Dubai becomes a leading regional force in construction activity, regulation and arbitration

In 2017 Dubai was on the cusp of what is widely expected to be a multi-year building boom. Driven most immediately by preparations for Expo 2020, the construction of new and improved infrastructure and major event spaces constitutes an important component of the construction pipeline for the foreseeable future. At the same time, Dubai’s steadily increasing population, the rising number of incoming visitors (see Tourism chapter) and strong investment growth in recent years have fuelled an influx of new residential areas, hotels and warehouses.

Looking Up

The local construction industry has benefitted considerably from these factors, and is broadly optimistic looking ahead. In the first quarter of 2017, the most recent period for which data was available at the time of press, the sector accounted for 7% of emirate GDP, according to the Dubai Statistics Centre (DSC). This is slightly up on 6.6% for the whole of 2016 and 6.8% in 2015. Given the number of large-scale projects currently in progress or on the horizon, many market observers expect construction’s economic contribution to grow at a more rapid rate in 2017 and 2018.

This optimism partially reflects an expected upcoming recovery on a number of challenging years of late. Indeed, 2015 and 2016 have presented various hurdles for contractors, with economic pressures related to the continued low price of oil, the strength of the dollar, rising materials prices and a squeeze on public expenditure affecting the industry at large. However, many local players are confident that with the run-up to Expo 2020 beginning in earnest in 2017-18, plus rising domestic demand for transport infrastructure and industrial space, recovery is already beginning.

History

Dubai has long been among the most active and forward-looking construction markets in the world. The process of building – whether it be residential housing, office buildings, skyscrapers, shopping malls, luxury hotels, architectural edifices and higher education institutions – is in many ways synonymous with the emergence of Dubai as a cultural and economic centre in the Middle East and further afield. Many of the emirate’s iconic buildings are famous around the world, from the sail-shaped Burj Al Arab Jumeirah Hotel to the Burj Khalifa, which, at 829.8 metres, has been the tallest building in the world since its completion in 2010.

The history of construction in Dubai began with the need for transport infrastructure and the building of schools and hospitals. Following the discovery of oil in Abu Dhabi in 1958, the UAE set out to industrialise, building roads, deepwater ports, international airports, electricity grids and water supplies at a rapid pace and on a large scale. This early period foreshadowed the landscape of the current construction sector in many ways. It required a substantial number of labourers who came to Dubai and the other six emirates in large part from the Indian subcontinent, although also from other Arab countries and Europe. The current industry continues to rely largely on expatriate labour, although in recent years the policy of Emiratisation has taken hold across the sector, and the number of nationals working in it has jumped considerably.

Materials

Similarly, driven by rapidly rising demand, a number of private firms in the 1960s and 1970s set out to manufacture building materials and a range of other industrial and retail products on an import-substitution basis, thus laying the groundwork for the current, well-developed materials manufacturing segment.

By 1990 the country as a whole was home to more than 700 non-oil sector industrial establishments, a majority of which were related to the production of construction materials, according to the UAE’s Ministry of Finance and Industry. Through the 1990s this figure more than doubled, reaching 1859 by 1999, on the back of the construction boom that saw Dubai first emerge as a global economic centre. Indeed, in 1999 the emirate was home to the largest number of industrial establishments in the UAE, with 678, compared to 581 in Sharjah, 257 in Ajman and 204 in Abu Dhabi.

Recent Developments

Dubai’s reputation continued to grow through the early years of the 21st century. The emirate’s construction and real estate sector together contributed 15% of GDP in 2008, making it the single-largest building and property industry in the GCC region. From 2005 through 2010 GCC countries reported infrastructure construction projects worth some $1trn; two-thirds of these took place in the UAE, and the bulk of those were in Dubai. Interestingly, in 2006 around 24% of the world’s construction cranes were located in Dubai – a tangible indication of the pace and scale of building then taking place in the emirate. During this period a handful of major global construction and development companies established themselves in Dubai – perhaps most notably the firms Emaar Properties, Nakheel and Dubai Properties Group, which today remain central players in the industry.

Dubai, like many of its neighbours, was negatively affected by the international financial downturn that swept across the globe in 2008-09. The results of the increased economic pressure included a slowdown in government spending, with a raft of projects put on hold and some cancelled outright, accompanied by a market correction in many segments.

Yet, following a few years of recovery and cautious planning, the market began to pick up again in 2011-13. According to data from the Dubai Chamber of Commerce and Industry (DCCI), the construction sector’s economic contribution dropped from 6.8% of GDP in 2010 to 6.5% in 2011, and then began to rise again. Similarly, the number of sector workers employed in the emirate dropped from around 625,000 in 2010 to 485,000 in 2011, before levelling out to 475,000 workers in 2012. The total began to rise again to 480,000 in 2013, and construction workers numbered 500,000 by the end of 2014. This growth continued until 2014-15, when the market once again entered a period characterised by slower expansion, decreased long-term investment commitments and short-term uncertainty.

Headline Figures

Based on conversations with many local contractors and other sector players, the recent period of slow growth has either already come to an end, or is expected to soon. This means the time is now for buyers. “It is a good time to buy property, especially in the more established areas of Dubai, given the softening of capital values over the last few years,” Harmen de Jong, a partner in the Dubai office of global real estate consultancy Knight Frank, told OBG.

While many agree that the downward movement has ended, it remains unknown as to when, exactly, recovery will begin. Nonetheless, particular types of projects are seen to have the potential to offset any unforeseen relapses. “It is clear that the major developers are continuing to plan and launch new projects, with the expectation that Expo 2020 and the government’s investment in large-scale transport infrastructure will stimulate employment growth and demand for residential accommodation, which will hopefully mitigate the extent of any future price and rental declines,” John Allen, director of valuation and advisory at the Dubai office of real estate services firm Asteco, told OBG.

However, an August 2017 report on the sector, published by the DSC in conjunction with data from Dubai Municipality, indicate only a potential turnaround in building across the emirate. For example, in the first half of 2017 some 4333 new residential units were completed in Dubai at a value of Dh14.9bn ($4.1bn), as compared to 5837 units at a value of Dh13.3bn ($3.7bn) in the first half of 2016. The bulk of this new construction took the form of apartment building units.

Some 3300 new apartment units were added in the third quarter of 2017, according to real estate research firm JLL, in addition to 660 villas and 75 town houses. The firm indicated that total residential supply sat around 487,000 units in September 2017, with rents bottoming out. That same month, Dubai hosted the Cityscape Global event, where developers announced new mega-projects. Direct sales of UAE properties were also allowed at the event for the first time in 10 years, peaking buyer interest.

In terms of inputs, the same August article by the DSC reported that the cost of construction rose ever so slightly in 2016, due to a small increase in the cost of raw materials. Dubai’s general construction index rose 0.06% in 2016 on the previous year, with the prices of construction materials up by 0.23%; the higher price of quarrying materials was a key contributor to this increase. Meanwhile, a number of other construction costs declined: the price of equipment and labour dropped by 0.19% between 2015 and 2016, and manufacturing materials decreased by 0.27%.

Oversight & Regulation

Dubai’s construction industry has become increasingly well regulated over the past 10-15 years, to the point that today it is widely seen to be nearing maturity. “The emirate’s Legal Affairs Department [LAD] has worked hard to raise the bar in terms of oversight and regulation,” Nick Carnell, head of construction in the Dubai office of UK-based law firm Taylor Wessing, told OBG. “The industry is increasingly driven by financing vehicles and contracts that are recognised in Europe and around the world. This is undoubtedly a sign of maturity.” The LAD, which is responsible for overseeing the emirate’s legal codes and regulatory requirements across all economic sectors, maintains the legal framework for construction activity and is a cornerstone of the industry. The department’s activities are based in large part on federal construction-related statutes, including the Civil Transactions Code Federal Law No. 1 of 1985, which includes contract regulations drawn up specifically for the construction sector.

At the emirate level, contractors are required to abide by rules enacted and overseen by Dubai Municipality, which issues building codes and standards, qualifications related to the environment, and health and safety regulations. The Dubai Land Department also specifies construction procedures. Each of Dubai’s numerous free zones and legally independent – or partially independent – industrial areas have separate rules and regulations regarding building. “In recent years it seems that more construction firms are interested in obtaining legal advice at the beginning of a project, rather than at the end. This is a reflection of rising awareness about financial issues during a tight period in the market, but it is also understood as a signal of a more seasoned market,” Carnell told OBG.

Dubai’s strong legal framework with regard to construction has resulted in the emirate becoming a key site of dispute arbitration for the region. The Dubai International Arbitration Centre, an autonomous, nonprofit institution that has been active since 1994, has taken the lead on interpreting construction disputes and handling arbitration proceedings in recent years. Additionally, Dubai’s status as a regional home base for a growing number of multinational law firms can be attributed, at least in part, to the increasing number of construction and real estate-related cases being heard in the emirate. Other local entities that offer legal advice and arbitration services to construction firms include the International Chamber of Commerce and the Dubai International Financial Centre.

Sector Landscape

Dubai’s construction sector is composed of a large number of multinational contractors, plus a significant number of local firms. Major players either based or operating regularly in the emirate include Habtoor Leighton Group, Arabtec Construction, Al Shafar General Contracting, Al Jaber Engineering & Contracting (ALEC), Consolidated Contractors Company, Al Shafar General Contracting, Arabian Construction Company, Al Futtaim Group, Saudi Binladin Group, Actco General Contracting, Brookfield Multiplex, China State Construction Engineering Corporation and Samsung C&T.

The most recent bout of economic pressure has hit smaller players particularly hard, resulting in some small and medium-sized enterprises being forced to shutter their operations either temporarily or permanently. “Major developers are still planning and delivering new projects in all segments,” Asteco’s Allen told OBG. “But smaller individual developers may well struggle to compete in the off-plan sales market with margins being squeezed by the larger master plan developers, as well as being forced to compete with attractive pricing and delayed payment plans to generate interest.”

In terms of developers, Dubai is home to some of the largest players in the world, many of which benefit from formal links to the government. The emirate’s three key developers are Emaar Properties, Nakheel Properties and Dubai Properties Group. Despite various hurdles over the past decade – particularly in relation to the international financial downturn – these three companies have consolidated their market share to become the largest players in a relatively crowded field.

Key Projects

Much of the current construction activity in the emirate is being driven by government-mandated projects, including a considerable number related to Expo 2020 (see analysis). This trend is typical for Dubai, where the government – primarily the emirate authorities, but also the federal government – has long been the biggest developer. Large-scale public infrastructure projects, headline mega-projects like the skyscraper Burj Khalifa, and industrial and transport-related initiatives are generally either financed with state support, led by a government-linked developer or implemented by the state directly.

Expo 2020 has been the primary focus in terms of public development since Dubai was awarded the world exhibition in 2013. With expectations that the event will draw some 25m visitors – around 70% of them from outside the UAE – over the course of six months, the requirements for Expo 2020 are substantial. While pre-planning, hiring, scheduling and other preparatory activities – including excavation and site preparation – have been ongoing since 2013, the bulk of the construction for the event is slated for the 2017-19 period. As such, in the 11 months to November 2017 the government entity charged with carrying out the event issued Dh11.2bn ($3bn) in tenders, covering both construction and non-construction contracts. The majority of contracts were for building works for the expo site itself, a 4.38-sq-km plot of land located in Dubai South, near Al Maktoum International Airport (DWC). This was a major increase on the Dh2bn ($544.4m) in contracts awarded over the course of 2016.

Beyond The Expo

In addition to the new exhibition areas hosting Expo 2020, the government is using the event as a catalyst for the development of an entirely new district, namely Dubai South, which is slated to become a new residential, business, logistics and transport hub in the emirate. Central to this outcome is the completion of a raft of major infrastructure projects, many of which are scheduled for completion prior to the expo, but have been designed to serve Dubai’s growing population for decades after 2020. These plans include a major expansion of DWC – which opened for business in 2010 and to date handles only a small fraction of the passengers and freight of the emirate’s primary air facility, Dubai International Airport (DXB), which is one of the busiest airports in the world. In late 2016 the government announced plans to spend some $35.7bn on DWC and a surrounding logistics centre in the medium-term future. The long-term goal is to boost the airport’s capacity to around 160m passengers – almost double DXB’s current capacity – at which point DWC would become the primary international entry point to Dubai and possibly the wider UAE.

Other major projects set to be completed before Expo 2020 include a number of expansions to the Port of Jebel Ali, which is the largest port in the Middle East and the ninth-largest globally, as well as the expansion of the Dubai Metro to connect the city centre to the expo site. Both of these projects have been developed to benefit Dubai’s population for years after the world’s fair has ended. Indeed, Jebel Ali, which is located near the Dubai South project, is one of the main reasons for the government’s enormous planned investment in DWC over the coming years. By building up air links, warehousing and other logistics services in and around Dubai South, the emirate is seeking to remain competitive in a region with a significant number of major container ports, all of which compete with Dubai’s Jebel Ali (see Maritime chapter). This is in line with development plans at Jebel Ali itself. In 2015 the port operator, DP World – a major domestic player in the global logistics industry – announced that it planned to build a fourth container terminal at the port. However, this plan was on hold in 2017, primarily due to slower global trade in recent years.

Additionally, in mid-2016 Dubai’s Roads and Transport Authority issued a contract to extend the Dubai Metro’s Red Line to the Expo 2020 site, which will involve adding some 15 km of new track at a cost of Dh10.6bn ($2.9bn). The tender was awarded to an international consortium comprising contractors from France, Spain and Turkey (see Transport & Logistics chapter).

Material Matters

While the majority of Dubai’s construction materials are imported, the ratio of imports to domestically produced stock varies widely depending on the material in question. According to a report on the performance of the construction sector in 2016, published by the DCCI in December 2017, trade of construction materials accounted for approximately 5.3% of Dubai’s total non-oil foreign trade of Dh1.28trn ($347.3bn) that year. Of the $18.4bn building materials total, imports made up around 68%, re-exports accounted for 18% and exports 14%. This breakdown has remained relatively constant since 2012.

Dubai’s most-traded construction products in 2016 included steel, with 46% of the total; heating, ventilation, air conditioning and refrigeration (HVACR) products, with 17.4%; wires and cables (8.1%); wood products (7%); and lighting (6.8%). The emirate’s fastest-growing construction material exports during the 2013-16 period have been aggregates, gravel and sand, with a 36% compound annual growth rate (CAGR). The second-fastest growth category was HVACR products, at 22%, followed by insulation (19%), waterproofing materials (5%), and both bricks and plumbing products (4%). In terms of imports, concrete was the fastest growing between 2013 and 2016, with a CAGR of nearly 12%. This was followed by glass at 7.9%, wood products (4.8%), HVACR products (3.9%), and doors and windows (3.4%), according to DCCI data.

While Dubai is, indeed, a major importer of concrete, the material also comprised 1% of exports in 2016. Furthermore, while aggregates, gravel and sand was the top-growing export category, sand is still in high demand in the Gulf countries, where natural desert sand is too smooth for construction purposes.

Commercial Projects

With the recent pressure on the construction industry widely understood to be either levelling out or letting up somewhat, a raft of major commercial projects are under way. Many of these are linked to Expo 2020, either directly – in that they will play some role in the event itself – or indirectly, in that developers are working to complete them before the exposition to benefit from global attention Dubai expects to receive during the event.

A significant number of major mixed-use residential projects are under development. These include a large amount of apartments and villas, plus retail and entertainment space, food and beverage outlets, a hospitality element and office space. Among the largest of these are Emaar’s Dubai Creek Harbour (DCH) district, which is slated to be twice as large as Downtown Dubai; Meydan Group’s 4.2m-sq-metre Mohammad Bin Rashid Al Maktoum (MBR) City, District One; and Nakheel’s Deira Islands project. A spate of new hotels are also currently under construction. According to industry media, some 114 new hospitality properties were set to open in the emirate in 2017-18, which was the largest figure in the region (see Tourism chapter).

The centrepiece of DCH is The Tower, a spire that is slated to be more than 100 metres taller than the Burj Khalifa building upon its completion in 2019. Located at Dubai Creek near Ras Al Khor, DCH is set to cover some 1200 ha in total, as compared to Downtown Dubai’s 500-ha footprint. The development – which is set to include 679m sq metres of new residential space and 851,000 sq metres of new commercial space, plus 22 new hotels and retail space covering 11.2m sq metres – saw site preparation work begin in late 2016.

Emaar has awarded major DCH contracts to a wide range of local and international firms. In July 2017 a subsidiary of Arabtec won a Dh113m ($30.8m) contract for the mechanical, electrical and plumbing work at two 37-storey residential towers at the site. In September 2016 BMT Fluid Mechanics, a subsidiary of UK-based BMT Group, was appointed as wind engineering consultant for The Tower skyscraper.

MBR City, District One, meanwhile, has been under construction since 2012 and delivered its first villas in late 2016. The project, which will eventually include 1500 villas at a cost of Dh25bn ($6.8bn), is set to be built in four phases, with completion of all four scheduled for 2022. However, like other developers, the Meydan Group plans to have completed a significant portion of MBR City in time for Expo 2020.

Elsewhere in the emirate, Deira Islands comprises a handful of reclaimed islands that are part of a much larger group of reclaimed islands built as part of the now-cancelled Palm Deira development. The project, although scaled back from the original Palm Deira plan, is set to include 16 residential buildings, two hotels and two serviced apartment buildings surrounding Deira Mall, a 604,000-sq-metre retail establishment. Upon completion, Deira Islands is set to house 250,000 residents and supply some 80,000 new jobs in retail, hospitality and other establishments.

The project passed a milestone in December 2016 when the developer, Nakheel, completed work on a Dh150m ($40.8m) road bridge between the islands and the mainland. While the project as a whole is not expected to be completed in time for the global exhibition, Nakheel plans to deliver the first batch of towers by the second quarter of 2020, just in time for the event, which will begin in October of that year.

Outlook

Despite ongoing economic pressure in construction markets across the Middle East, there are many reasons for a positive outlook among contractors working in Dubai. The emirate’s 2018 budget, which was finalised in December 2017, indicated an increase in total government expenditure of 19.5% on the previous year, with 21% of spending going towards a range of ambitious new infrastructure projects in line with the emirate’s greater strategic plan.

“Dubai remains an incredibly buoyant market,” Kez Taylor, CEO of Dubai-based contractor ALEC, told OBG. “This is becoming a much more liveable city because of all the work going into transportation and other kinds of infrastructure at the moment.” At present much of the ongoing construction activity in Dubai involves projects that are pegged – either formally or informally – to Expo 2020, with another strong year of event spending in the forecast. A significant number of private residential, retail, hospitality and industrial developments are also currently under way (see Real Estate overview), with designers and contractors alike hoping that the efforts will generate a rush of interest in the emirate among investors, businesses and individuals looking to move to or visit the metropolis.