Infrastructure and tourism projects continue in Abu Dhabi despite a slowdown in growth in the construction sector

Activity and opportunities in the Abu Dhabi construction market appear to have slowed in 2015, due in part to a fall in the international price of oil. However, a wide range of large projects are currently being built, including a major airport terminal, nuclear power plants and a local branch of the Louvre museum. A number of construction and engineering projects, including the second phase of the national railway, a metro system, a major chemicals project and several more museums, are additionally in the pipeline, and industry figures say that announced projects remain likely to go ahead despite reduced oil revenues, albeit possibly at a slower pace than originally planned.

Industry Activity

The value of construction sector activity in Abu Dhabi stood at Dh91.3bn ($24.9bn) in 2014, up from Dh85.7bn ($23.3bn) in 2013, according to data from the 2015 Statistical Yearbook of the Statistics Centre - Abu Dhabi (SCAD).

In constant prices, sector activity grew 3.3% in 2014 over the previous year, up from growth of 0.6% in 2013 (the latest available data at the time of writing). The industry accounted for 9.6% of national GDP at current prices, up from 9.2% in 2013 and 2.8% of gross fixed capital formation.

Despite sector GDP growth, the number of new buildings completed fell from 5582 in 2013 to 2761 in 2014, according to SCAD data. However, the number of completions in the first half of 2015 rose on the same period the previous year, from 1602 to 1761.

An overall total of 2466 permits for the construction of new buildings were issued in 2014, according to SCAD data, including 1350 in the Abu Dhabi region, 825 in Al Ain and 291 in Al Gharbia. The total figure was up from 2394 a year earlier.

Recent Slowdown

While activity in the sector grew in 2014, the fall in the international price of oil since mid-2014 had an impact on construction firms, with delays to both existing projects and those in the pipeline. The UAE Central Bank in July 2015 said that the federal government was expected to cut spending by 4.2% due to lower oil prices (similar figures for the emirate’s government budget are not available). “The government is cutting costs, and while projects that have already been announced will go ahead, some appear to proceeding at a slower rate than previously planned and few new projects are being announced,” said Mai Hassan, financial analyst at real estate services company JLL.

As a result of the slowdown in spending, industry figures speaking in late 2015 said that market activity was currently very low. “Abu Dhabi is extremely quiet for projects at the moment and is likely to remain so for another two to three years,” Wassim Merhebi, executive director of Arabian Construction Company, told OBG, adding that the combination of the slowdown and high levels of competition also mean that current industry margins are tight.

“Construction companies across the region are being squeezed in the middle as they need to pay their subcontractors to keep them afloat, but they are sometimes facing delays in payments from clients,” Sanyalaksna Manibandhu, head of research at NBAD Securities, said, adding that the impact of the slowdown would be felt disproportionately in the non-hydrocarbons sector. “Governments across the region, including in Abu Dhabi, will continue to invest in developing their oil and gas resources, which will leave fewer resources available for projects outside of the sector,” Manibandhu told OBG.

Promising Segments

Nevertheless, some segments retain substantial potential, and social infrastructure in particular is seen as one of the more promising market segments for industry growth. The constant, and increasing, need for houses, hospitals and schools is viewed as good news for the construction industry. The emirate has seen the construction of a number of new universities in recent years, including branches of New York University and the Sorbonne. In the health care segment, the Cleveland Clinic Abu Dhabi hospital on Al Maryah Island was inaugurated in early 2015, while Arabtec and Spanish firm Constructora San José are currently building a new 713-bed hospital complex, the New Al Ain hospital, in Al Ain city. The project’s main building is due to be completed by 2018, with the wider facility expected to be finished two years later, in 2020.

Another major construction project under way is Louvre Abu Dhabi, a 9200-sq-metre museum being built by a joint venture between Arabtec Construction LLC, San Jose SA and Oger Abu Dhabi LLC, at a cost of $650m. The project is part of the Saadiyat Cultural District. The project has faced delays; it was originally due to open in 2012 but has been subsequently pushed back several times. In October 2015, Saadiyat’s developer, Tourism Development & Investment Company, said that the museum would open in the second half of 2016. Two other museums that are also planned in the Saadiyat Cultural District are the Norman Foster-designed Zayed National Museum and the Frank Gehry-designed Guggenheim Abu Dhabi. Preparatory structural works had been completed for both museums; however, construction tenders have not been awarded yet.

Transport Projects

Transport infrastructure is also helping to drive activity in the sector. “Road, rail and maritime infrastructure as well as the airport segment have all seen a strong increase in construction activity, with a number of projects in the pipeline over the coming years,” Ali Haydar Özak, project director at Turkish airports specialist, TAV Group, told OBG. The firm, together with project partners Arabtec and Consolidated Contractors Company, is building the largest construction project currently under way in the emirate outside of the energy sector, namely a new terminal at Abu Dhabi International Airport known as the Midfield Terminal Building (MTB). Once fully completed, the $2.96bn facility will have 700,000 sq metres of internal space, making it one of the largest buildings in the emirate, with a roof span of 319 metres at its widest point, a ceiling that is 52 metres high at its highest point and 18 arches with a maximum span of 180 metres across.

In August 2015 workers began the six-month process of removing temporary towers supporting the building’s steel roof, and at the end of the year, Abu Dhabi Airports said that around 70% of work on the project was complete, putting the project on schedule for an opening ceremony in December 2017.

Other projects in the pipeline could also help bolster construction activity in the coming years. In October 2015 national railway company Etihad Rail said that it was evaluating construction tenders for the 624-km-long second phase of the country’s railway project, and would present recommendations to its board before the end of the year. The results of the tenders were delayed following a decision to run them again in summer 2015. Another major forthcoming transport infrastructure project is the planned construction of an integrated urban rail and bus rapid-transit network in Abu Dhabi City, with an estimated price tag of around $7bn. The project includes an 18-km metro line, two light rail lines with a combined length of 28 km and a bus rapid transit network. The Executive Council approved funding for the project in 2012; however, procurement for the project has yet to be launched.

Energy

The largest construction and engineering project currently under way in the emirate is a nuclear power plant consisting of four reactors with a combined generation capacity of 5.6 GW being built at Barakah in Al Gharbia by the major South Korean energy company Kepco at a cost of $20bn. Work on the first reactor began in 2012, followed by construction on the second and third ones in 2013 and 2014, respectively. Construction on the final reactor to be built began in September 2015. The first of the four reactors is due to enter operations in 2017, with all of them due to be completed by 2020.

Major oil and gas construction and engineering contracts issued in 2015 include $1.6bn of deals awarded by Abu Dhabi Gas Industries – a joint venture between Abu Dhabi National Oil Company, Shell Total and Partex – and Abu Dhabi Gas Liquefaction in February, including a $700m engineering, procurement and construction (EPC) contract awarded to Tecnicas Reuinidas for the two firms’ third integrated gas development expansion project, and a $491m contract awarded to Tecnimont and Archirodon to boost capacity at the firms’ offshore gas processing facilities on Das Island. In May 2015 the Abu Dhabi Company for Onshore Petroleum Operations (ADCO) awarded a $344m EPC contract for the development of the Mender oil field to China Petroleum Engineering and Construction Corporation, while in October ADCO also awarded a $175m contract to local firm Al Asab General Contracting for tie-ins at 58 wells in the Asab and Sahil fields and a $170m EPC contract for tie-ins at the Shah, Mender and Qusahwira fields.

Industry

The largest construction and engineering project in the pipeline in Abu Dhabi is the $20bn Tacaamol-Al Gharbia Chemical Industrial City, which is to be built in the Taweelah area of Al Gharbia. The project was initially to be built in one go but has since been divided into three phases, starting with an aromatics project. Abu Dhabi National Chemicals Corporation, known as ChemaWEyaat, and Thai chemicals firm Indorama Ventures in January 2014 agreed to establish a joint venture known as Tacaamol which will design and build the $1bn first phase of the project, due to come on-stream in 2020. Foster Wheeler is providing project management consultancy services for the project while CH2M Hill is carrying out front-end engineering and design work.

Tourism & Hospitality

Tourism is also a promising sector for construction. The hotels industry has been performing strongly, thanks to factors such as the development of major leisure and retail attractions in Abu Dhabi and Etihad Airways’ expansion driving demand for new accommodation facilities. Hotel guest numbers rose by 17% year-on-year in the first half of 2015. The planned opening of the emirate’s Louvre museum in 2016 should further boost its attractiveness to tourists and help to increase the number of visitors to Dubai who make side-trips to Abu Dhabi, just an hour away, in particular. Despite new room openings in 2015, Abu Dhabi Tourism and Culture Authority figures show that hotel occupancy rates rose from 70% in August 2014 to 71% a year later, underscoring high demand. Notable hotel construction projects under way include the Four Seasons on Al Maryah Island, due to open in 2016.

Urban Development Projects

Major urban development, mixed-use and retail projects are also set to provide further opportunities to construction and engineering firms in coming years. Abu Dhabi Urban Planning Council (UPC) approved 101 urban development master plans and projects in 2015.

In the fourth quarter of 2015 the UPC granted detailed approval for 27 major real estate projects and master plans spanning almost 9m sq metres, with the total gross floor area approved in 2015 up 26% on the previous year. Two approvals were given for projects and master plans located in Al Ain, four in Al Gharbia and 21 in the Abu Dhabi Metropolitan Area – consisting of 11 projects on Abu Dhabi Island and 10 on Abu Dhabi Mainland.

Projects approved for Al Reem Island included Najmat Tower, a residential complex comprising 243 units spread over 37 residential floors; Shams Meera, which comprises twin residential towers in the Shams District; and the Reem Mall. Detailed approval was also granted for Al Fahid Island, a sustainable, low-rise beachside residential community situated between Yas Island and Saadiyat Island.

In total, between its launch in 2008 and the end of 2015, the UPC has approved 488 urban development projects and master plans with an aggregate floor area of more than 84m sq metres.

Construction Contracts

Major construction contracts recently awarded in the mixed-use and retail segments include a $425m contract won by Australian firm Brookfield Multiple in August 2015 to build the Al Maryah Central mixed-use development, the centrepiece of which will be a large mall, on Al Maryah Island. The mall is due to open in March 2018.

The developers of the $1bn, 450-outlet Reem Mall on Al Reem Island, which is also scheduled for a 2018 opening, in November 2015 said they would seek to award the main contract for the development by March 2016, while Reem Developers in June said it intended to issue a tender for a residential tower in the Najmat Abu Dhabi mixed-use project on the island by the first quarter of 2016.

Contractors

There are around 115,000 licensed construction companies in the emirate, according to the Department of Economic Development, with numerous international and regional firms active. Major local players include Arabtec, which is headquartered in Dubai but in which the Abu Dhabi government-owned investment fund Aabar owns a stake of around 35%, making it the largest shareholder in the firm. The company is involved in some of the largest construction projects in the emirate, including both the Louvre and the MTB. However, it has experienced a substantial number of financial and management problems of late and in the third quarter of 2015 posted its fourth consecutive quarterly loss, with total losses over the previous 12 months amounting to Dh2.06bn ($560.7m).

As of early November the firm’s share price was also down 85% from a peak in May 2014. The company reported that as of March 2015, the firm’s order pipeline stood at around $26bn, equivalent to approximately two and a half years’ worth of revenue. Efforts by the firm to diversify its activities to boost its portfolio have met with limited success. Since 2012 Arabtec has been attempting to participate more in the oil and gas sector and EPC contracts, as well as power and utilities, but to date progress in the areas has been slow. However, it was also made clear that Aabar should be able to continue to provide support to the firm through difficult times.

Foreign Operations

Much of Arabtec’s work takes place outside of the UAE; however, it appears to be scaling down activities in some countries. In March 2015 the company announced that it was planning to sell four of its five units in Saudi Arabia. The same month, the Egyptian military authorities announced they were putting a $40bn project for the construction of 1m affordable houses, for which the company was the lead contractor, on hold, amid reports that the two sides were unable to come to agreement on various aspects of the deal. In October 2015 Reuters reported that the Egyptian government was waiting for the company to provide details on how it would build the first 100,000 homes under the scheme, amid questions about how it could finance them.

In November the firm submitted a proposal for the construction of 13,000 homes in Egypt, which Mohamed Al Rumaithi, the chairman of the company, said could constitute the first phase of the project.

Company representatives said that the firm’s decision to sell some of its Saudi operations pointed to the fact that it appeared to have limited control of some of its projects abroad, for which it had partnered with other firms. In some cases Arabtec does not seem to have a direct relationship with the customer and in several of these cases it appears rather to be acting more as a type of subcontractor. In these instances it appears to have wanted to make changes on contracts but customers would not agree.

Costs

According to SCAD figures, construction costs per square metre fell from their recent peak of Dh3677 ($1001) in the third quarter of 2014 to Dh2839 ($773) in the second quarter of 2015. The average construction cost per square metre in the emirate for buildings completed during the third quarter of 2015 amounted to Dh2876 ($783), with the price of many materials registering falls during the period. The costs, for example, of steel and power cabling came down by 19.1% and 14.4%, respectively, on the same period in 2014. However, sector wages rose by 22.7%, a substantial rise (see analysis).

Sustainability

In 2010 the UPC launched a new industry initiative, called the Estidama Pearl Rating System, aimed at boosting the sustainability of new projects as regards energy and water usage efficiency. The system covers three main categories: villas, buildings and communities. The potential rating levels for villas and buildings – on a scale of one to five “pearls” – is based on evaluations of the design and construction phases, with the operational rating to be implemented in future.

All new company-developed buildings that are constructed in the emirate must have a minimum rating of one pearl under the system, and government-funded buildings are obliged to meet the standards for a minimum two-pearl rating.

At the end of 2015 there were 1322 buildings in the emirate rated under the system, including planned projects and buildings under construction as well as completed projects. Of these, 594 were one-pearl structures, 678 were two-pearl, 44 took three pearls, five had four pearls and just one had five. There were also 13,685 rated villas, the great bulk of which (10,576) had a two-pearl rating. Prominent higher-rated projects include the MTB, which has a three-pearl rating. “There are not yet many buildings with higher pearl ratings, but some developers have found that these have higher margins and are therefore seeking them out,” Al Ahbabi told OBG.

Outlook

Activity in the construction industry appears unlikely to pick up substantially until international oil prices see a sustained rebound. However, industry figures say that projects already in the pipeline, such as the metro, are likely to go ahead eventually. The oil and gas industry will continue to generate substantial EPC contracts, and some over-performing sectors such as tourism also appear set to drive significant construction activity in coming years.