Bouncing back: After four challenging years, activity is ramping up again at home and throughout the region

Despite the lingering effects of the 2008-09 global economic downturn, contractors, property developers, materials suppliers and other players are broadly optimistic about the construction industry in Dubai.

While the sector lost a substantial amount of value in the years following the crisis, since mid-2011 the market has been steadily improving, largely as a result of a handful of key segments, including hotel, tourism and retail projects. There have also been pockets of activity in Dubai’s massive residential segment. Moreover, in an effort to diversify their activities, many local contractors have undertaken major projects elsewhere in the Middle East and further afield in recent years.

According to a collaborative report published by the World Bank and the International Finance Corporation in November 2012, the UAE as a whole ranked number 26 out of 185 countries for ease of doing business, adding value to Dubai as an increasingly stable home base for construction companies looking to carry out projects in Saudi Arabia, Qatar and other growing Gulf economies. Additionally, a report released in 2012 by Jones Lang LaSalle, an international real estate firm, ranked Dubai above other GCC destinations in terms of real estate sector transparency.

CLUTTER IN THE CLOSET: Nonetheless, the local construction sector faces a number of challenges. Many banks and other local financial services firms are currently holding onto a substantial amount of bad real estate-related debt and, in some cases, completed but unsold buildings. Analysts from Emirates NBD, which was created in 2007 following a merger between Emirates Bank International and the National Bank of Dubai, noted in a research report that it would take until 2014 for the brokerage to cover its cost of capital, as provisions currently amount to between 53% and 76% of its operating profit. As a result of issues like this, financing for new construction projects is still relatively hard to come by, especially for smaller private sector developers. Additionally, the regional political situation has negatively impacted numerous Dubai-based construction firms carrying out projects in Libya and Syria, for example, though it has also resulted in a substantial amount of capital flowing into the emirate. Finally, strong price competition amongst local contractors has resulted in falling revenues at many firms and, in some cases, low-quality builds.Despite these issues, Dubai is expected to continue to serve as home base for many of the Middle East’s leading contractors, such as Arabtec Construction, the largest construction firm in the UAE. The emirate offers one of the best operating environments in the region, easy access to the expanding construction market in nearby Saudi (among others) and a domestic construction market that is in the midst of recovery. Drake & Scull International (DSI), Dubai’s second-largest contractor, posted solid growth in the first quarter of 2012. Like Arabtec, DSI is poised to expand in 2013, having worked on numerous large-scale projects, including the Dubai Chamber of Commerce & Industry building and the Emirates Golf Club.

A series of ambitious new projects in Dubai – mostly government-funded developments – are expected to result in a substantial amount of new construction activity domestically in the coming years, in particular the three projects of Mohammed bin Rashid City (MBR), Dubai Creek and Dubai Theme Parks.

MBR, which will feature an enormous park and the landmark “Mall of the World”, is projected to cost in access of $100bn (see analysis). Dubai Creek, on the other hand, will see the extension of the Business Bay canal by 12.8 km, resulting in the construction of marine transit stations as well as new roads and bridges. Dubai Theme Parks will see five new theme parks built in Jebel Ali, and will feature large-scale leisure and entertainment facilities to capture the transit tourism market.

OVERSIGHT & REGULATION: A number of official government entities are involved in regulating and overseeing the construction industry. The Dubai Land Department (DLD), which was established in 1960, is the government’s property management arm. The DLD currently oversees and monitors a significant number of subsidiary organisations, including the Real Estate Regulatory Agency (RERA); the Dubai Real Estate Institute; Taqyeem, a real estate appraisal centre; and a real estate investment promotion arm, respectively. RERA, which has a mandate to develop, manage and enforce Dubai’s real estate regulatory regime, works closely with the construction sector.

Dubai Municipality, the government’s city management arm, oversees and enforces the emirate’s building codes. In 2007 the organisation introduced new legislation requiring all new government buildings to adhere to a green building code developed by the Dubai Supreme Council of Energy and the Dubai Electricity and Water Authority. In early 2011 Dubai Municipality introduced a new 70-point building-permit checklist, with the goal of simplifying and streamlining building inspections in the emirate. The municipal body’s building inspection teams work directly with developers and construction companies to ensure that new projects are up to standard. The new checklist covers air and water quality, emergency exits, fire systems, storage areas, public facilities, lighting systems and elevators, among others. Finally, in early 2012 the government announced that beginning in 2014 all new buildings put up in Dubai – government and private sector alike – would have to comply with the green building code.

Khaldoun Tabari, CEO of Drake and Scull International (DSI), a leading construction group, told OBG, “The market continues to mature and there is always room for improvement in terms of the quality of its structures.” He added, “As an example, more can be done in terms of green building, but it is promising to see initiatives being taken both in Dubai and Abu Dhabi to encourage the development of eco friendly construction.”

Dubai Municipality has also worked to crack down on illegal construction in recent years. In January 2012 the government announced that 1111 buildings in the emirate faced fines and disconnection of utilities for unauthorised structural alterations made in 2011. The government levied fines of up to Dh50,000 ($13,610) for modifications that endangered a building’s structure or had a negative impact on its architectural aesthetics. The municipality issued 3854 warnings in total, down 55% on the previous year, which points toward declining illegal construction in Dubai.

BY THE NUMBERS: The Swiss-based group OSEC reported in 2012 that since the 2008-09 downturn, Dubai’s construction industry has lost more than 50% of its overall value, worth a combined total of $58bn primarily as a result of stalled and cancelled projects. That said, the OSEC also noted that as of late 2011 the building and construction industry was the third-largest sector of the UAE’s economy, after hydrocarbons and trade. According to a recent report from Austrade, the Australian government’s trade organisation, the construction sector was worth $23bn in late 2011, which was equal to around 6% of GDP at the time. While some twothirds of this value was from Abu Dhabi, a steadily increasing percentage of the UAE’s total construction activity is set to reach Dubai in the coming years.

Indeed, economic growth in Dubai since mid-2011 is a strong sign for the industry. Data from the Institute of International Finance (IIF), a global association of financial institutions, shows that the UAE’s GDP grew by 4.7% in 2011, up from 3.2% in 2010 and 3.7% in 2009. As of late 2011 the UAE boasted the secondlargest economy in the Arab world behind Saudi Arabia. Dubai, which has the second-largest GDP in the UAE after Abu Dhabi, saw GDP growth of 3.2% in 2011, after posting losses of around 4% in 2009 and 2.2% in 2010. According to IIF forecasts, the emirate’s GDP will expand by around 2.5% in 2012, due largely to solid expansion in trade and the thriving retail and tourism segments.

The construction and real estate markets in Dubai has benefitted from this expansion. In the first half of 2012 land transactions in Dubai were worth Dh63bn ($17.15bn), up 21% from the same period in 2011, according to data from the DLD. Similarly, as per local news reports, in 2011 some 137 construction projects were awarded and then cancelled, down from 229 the previous year. This figure is expected to continue to drop in the coming years, to around 109 in 2012 and to just 30 in 2013, as developers work to ensure that their projects are well planned and commercially viable.

ARABTEC: The emirate is home to a handful of global construction firms, most of which emerged during the mid-2000s growth period. Arabtec, which was founded in 1975, is currently the biggest construction company in the UAE, and one of the largest in the Middle East. In the first quarter of 2012 Arabtec’s profits reached Dh84.1m ($22.89m), more than three times the Dh26.6m ($7.24m) earned in the same period in 2011. Revenues rose from Dh1.2bn ($326.64m) to Dh1.3bn ($353.87m) over the same period. In the second quarter of 2012 Arabtec posted a revenue loss compared to the previous year due to a number of the company’s projects in Saudi Arabia stalling. With the construction market in the kingdom expected to pick up again in the latter half of 2012 and 2013, however, the drop in revenues was thought to be temporary.

Nearly three-quarters of Arabtec is listed on the Dubai Financial Market exchange, while 21.6% of the firm is owned by Aabar Investments, an Abu Dhabi government-controlled fund. The company has been involved in many of UAE’s banner construction projects, including the Burj Khalifa, Infinity Tower, Dubai International Financial Centre, Gate Village, Jumeirah Beach Residences one and three, the Fairmont Dubai, the Palazzo Versace, as well as the Abu Dhabi National Exhibitions Company building, among others.

Since 2004 Arabtec has been working to win contracts outside of the UAE, with a substantial amount of success. In Saudi Arabia, for example, the firm is currently working on a Dh4.89bn ($1.33bn) housing project as part of a joint venture with the Saudi Binladen Group. In early October 2012 Arabtec won a Dh453m ($123.31m) contract to construct a 463-metre office tower in St. Petersburg for Gazprom, the Russian government’s oil and gas arm. The building, which will be the tallest tower in Europe upon completion, will be Arabtec’s first project in Europe. The company also recently won some Dh270m ($73.49m) worth of projects in Qatar and Abu Dhabi, including Msheireb Downtown Doha, Midfield Terminal Building at Abu Dhabi International Airport, Saraya Residential Development in Abu Dhabi, Twin Towers - Qatar and the World Trade Centre Doha. The group also secured a contract to build the SECON Nile Towers in Cairo, Egypt.

DRAKE & SCULL INTERNATIONAL(DSI): Active in the UAE since 1966, DSI was Dubai’s second-largest contractor at the time of writing. The company posted solid growth in the first quarter of 2012, when profits reached Dh43m ($11.7m) and revenues hit Dh777m ($211.5m), up around 20% from the same period the previous year. Like Arabtec, DSI saw weaker profits in the second quarter of the year, though with some $2bn in contracts on its books, the company is poised for substantial expansion through the rest of 2012 and 2013. The firm has worked on numerous large-scale projects in the UAE, including the Dubai Chamber of Commerce & Industry building, Emirates Golf Club, Infinity Tower, Jumeirah Beach Hotel, International City and the KPM Tower. Additionally, the firm has taken part in a number of foreign projects, including King Abdullah University of Science and Technology and King Abdullah Financial District in Saudi Arabia and the Durrat Al Bahrain district cooling system in Bahrain, among others. In the first quarter of 2012 alone, DSI won contracts valued at Dh1.3bn ($353.87m) in total in the MENA region. These include a Dh200m ($54.44m) contact for a 25-storey tower in Dubai’s Business Bay neighbourhood; a $230m contract for work in Algeria; and a $38m contract for work on the Rocco Forte Hotel in Jeddah, Saudi Arabia. In September 2012 DSI won a Dh1.314bn ($357.67m) contract to undertake engineering, procurement and construction at an oil pipeline in south-east Iraq. The firm will collaborate with Sicim, an Italian contractor, on the project, which is being built at the Zubair oilfield, among the largest in the world.

OTHERS: In addition to Arabtec and DSI, Dubai is home to a diverse group of other construction firms. The Giga Group, which was founded in Dubai in 1956, has undertaken a variety of construction projects in the region in recent years. The firm is completing a $1bn project to build 12,000 houses in Basra, Iraq for the provincial administration. In April 2012 Al Arif Contracting, a subsidiary of Masharie, the private-equity arm of government-controlled Dubai Investments, announced Dh176.7m ($48.1m) in contracts in Dubai, including three new towers, 92 villas and a supermarket. Other local players active in the emirate include the Al Habtoor Leighton Group, the Dubai Contracting Company, Al Hamad Contracting and Al Rostamani Pegel, among others. number of other international and Middle Eastern firms are also active in the domestic market, including the Greece-based Consolidated Contractors Company, the Beirut-based Arabian Construction Company and Hill International, a US-based company.

INFRASTRUCTURE: Government-funded infrastructure projects account for a substantial percentage of the construction work currently under way in Dubai. The UAE has a long history of investing heavily in infrastructure. In early July 2012 the UAE was ranked first in the region, and 11th worldwide, in terms of transport infrastructure in the World Economic Forum’s “Global Enabling Trade Report 2012”. Globally, the UAE ranked fourth in terms of air transport infrastructure quality, sixth in terms of maritime infrastructure and seventh in terms of trans-shipment infrastructure.

Additionally, the UAE was named as one of only 17 countries to have paved 100% of its road network. Despite the high standard of the UAE’s existing transport networks, the government has ramped up spending on infrastructure in recent years. Under the 2012 budget, which was released in late 2011, some 41% of public expenditure in the emirate will go towards infrastructure projects, including roads, civil aviation development, airports and tourism. This is up from around 23% in the 2011 budget. The 2012 figure includes funding for several large-scale projects. For example, in late 2011 the Roads and Transport Authority announced a $272.5m, five-year project to overhaul and update Dubai’s urban road network, which should see a substantial amount of new construction work for local firms. In addition, Dubai International Airport, which is expected to welcome some 56m passengers in 2012 (up from 51m in 2011), launched a $7.8bn expansion initiative in mid-2011. This project aims to enable the airport to cater to 90m passengers by 2019.

Similarly, Abu Dhabi International Airport recently announced a $3bn expansion project, which is set to run through until at least 2017. Other major transport infrastructure projects include large-scale power projects in the Northern Emirates and the Etihad Rail initiative, which will see the development of a national rail network in the UAE (see Transport chapter).

TOURISM & HOTELS: The expanding tourism sector is expected to be a major economic contributor for the future. Dubai has become a major tourism destination over the past decade, and in 2011 the emirate’s hotels welcomed 9.3m visitors, up 10% from 8.49m the previous year, according to data from the Department of Tourism and Commerce Marketing, the government’s tourism promotion entity. As of mid-2012 there were 54,250 hotel rooms in Dubai according to data from Jones Lang LaSalle. Rising visitor numbers have translated into increasing demand for hotel rooms in recent years. As of the end of 2011 Dubai’s construction pipeline included 13,349 hotel rooms, according to data from STR Global, a US-based hotel industry research firm. This figure is nearly three times higher than in Abu Dhabi, the second-largest hotel market in the region, which had 5298 rooms in the construction pipeline at the end of 2011. Other major hotel markets in the Middle East include Riyadh, Saudi Arabia, which had 2687 hotel rooms in the construction pipeline at the end of 2011; Cairo, Egypt, with 1977 rooms; and Amman, Jordan, with 1507 rooms, according to STR Global.

THE REGIONAL MARKET: In addition to increasing construction activity at home, Dubai-based firms are expected to continue to play a major role in projects elsewhere in the Middle East and further afield. Saudi Arabia and Qatar, in particular, are predicted to be major sources of new construction contracts for the next 5-10 years. Indeed, spending on infrastructure in Saudi Arabia has been growing exponentially in recent years. In 2011 the kingdom awarded SR270bn ($63.88bn) worth of construction contracts, up 155% from 2010 and 32% from 2009. Most of this expansion took place in the transport, power and industrial sectors, as Saudi worked to shore up its reputation as the dominant oil producer in the region. According to recent forecasts from the Saudi-based National Commercial Bank (NCB), the kingdom is expected to spend SR234bn ($62.39bn) on new projects in 2012, including a substantial amount on social development projects. Saudi’s 2012 budget includes plans to build over 700 new schools, in addition to a number of new hospitals, clinics and social welfare centres. According to an October 2012 report by NCB, Saudi is expected to spend some $240bn on housing alone by 2020, which will pay for the construction of 6.8m new homes in the kingdom. The leading contractors in Dubai, including Arabtec and DSI, will be central to this construction activity.

In addition to Saudi, a number of other GCC and Middle East markets are expected to be a major source of new construction contracts in the coming years. Qatar will likely begin spending heavily on new infrastructure and other projects in the near future in preparation for hosting the 2022 FIFA World Cup, for example. Kuwait, which is in the early stages of building the world’s largest downstream oil refinery at a cost of $14.5bn, will also be a major source of new contracts over the course of the coming decade. Finally, in October 2012 the government of Iraq announced plans to sign memoranda of understanding with six developers – including the Dubai-based firms Emaar Properties and Damac Properties – to carry out a variety of large-scale projects there. According to a recent study by McKinsey, Iraq is expected to spend $10.4bn on construction and infrastructure projects in 2013. The country is working to build around 150,000 low-cost housing units per year in an effort to meet local demand for housing for the foreseeable future. The country plans to construct 2.5m homes in total by 2016 and is also investing heavily in energy infrastructure, another potential source of work.

CONSTRUCTION MATERIALS: Data from Frost and Sullivan, a US-based market research consultancy, shows that the building materials market in the MENA region is valued at around $145bn, due largely to current and planned projects in Saudi Arabia and Qatar. While prices are different in each country, in general around 33% of a project’s budget is spent on materials in the region.

Material prices fell notably in the wake of the 2008-09 downturn, though since late 2010 and early 2011 they have begun to go up again, in line with increased development in many countries. “Building materials are rising again,” Mohammed Al Rais, senior vice-president and managing director of Hill International, a US-based contractor, told OBG. “This indicates that it is a good time to start projects that within a period of three years may see a 25% increase in value,” he also added.The cement segment has been a major beneficiary of the jump in construction activity in the region. In the first quarter of 2012 cement companies in the Gulf pulled in $1.26bn in revenues, up 24.3% from the same period the previous year. Cement companies operating in the UAE, in particular, reported a jump in revenues of 7.7% to $258.1m in the first quarter, after years of declining sales. The UAE is home to a number of cement producers, including Unibeton Readymix, Jebel Ali Cement, Star Cement, Binani Cement and Dubai’s National Cement Company. In April 2012 the Ministry of Environment and Water introduced new regulations in an effort to reduce the environmental impact of the local cement industry. In particular, cement firms are required to reduce “volatile dust emissions” and improve health and safety standards at their facilities.

Demand for steel among the GCC is predicted to rise by 6% in the next five years as well, according to Frost and Sullivan forecasts, and is likely to push up prices.

OUTLOOK: While the local real estate industry is expected to continue to grow over the coming decade, its faces a number of challenges. Securing finance is an ongoing issue, for example, as many financial institutions remain reticent when it comes to funding new real estate projects in the UAE. Price competition among local firms is another challenge facing the industry. Dubai is home to a glut of contractors and other construction companies, the majority of which set up shop in the emirate before the downturn. Since the market dropped off in 2008-09, new developments have been somewhat scarce, which has caused firms to bid on any and all projects they can. Consequently, a contract that would have attracted 10 bids before the crisis has the potential to attract 30 today. The government is working to address these issues. To boost the availability of lending, the state has sought to introduce a number of new initiatives to increase market activity (see analysis). This is expected to both loosen the financial sector’s purse strings when it comes to property lending and dilute competition for projects across the board.