliers International reported that as of May 2018 a 30% jump in steel rebar had contributed to an average year-on-year (y-o-y) materials inflation rate of almost 10% in the UAE. Other key material cost increases included a 22% rise in diesel prices, a 13-16% rise in electric cabling and a 6-12% rise in timber, all of which combined to add 3.1% to the average cost of constructing a building in the UAE.

Although Colliers largely attributed this phenomenon to global trends, such as a construction boom in Europe and more stringent enforcement of pollution standards in China, rising local input costs, such as higher gas prices, also drove up building costs within the GCC. However, with Saudi Arabia lifting a 10-year ban on the export of rebar in late 2017 and the World Bank forecasting iron ore and aluminium price drops in the year ahead, Colliers anticipates that the steep materials inflation beginning in 2017 will slow. Additional contributors to construction inflation in Abu Dhabi included higher worker wages, which grew by 6.6% y-o-y as of July 2018, and the rising cost of services, which increased by 13% y-o-y over the same period, according to SCAD. Partnerships have been flagged as one possible way of reducing operating costs. “There are major opportunities to be had from deploying a partnership model in the Abu Dhabi construction industry, as opposed to the traditional contractor-versus-employer model. This approach allows for fit-for-purpose solutions, real value engineering and best construction processes, which have a large impact on reducing investment and operational cost and generating earlier and greater revenues on investment. It will develop the construction market to a new level of maturity,” Manfred Wetzel, general manager of Züblin Construction, told OBG.

Licensing & Registration Changes

A number of regulatory changes are expected to boost efficiency. In February 2018 Sheikh Khalifa bin Zayed Al Nahyan, president of the UAE and ruler of Abu Dhabi, issued Law No. 5 of 2018, which officially established the new Department of Urban Planning and Municipalities (DPM) in Abu Dhabi. The DPM absorbed the former functions of the Urban Planning Council and the Department of Municipal Affairs and Transport, and is accordingly now responsible for the majority of construction-related licensing in the emirate.

A May 2018 agreement signed between the DPM and the General Directorate of Civil Defence Abu Dhabi will see the two bodies form a joint team to review construction plans. They are expected to collaborate in speeding up the approval process for construction licences, as well as cutting departmental costs by rationalising the review process and ensuring that projects fall in line with international best practices.

Energy Projects

Various new infrastructure developments in the energy and transport sectors are expected to shore up construction demand. The largest energy project in both Abu Dhabi and the wider UAE is the $24bn Barakah Nuclear Energy Plant in Al Dhafra. The plant is now almost 90% complete, with construction on the first of its four reactors successfully completed in March 2018. Led by the Korean Electric Power Corporation, the project has also seen over 1400 UAE-based companies receive contracts worth a total of $3.25bn since construction began in 2017.

The country’s energy goals of producing 44% of total generation with renewable resources by 2050 will likely continue to provide work to construction companies, with the UAE planning to add 1 GW of renewable energy to its grid per year. Having already broken ground on the 1.17-GW Noor Abu Dhabi, the world’s largest solar plant, in the first quarter of 2017, the Abu Dhabi Water and Electricity Authority announced plans to develop a second similarly sized solar plant in January 2018. Tendering for the second plant is expected to take place in late 2018, with the $872m lead contract for the first facility given to Japan’s Marubeni Corporation and China’s JinkoSolar.

In addition to this, in March 2018 ADNOC handed a $473m contract to South Korean company Samsung Engineering for the construction of a power and desalination facility at the Ruwais Industrial Complex, 240 km west of Abu Dhabi City. Expected to be completed in 2023, the waste heat recovery project will produce additional fresh water and power for the complex.

Transport

Construction of the 84m-passenger-per-year Midfield Terminal Building at Abu Dhabi International Airport is also drawing to a close. Commercial operations are expected to commence in late 2019 at a total cost of Dh10.8bn ($2.9bn). Contractors are hopeful that an improved economic outlook means that construction of several long-awaited rail infrastructure projects will begin soon. Most significant in this regard is the second phase of the Etihad Rail network. Recent momentum on the project saw Etihad Rail award consultancy deals to the US-based Jacobs Engineering Group and France’s Egis Rail in mid-2018. Stage two will include the construction of 605 km of track running from the Saudi border to the UAE’s Port of Fujairah, connecting Abu Dhabi and Dubai by rail for the first time. Completed in 2015, the first phase of the project is wholly within Abu Dhabi, running from Shah and Habshan to Ruwais.

Another notable rail project in the pipeline is the Abu Dhabi Metro, which was also put on hold in 2016, the initial phase of which would see the construction of 17 stations and 18 km of track, aimed at easing congestion on Abu Dhabi’s islands, However, the tendering for the project has yet to recommence. Lastly, at the Cityscape Abu Dhabi 2018 exhibition in April, Abu Dhabi-based developer Aldar Properties signed a memorandum of understanding with US transport research firm Hyperloop Transportation Technologies for the construction of a 10-km hyperloop track in Aldar’s Dh10bn ($2.7bn) Al Ghadeer residential development on the border with Dubai by 2020.

“Abu Dhabi’s construction sector is facing a backlog in infrastructure as a result of several years of reduced spending,” Sami Sidawi, chairman of Al Nasr Contracting Company, told OBG. “This means that there are many opportunities in the short term to participate in high-priority projects that are now being pursued, particularly in utilities and transport infrastructure.”

Master-Planned Communities

Abu Dhabi has a strong residential project pipeline. Approximately 16,000 units are expected to enter the market in 2018-19, with several major residential developments announced in the beginning of 2017.

The most significant of these was the November 2017 Abu Dhabi government announcement that it planned to develop the 8000-ha Al Riyadh City. Located between the areas of South Shamkha and North Wathba, and 30 km from downtown Abu Dhabi City, the project will house up to 200,000 people when complete, making it the largest housing development in all of the UAE. Construction will be overseen by the newly formed Modon Properties, an Abu Dhabi government-owned entity specialising in housing and infrastructure. A completion date has yet to be set, but in March 2018 Modon announced that it had started building five temporary mosques in the area and appointed the Dubai-based Arabtec Construction to build a show village for the project.

There has also been progress made on the master-planned waterfront development on Al Fahid Island, which initially received project approval in 2015. In late 2017 lead developer Al Fahid Property Development awarded the project programme management contract to Faithful+Gould, which in turn handed a ninemonth land reclamation contract to Abu Dhabi-based Bright Accord General Contracting in March 2018. As is outlined in the master plan, the 21m-sq-metre island, which is situated between the Saadiyat and Yas Islands, will host a variety of housing units, including 301 villas, 652 apartments and 15 townhouses, upon completion.