Abu Dhabi's construction sector building momentum

In 2017 Abu Dhabi’s construction sector should begin recovering after global oil prices reached their pain point in 2016, ending the year two-thirds higher than in January following a landmark OPEC deal. Stabilising oil prices allowed the government to reduce spending cuts, and the industry’s long-term outlook remains positive since the Abu Dhabi Executive Council and the Abu Dhabi Urban Planning Council (UPC) approved dozens of new public works, real estate projects and neighbourhood master plans in 2016, including infrastructure for the financial free zone on Al Maryah Island. While sluggish macroeconomic growth should also keep construction costs flat, pressures remain on contractors’ margins. “Sometimes government budgets are cut back, and this is a challenge, but private developers do not stop. They have continued to unveil new projects, albeit with some conservatism, utilising more of a wait-and-see approach,” Hamad Al Ameri, managing director of Trojan Holding, told OBG.

Recent growth

Although the construction sector’s contribution to GDP growth, employment levels and wages expanded between 2011 and 2014, the mid-year oil price collapse in 2014 led to a slowdown. Statistics Centre - Abu Dhabi (SCAD) reported that the sector’s contribution to GDP at current prices shrank slightly in 2012 to Dh85.15bn ($23.18bn), before improving to hit Dh92.6bn ($25.2bn) in 2014, the most recent year for which statistics are available. The sector accounted for 9.9% of GDP in 2011, falling to 9.1% in 2012, before improving to 9.2% in 2013 and 9.6% in 2014. Industry performance recovered from a 0.4% contraction in 2012 to growth of 8.1% in 2014, leading to an average annual growth rate of 2.9% between 2011 and 2014, according to SCAD. The IMF forecasts that the UAE’s economy will grow by 2.5% in 2017, with Abu Dhabi’s GDP growth projected to be 1.7% in that year.

Lower state revenues led to a prioritisation of state spending in 2015, with public expenditure steadily declining. This has had an impact on the construction industry, as layoffs have reduced demand for new office space and budget cuts have slowed development of some big-ticket public infrastructure projects.

Contractor Challenges

Contract awards declined in 2015 as a result of the economic environment, with consultancy Faithful+Gould reporting in April 2016 that Abu Dhabi’s recent re-evaluation of its construction programme was the main contributor to the 30% drop in UAE construction awards in 2014. The agency projected that construction awards decreased by 5% in both 2015 and 2016, for a net 37.5% decline in awards between 2014 and 2016.

The slowdown is part of a broader regional trend, and a Deloitte report published in May 2016 forecast that contract awards across the GCC would fall by 17%, or $140bn, in 2016. Of the GCC member states, Saudi Arabia and the UAE’s construction markets have been hit hardest by the slowdown, according to Deloitte, which also noted that while there are currently $2.6trn worth of projects at the pre-execution or execution stages in the GCC, just $657bn of this is currently under construction. Deloitte reported that more than 90% of contractors surveyed found that market conditions were more difficult in 2016 than in 2015, while 64% reported seeing an increase in costly construction disputes. “Some companies’ reactions during market downturns is to let staff go, but we feel this is a mistake,” Al Ameri told OBG. “If you do this, you are not fully ready when the market picks up again. You have to have faith that this business is cyclical.”

Growth Forecast

The mid-term forecast is more promising, and in February 2016 BMI Research reported that Abu Dhabi’s construction sector is expected to outperform the wider economy over the medium term. The sector is projected to expand by an annual average of 5.9% between 2016 and 2020, with the emirate accounting for $45bn of projects under construction in the UAE, out of a federal total of $103bn, the largest amount for any single emirate. However, the UAE’s project pipeline was valued at $62bn, with more than 70% of projects currently under construction expected to come on-line in the near term. Delayed projects are a concern for construction stakeholders, according to BMI Research, particularly around flagship projects.

Positive Prospects

Abu Dhabi’s construction industry could rebound in 2017 as inflation stabilises, regulatory reforms continue and the government pulls back on austerity measures. Low inflation in particular could offer a silver lining to contractors, and construction costs in the UAE are set to remain steady over the medium term, helping to offset the rapid inflation in wages and materials recorded in recent years.

Wage growth has been a challenge for contractors. In August 2015 SCAD reported that construction wages in the emirate rose by 17.4% during the 12 months to July 2015, compared to the national average of 7.8%. Surveyor salaries recorded the strongest growth, with hourly wages rising to a total of Dh25 ($6.81) in July 2015, compared to Dh22 ($5.99) the previous month. These costs have since moderated amid ongoing layoffs and mergers, and in March 2016 global recruitment consultancy Morgan McKinley reported that hiring in the industry had decreased by 10-15% since the first half of 2015, even as salaries for management-level sector professionals were forecast to increase by 2-5% in 2016.

Materials

Inflation of materials has also slowed significantly. For example, Faithful+Gould reported that rebar prices in the UAE fell to less than Dh1300 ($354) per tonne in September 2015, after spiking from Dh1400 ($381) to Dh2000 ($545) earlier in the year. Prices had recovered somewhat by the end of 2015, to some Dh1600 ($435) in December. Emirates Steel Company reported in October 2016 that per capita steel consumption had dropped from 1400 kg in 2010 to around 800 kg. SCAD also reported that construction costs in the emirate have been falling since early 2014, with its construction cost index declining from 99.7 in the first quarter of 2014 to 98.8 in the third quarter of 2014, and to 97.1 in the first three months of 2015. It rebounded to 98.7 in the third quarter of 2015, the most recent period for which statistics are available.

Construction cost growth rates in the UAE and Oman are expected to be the lowest globally over the medium term, according to consultancy Turner & Townsend, which found in June 2016 that the UAE was one of only three global markets in which construction costs were not forecast to rise over the next year.

Regulation

Regulatory reforms should also support growth. In October 2016 the Abu Dhabi Executive Council announced plans to establish a one-stop shop for construction permits in the emirate, with the Department of Municipal Affairs and Transport (DMAT) receiving approval to issue new permits. Under the current system each submission takes around 30 days to be reviewed by the municipality, due to the fact that officials must obtain up to nine approvals from other city authorities, such as the Abu Dhabi Distribution Company and Etisalat, the UAE-based telecommunications provider. A new property law enacted in early 2016 requires developers to obtain a valid construction permit prior to launching property sales, making the new one-stop shop extremely beneficial to developers (see Real Estate chapter). This should help the UAE’s construction market maintain its strong international standing, with the World Bank’s “Doing Business 2016” survey ranking the UAE fourth out of 189 global economies in its “dealing with construction permits” category, the same position it held in 2015.

According to a May 2016 report by ratings agency Moody’s, the government of Abu Dhabi is also expected to relax its fiscal consolidation efforts over the next financial year to support growth. Moody’s expected the emirate’s deficit to have narrowed to 9% of GDP in 2016, after the government leveraged sovereign wealth fund assets to help finance the deficit during the previous year. Ratings agencies across the board report that the UAE is one of the Gulf economies best placed to manage low oil prices as a result of its large sovereign wealth fund and low debt levels. With spending cuts easing, a number of large-scale infrastructure projects moved forward in 2016, and further progress is expected.

Major Projects

Three ongoing projects that are large enough in size to have driven activity in the construction sector for the last several years are moving closer to completion. The Barakah nuclear power plant in Al Dhafra will be the first in the region. More than 1400 UAE-based companies are now under contract for project, which will see the construction of four nuclear reactors. The reactors are scheduled to come on-line successively in the coming years, with the first reactor having completed its initial construction work in 2017 and expected to come online in 2018.

The second, this time in the tourism and culture sector, is the Louvre Abu Dhabi. The development of the art museum began following an inter-governmental agreement between the emirate and the French government in 2007. It is being supervised by the Tourism Development and Investment Company (TDIC), with the works carried out through a joint venture led by Arabtec in partnership with the Spanish firm Constructora San José and Oger Abu Dhabi. The project, estimated at Dh2.4bn ($653.4m), is nearing completion, with the museum expected to open in 2017.

The largest development of all, however, is Abu Dhabi Airports’ Dh10.8bn ($2.9bn) Midfield Terminal Building at Abu Dhabi International Airport (AUH). The 700,000-sq-metre project remains ongoing and is scheduled for completion in 2019. It is being built through a joint venture between Arabtec, Turkey’s TAV and Greece’s Consolidated Contractors Company, with construction beginning in 2013. AUH will have passenger capacity of 45m per year when the Midfield Terminal opens. The building has a curved roof that appears to float across 18 steel arches and can be seen from around 1.5 km away. The terminal is part of a wider Dh40bn ($10.9bn) AUH expansion project.

Meanwhile, another major project is in the pipeline that promises to give a boost to transport and logistics in the emirate. In August 2016 Abu Dhabi Ports announced a major expansion plan at Khalifa Port, which will add 1000 metres of new quay wall, deepen its main channel and basin from 16 to 18 metres, and add 600,000 sq metres of cargo-handling space to existing facilities. The company announced that it had signed a contract with the National Marine Dredging Company to carry out preparatory work for dredging the channels, using dredged material to build the quay wall. The project will employ 250 workers and is scheduled for completion in 2018.

Executive Council Approvals

These large-scale projects follow on from a number of smaller public works unveiled in July 2016, when the Abu Dhabi Executive Council approved Dh544m ($148.1m) of new roads, schools and infrastructure projects, including over Dh108m ($29.4m) of contracts to develop Zayed City. The city’s upcoming infrastructure works include 7.7 km of roads, water networks, a wastewater system, electricity and communications lines, irrigation systems, drainage and road lighting. The council’s executive committee also approved roads and infrastructure projects in the Al Nahda Military Residential Zone, Bani Yas and Al Shawamekh, worth over Dh102m ($27.8m) combined. Projects to improve Sheikh Zayed Road from the Al Falah intersection to the Qasr Al Bahr intersection, valued at Dh54.77m ($14.9m), were also approved.

In the Al Dhafra Region a Dh36m ($9.8m) contract was awarded for the manufacturing, installation and maintenance of signs under the Abu Dhabi Street Address, Geonames and Signage System, which is part of the broader Plan Capital 2030, a long-term urban development agenda emphasising citizen interaction with their built-up environment, including the creation of pedestrian and public spaces, and encouraging mass transit ridership (see Real Estate chapter).

Other public works contracts awarded included the first phase of the Ghweifat border crossing into Saudi Arabia, a Dh135.5m ($36.9m) project which includes road restoration for light vehicle and bus traffic, and a Dh106.7m ($29.1m) design and construction award for a new primary school and kindergarten on Delma Island, which will accommodate 758 students. In 2016 Abu Dhabi Municipality also announced that it was planning the construction of a total of 14 public parks and playgrounds spanning an area of more than 14,000 sq metres, estimated to cost some Dh20.5m ($5.6m) under Plan Capital 2030 guidelines. These facilities come on the back of six playgrounds valued at a total of Dh9m ($2.5m) constructed in 2015. Parks developed in 2016 will cover an area of more than 9700 sq metres, according to city officials. An additional Dh6bn ($1.6bn) of contracts were awarded by the council in October 2016, including a construction package worth Dh1bn ($272.3m) for the Madinat Zayed business district project, and a Dh687m ($187m) residential project in Al Hayer. Among the contractors that have been secured to undertake these projects are civil engineering and building company Saif Bin Darwish, Kuwait’s MA Kharafi and Sons, UAE-based construction contractor Nael and Bin Harmal Hydroexport Establishment, Ghantoot Transport and General Contracting, Western Bainoona Group for General Contracting, Al Jaber Transport and General Contracting, Bin Hafeez General Contracting, and Wade Adams Hilalco.

Residential Pipeline

The UPC, which is also responsible for approving large-scale projects and master plans, has made major recent additions to the emirate’s residential project pipeline. At the Cityscape Abu Dhabi event in April 2016 the council announced that it had approved 27 major real estate projects, including Reem Mall on the eponymous island, in the final quarter of 2015. This brought the total number of projects and master plans approved in 2015 to 101.

Saadiyat Island will remain a centre of activity in 2017 after TDIC awarded a Dh370m ($100.7m) construction contract for Jawaher Saadiyat, a mixed-use tourism and residential development, to Al Jaber Building in July 2016. Located in the Saadiyat Beach District and overlooking Saadiyat Beach Golf Club, the luxury development includes 83 villas and four-bedroom townhouses. Western Bainoona Group for General Contracting has been awarded the enabling works package for the first phase of the Saadiyat Lagoons project, the first phase of which includes 820 townhouses in a gated community. The district will eventually house 29,000 residents in more than 4300 homes.

In April 2016 TDIC awarded the main construction contract for Mamsha Al Saadiyat, the first residential development in the Saadiyat Cultural District, to a joint venture between San Jose Contracting, and Pivot Engineering and General Contracting. The project is set for delivery in the second half of 2018. Developers of Leonardo Residences in Masdar City also broke ground in April 2016. The project includes construction of 170 one-, two- and three-bedroom apartments within walking distance of the Masdar Institute of Science and Technology – merged in early 2017 with Khalifa University and the Petroleum Institute. The project has been designed to achieve a minimum 3-pearl Estidama rating (see Real Estate chapter). In addition, Aldar said in October 2016 that interior work was nearing completion in some of its 546 apartments in Ansam on Yas Island. The company said that infrastructure work at its nearby 1017-villa project exclusively for Emiratis, West Yas, was nearing completion and that villa construction was under way. Aldar also confirmed in October that tendering for its largest-ever project – Yas Acres – was under way. The main contractor is expected to be appointed by mid-2017. Launched in April 2016, the project is located on the northern part of Yas Island and will add 1315 villas to the emirate.

Hotels

Hospitality construction is also set for strong near-term growth, with German research company Tophotelprojects reporting in July 2016 that of a total of 183 hotel projects under way in the UAE, 24 new builds adding 6486 new keys to the market are set to come on-line in Abu Dhabi. The World Expo 2020 event, which will take place in Dubai, is driving much new demand, with Faithful+Gould projecting that Abu Dhabi will benefit from $8bn worth of Expo 2020-related construction contract awards in 2016. Abu Dhabi contractors have also benefited from hospitality growth in Dubai. In August 2016, for example, Dubai developer Nakheel awarded a Dh1.5bn ($408.4m) contract to Abu Dhabi-based Dhabi Contracting for construction of the Al Khail Avenue project, which includes retail, dining and entertainment facilities, as well as a 252-room hotel. Construction is expected to finish in the first quarter of 2019. Many other associated industries, from steel to cement, will benefit Abu Dhabi firms in the lead up to the event.

Estidama

Estidama represents a vision for a sustainable Abu Dhabi by preserving and enriching the emirate’s physical and cultural identity, while improving quality of life for its residents. One of the key components is the Pearl Rating System (PRS), the Arab world’s first rating system designed to assess the sustainability performance of buildings and communities.

The PRS aims to address the sustainability of a given development throughout its lifecycle. In 2010 the emirate marked a significant milestone towards this transition, as the Estidama PRS became mandatory for all new developments within the emirate. The Estidama PRS is mandatory for newly proposed construction of villas, buildings and community projects. All new projects that are funded by private companies must achieve a minimum 1-Pearl rating, whereas projects funded by the government must achieve at least a 2-Pearl rating. The PRS has been integrated into the building permit process of various municipalities, such that the construction of a development is only possible if it complies with the PRS.

The Estidama PRS reduces the strain on resources by prescribing sustainable construction practices to reduce energy and water consumption, related carbon emissions and construction waste, and diverting waste from landfills. Design teams are also required to follow the PRS Integrated Development Process, which aims to improve communication, maximise coordination and the use of sustainable design opportunities, and reduce design conflicts. To address the efficient use of resources in energy-intensive operations, the Pearl Operational Rating System is currently being piloted on PRS-rated construction projects.

Outlook

Abu Dhabi’s construction industry weathered a challenging 2015 and 2016, and long-term prospects remain positive. The industry should also benefit from a landmark OPEC deal reached in November 2016, which saw the bloc cut production by 1.2m barrels per day in January 2017. Oil prices jumped following the announcement, and entered 2017 at around $50 per barrel, compared to lows of under $30 in January 2016. The US Energy Information Administration forecasts Brent crude prices will average $53 per barrel in 2017.

With government spending cuts now easing, public infrastructure projects are set to ramp up, with the mid-term pipeline supported by renewable energy, retail, residential and hospitality projects.

Prospects have also been significantly bolstered by the recent approval of new master plans, ongoing economic diversification efforts which emphasise new developments on Al Maryah, Saadiyat, Yas and Al Reem islands, as well as the new planned Zayed City.