Dubai's construction sector puts finishing touches on Expo 2020 infrastructure

Construction in Dubai was a major factor in the expansive economic growth seen in the early 2000s. Indeed, it was a popular claim that the emirate was home to 20% of the world’s cranes at the height of the boom in 2006. However, the sector has witnessed a slowdown in recent years as lower oil prices depressed consumer demand. This was particularly the case for real estate, which slowed building activity. The authorities are looking to counter the slump through several big-ticket infrastructure projects associated with the hosting of Expo 2020, which has provided a steady stream of projects for contractors.

The emirate has prioritised infrastructure development in its diversification drive, and this has been reflected in state spending. Dubai’s 2019 budget earmarked Dh9.2bn ($2.5bn) for infrastructure projects, down 22.6% from the Dh11.6bn ($3.2bn) allocated in 2018 but still more than the Dh8bn ($2.2bn) set aside in 2017. This funding accounts for 16% of the total budget of Dh56.8bn ($15.5bn), down from 21% in 2018. Even so, such a sizeable amount – combined with public-private partnerships for mega-projects – has proven to be a boon for the construction sector.

Structure & Oversight

A number of federal and emirate-level bodies are involved in the regulation of the construction industry. Dubai Municipality is responsible for issuing health and safety regulations, building permits, and property codes and guidelines. It is also charged with fire prevention and sanitation, technical specification and environmental standards. Construction in Dubai’s numerous free zones is regulated by their respective authorities, as they do not come under Dubai Municipality’s legal jurisdiction.

The municipality is also responsible for developing Dubai’s urban planning strategy and carrying out the Dubai 2020 Urban Masterplan. The masterplan is organised around three goals: identifying the parameters of urbanisation; facilitating competitive and sustainable spatial planning; and promoting the system’s responsiveness to future needs. To encourage sustainability, it aims to reduce the city’s usage of cars through projects such as a 15-km extension of the Dubai Metro Red Line to service Expo 2020. The focus on urban development is set to continue with the Dubai 2040 Urban Masterplan, which will encourage human-centric and pedestrian-friendly living via the development of public transport.

With the municipality responsible for longer-term urban planning, the Dubai Land Department (DLD) regulates property sales and organises and promotes property investment. The DLD’s Real Estate Regulation Authority regulates property exchanges and relationships between contracting parties. The Legal Affairs Department plays a key role by drafting or reviewing all legal agreements to which the Dubai government is a party, including awarded contracts related to the construction sector.

Several federal statutes are particularly important for the construction industry. The most pertinent of these laws are Federal Law No. 5 of 1985, which lays out the terms for negotiating and enforcing contracts; and Federal Law No. 8 of 1980, which covers labour relations, workplace health and safety, and other issues related to employment.

Construction Companies

Dubai is home to several of the region’s largest property developers, including Emaar Properties, Nakheel Properties, Damac Properties and Dubai Properties Group. After a period of contraction following the global financial crisis of 2007-08, competition between a wide range of developers resulted in a consolidated market made up of the larger companies that were able to weather the downturn.

A large number of local and global contractors operate in the emirate, with Dubai Municipality maintaining a registry of 745 engineering consultancies. However, the bulk of the work is carried out by large firms such as CSCEC Middle East, the regional arm of China State Construction Engineering Corporation, which began operations in Dubai in 2005.

Size & Performance

While construction activity has slowed in the years that followed the global drop in the price of oil in 2014, it continues to play a central role in stimulating growth in the region. Over $138.5bn in contracts are projected to be awarded across the GCC in 2019. Of the total, $69bn is expected to be awarded for construction projects, $47.2bn for energy-related construction and $22.2bn for infrastructure construction. Government spending has fuelled much of this development through a series of mega-projects across the Gulf.

Although the challenging international economic environment dampened demand for real estate segments such as retail, office and residential space, construction is continuing apace in other areas, such as infrastructure development. Much of this has been focused on infrastructure for Expo 2020, which Dubai will host between October 2020 and April 2021. The event is expected to add Dh22.7bn ($6.2bn) to the UAE’s GDP. The number of full-time jobs supported by the event, meanwhile, is predicted to peak at around 94,000 in 2020.

Construction activity in Dubai fell during the first three quarters of 2019 as the value of new projects awarded failed to keep up with the value of the large projects that had been completed. Around $1.2bn construction and transportation tenders were distributed between January and September of 2019, compared with $6.6bn worth of projects during the same period the year before.

Construction contributed 6.4% of the emirate’s total GDP of Dh298.1bn ($81.1bn) in 2018, or Dh25.4bn ($6.9bn). The contribution of construction to GDP increased by 14.5% from the previous year, according to figures from the Dubai Statistics Centre. The sector’s growth outpaced that of the overall economy, with construction expanding by 4.5% in 2018, compared to GDP, which rose by 1.9%. Furthermore, a report published by Emirates NBD Research in July 2019 forecast Dubai’s GDP will grow by 3% in 2019 and 3.7% in 2020, with this largely fuelled by construction activity.

Recent projects have gone beyond works solely for the expected crowds during Expo 2020. In the first half of 2019 Dubai’s Road and Transport Authority (RTA) awarded two mega-road construction projects totalling $400m. The first was awarded to CSCEC Middle East, which won a Dh710m ($193.3m) contract to build the next section of the Shindagha Corridor project that will eventually extend 13 km along the streets of Sheikh Rashid, Al Mina, Al Khaleej and Cairo in Dubai. The second was a Dh712m ($193.8m) contract awarded to Turkey-based MNG Günal for an upgrade of the Al Ain highway.

Housing

Residential construction remains the largest segment in both Dubai and the UAE. In 2018, 33.1% of total construction activity across the UAE was residential, largely driven by the efforts of the federal government to increase housing stock. This trend is set to continue, as government spending on housing is expected to hit Dh1.7bn ($462.7m) in 2019, up 6.3% from Dh1.6bn ($435.5m) in 2018.

In Dubai a number of major residential projects were completed in the first six months of 2019, including Al Khail Heights, Bluewaters Island and the Arabella villas. In the first quarter of 2019 alone 9800 residential units were built, bringing Dubai’s residential stock to 530,000 units. An additional 50,000 residences under construction as of the first quarter of 2019 and expected to be completed by the end of 2019. Housing stock is set to expand to 652,000 by the end of 2021, after projects such as Seven City in Jumeirah Lake Towers, Azizi Riviera in Meydan and Al Habtoor City are delivered.

The focus on increasing the supply of housing and improving the underlying infrastructure is helping to drive the emirate’s growth back to levels witnessed prior to the drop in oil prices in 2014 and is reflective of a return to higher levels of production. To that end, construction in the UAE is forecast to be a main contributor to the expected GDP growth of 4.2% between 2019 and 2023, according to estimates from the Dubai Chamber of Commerce and Industry.

Go with the Flow

Nonetheless, the performance of the sector has struggled due to liquidity issues. A survey conducted by regional business intelligence firm MEED, released in February 2019, found that 60.3% of UAE’s construction firms cited late payments causing cash-flow problems as the most significant financial risk, far outweighing concerns about too much competition eroding margins (13.8%) and disputes with clients (8.6%). “There is wide abuse of contractor bonds, late or no payments to contractors, or unresolved variation orders,” Shaun Killa, the principal architect behind the Museum of the Future which is set to open in 2020, told MEED. These payment issues have had trickle-down effects. “There are also delays in projects and inflation in costs due to the uncertainty of receiving final payments or counter-claims,” he explained.

Building Materials

Average building costs were stable between the first quarter of 2018 and that of 2019, increasing by 0.8%, according to a Colliers May 2019 report on Dubai and Abu Dhabi. The largest cost difference was seen in steel rebar, the price of which fell by 9%, mirroring the trend in steel pricing seen throughout the Middle East. The price of concrete fell by 2%; meanwhile, the costs of electrical cables rose by 2-5%; glass by 2%; stone, marble and tiles by 2-8%; sanitary ware by 2-5%; and transport by 6%. Looking into the future, Colliers predicted that construction cost inflation would not exceed 1% through the first quarter of 2020.

Demand Drivers

Expo 2020 – which will be the first world fair held in the MENA region – has driven much of the construction and infrastructure projects in Dubai as the emirate worked to build the infrastructure needed to host an estimated 25m people. Construction on the 483-ha of pavilions and related infrastructure, which includes extensions of the city’s two metro lines, is on track to be completed before October 2020. According to the Dubai Free Zone, $35bn is expected to be spent on the event, with most of the funding coming from the government and the remainder from private investors. Several projects will support the event, including Deira Islands, which is a chain of four artificial islands spanning 3 ha with shopping malls, hotels and a night market, set to be completed before October 2020. Also constructed for the event was the Dubai Water Canal, which was inaugurated in November 2016 and connects Deira Islands to other locations in Dubai.

Several entertainment projects are also in the pipeline, including Aladdin City, a hotel and shopping complex in the theme of the legends of Aladdin and Sinbad, which is expected to be completed in September 2020. The Museum of the Future aims to explore how challenges and technology will shape the future, and is set to open in September 2020. Legoland Dubai, Bollywood Parks Dubai and Motiongate Dubai theme parks all opened in late 2016.

The preparations for Expo 2020 also saw an uptick in transport infrastructure. In August 2019 the RTA announced it opened phases three and four of the road projects for the event, which built 22 km of new roads and bridges at a combined cost of Dh1.3bn ($353.9m). Around 43 km of roads were built in line with the first two phases, and an additional 11 km of roads and 4 km of bridges are expected to be completed by October 2020 in the final fifth and sixth phases. The 15-km expansion of the Dubai Metro Red Line – dubbed Route 2020 – will also feature an Expo 2020 station that will facilitate an expected 522,000 passengers to the event per day.

Looking beyond Expo 2020, housing construction is set to continue to drive sector activity. In May 2019 Sheikh Mohammed bin Rashid Al Maktoum, vice-president and prime minister of the UAE, and ruler of Dubai, announced he had allocated new land in the Nad Al Sheba and Wadi Al Amardi areas for residential development, which contained 1000 plots.

Outlook

While construction slowed on the back of low oil prices, causing the government to rein in public spending, investments associated with Expo 2020 have sustained activity in the sector. This is particularly the case with large-scale infrastructure projects. However, with the start of the expo on the horizon, investors and developers are looking beyond the event to identify new prospects.

Among the most promising are likely to be those related to housing and tourism, with the authorities aiming to sustain visitor numbers at 25m per year, up from the 15.9m who entered the emirate in 2018. Maintaining that level of visitor arrivals will require both the government and the private sector to keep pace with the demands of the increasing numbers of tourists. Officials will thus need to capitalise on the prestige of the one-time event to attract additional tourists and convince them to become regulars.