Swings and roundabouts: With competition among contractors growing, those with viable projects could find this a good time to build

After a period of rapid growth in 2008 and early 2009, the construction sector has settled into a more moderate pattern in recent years, with contractors primarily wrapping up legacy projects in 2011. However, 2012 began on a positive note, with the government announcing in January that it would resume some previously delayed projects. Nonetheless, with excess capacity in the system, competition for contracts has driven down pricing, providing an opportunity for developers. For viable projects, now may be a good time to build, with construction firms willing to bid low to win business.

ENGINE OF GROWTH: Although one of the goals of Abu Dhabi Economic Vision 2030, the emirate’s long-term economic plan, is to promote the private sector as the main stimulus of growth, at present the government plays a key role in the development of local real estate projects, in part through its holdings in Aldar Properties, the largest real estate developer in Abu Dhabi, and via its smaller stake in Sorouh Real Estate. The state also fully owns the Tourism Development & Investment Company (TDIC) and Mubadala Real Estate & Infrastructure, a business unit of Mubadala Development Company, both of which are mandated to deliver upon the government’s vision and subsequently provide considerable amounts of work to contractors.

Market participants have emphasised the high importance of government spending for the health of the local construction sector. As Richard Chammas, the president and COO of Saudi Arabia-based contractor Saudi Oger, said, “The government has to be the engine of growth in Abu Dhabi in order to bring about any kind of change to the present climate. While the private sector is crucial, it is not able to fill the role or generate the jobs or investment funds like government- and state-owned enterprises, particularly in the construction and real estate sectors.”

For that reason, 2011 was a year of uncertainty for contractors, as the government reassessed priorities and put some projects on hold. These included the development of local branches of the Guggenheim and Louvre Museums, with the TDIC announcing in October 2011 that these projects were being delayed indefinitely, although they have since been relaunched. A reassessment of priorities may well have been a reasonable move by the emirate’s government. While Abu Dhabi’s fundamentals remained strong, the global economic picture was nothing if not uncertain.

The government has sufficient funds to invest in commercial and residential developments if that is its preference, but businesses in the sector – including some state-owned entities – rely at least in part on international capital markets for their financing and the demand for new projects is, to a degree, a function of global economic conditions. While an air of uncertainty may have prevailed in 2011, conditions improved in 2012, with the Executive Council announcing in January that it had approved a list of development projects, including some that had previously been put on hold (see analysis). The news came as a strong positive announcement, according to Tariq Hatim Sultan, the CEO of Bunya, the company responsible for the planning, execution and management of infrastructure on Reem Island, an area near downtown Abu Dhabi City being developed as a residential and commercial centre. “The economic development package announced by the Abu Dhabi government at the beginning of 2012 is a very positive sign for projects in the UAE,” he said.

TRANSPORT: The list of projects that emerged from the Executive Council covered a variety of sectors, with a focus on social services such as housing, health care and education. However, it also included approval for several major transport infrastructure projects, such as a new terminal building at Abu Dhabi International Airport, part of a larger $6.8bn expansion plan for the airport. The main construction contract for the terminal, which has been valued at $2.9bn, was awarded in June 2012 to a consortium of local firm Arabtec, Turkey’s TAV and Athens-based Consolidated Contractors Company. Similarly, two major road projects were announced in January, including the development and expansion of the Al Mafraq-Ghuwaifat Road, which connects Abu Dhabi to Saudi Arabia. The Executive Council also approved the budget for infrastructure development at Khalifa Port. Infrastructure projects like these represent important opportunities for contractors and other construction-related businesses, Bashar Ayyash, the resident manager at Khatib & Alami, an architecture and engineering consulting firm, told OBG, adding that he expects most of the company’s work in 2012 to be in connection with public sector infrastructure spending in the transport and utilities sectors.

OTHER INFRASTRUCTURE: The Executive Council’s announcement also identified a number of investments in housing and community facilities, including a development at North Al Wathba that covers 4178 ha and will eventually have 13,150 residential plots. Many projects were also identified in the health care sector, with the Executive Council approving the building of six hospitals, as well as a medical rehabilitation centre, a dialysis centre, four walk-in clinics, a disease prevention and screening centre, and a special-needs centre. Authorities also revealed that 24 new schools proposed by the Abu Dhabi Education Council would be built.

Another development included in the January 2012 announcement was the approval of budgets and opening dates for the museums to be located on Saadiyat Island, which is being developed into a cultural centre by the TDIC. The first of the museums, the Louvre Abu Dhabi is scheduled to open in 2015, followed by the Zayed National Museum in 2016 and the Guggenheim Abu Dhabi in 2017. In March 2012 the TDIC announced that it was inviting contractors to bid for the main contract works at the Louvre. Saadiyat is one of several islands that have been the focus of development efforts by both the government and the private sector, with these areas having provided ample work for the construction sector in recent years (see analysis).

AL MARYAH ISLAND: Al Maryah Island (formerly Sowwah Island), developed by Mubadala Real Estate & Infrastructure, has been identified by the government as the location of a new Central Business District (CBD). The island is being developed in a series of phases, the first of which primarily involves the development of Sowwah Square, the heart of Abu Dhabi’s CBD, which comprises an office complex with four grade-A office towers, the new Abu Dhabi Securities Exchange headquarters, Rosewood Hotel Abu Dhabi and The Galleria at Sowwah Square, a 33,000-sq-metre retail and dining precinct. The first tower, Al Sila, on Sowwah Square, has been operational since March 2011 and is currently 89% leased. Tower 3 (Al Maqam) is 60% leased, with the first tenants expected to move in before the end of 2012. Towers 2 and 4 are also complete and receiving strong enquiry from the market. Cleveland Clinic Abu Dhabi, the state-of-the-art hospital, will sit adjacent to Sowwah Square on Al Maryah Island.

REEM ISLAND: Located adjacent to Al Maryah Island and a short drive from downtown Abu Dhabi City is Reem Island, which is being led by three master developers: Tamouh Investments, Sorouh Real Estate and Reem Investments. Tamouh’s primary project to date has been Marina Square, a mixed-use community featuring 13 high-rise residential towers, with 3440 units having been delivered. When complete, Marina Square will include a boutique mall, medical clinics, a five-star hotel and various food and beverage outlets.

Sorouh is also the master developer behind Shams Abu Dhabi, a mixture of commercial, retail and residential space, including the 74-storey Sky Tower and 65-storey Sun Tower, both of which have been delivered. Construction of the Gate Towers, also part of Shams and featuring three interconnected towers, was 80% complete as of mid-2012. Reem Investments is also responsible for the 184-ha Najmat development, an $8bn mixed-use project that is still in its early stages.

While these islands – plus others like Yas – being developed mainly as a tourist and leisure destination by Aldar – represent important demand drivers for the sector, other projects in Abu Dhabi City continued to provide work for contractors in 2011 and early 2012. For example, Etihad Towers, a mixed-use complex comprising five towers ranging from 54 to 75 floors, was handed over in December 2011. Arabian Construction Company was the main contractor for the project, which was developed by Sheikh Suroor Projects Department.

Etihad Towers is notable for the fact that all five of its towers exceeded 200 metres. Indeed, in 2011 nine buildings taller than 200 metres were added to the Abu Dhabi skyline, a “remarkable” achievement according to a report by the Council on Tall Buildings and Urban Habitat of the US, particularly as the emirate only had two such buildings at the beginning of 2011. The report added that 13 more towers are under construction.

Other handovers in 2011 included Al Zeina and Al Muneera, two residential developments at Al Raha Beach, a waterfront city that will cover more than 6m sq metres. Developed by Aldar, Al Raha Beach is a 20-minute drive from the centre of Abu Dhabi City and 10 minutes from the airport. The units at Al Muneera include 1286 apartments, 148 town houses and 11 villas, while the development also features Al Noor Tower, a 12-storey office building. Al Zeina has 1221 units, with 952 apartments, 26 penthouses, 119 townhouses and 124 attached and semi-attached villas.

Aldar also has a number of ongoing projects, including the Yas Mall, which is located on Yas Island and will have more than 235,000 sq metres of gross leasable area. The mall is being built by Six Construct, which is a subsidiary of BESIX Group, a joint venture between OCI and Belgian construction group Besix. It is scheduled for completion in the fourth quarter of 2013. Another continuing development for Aldar is the World Trade Centre, previously known as Central Market. This mixed-use development in downtown Abu Dhabi City, includes a shopping mall and two skyscrapers – Trust Tower, which will provide grade-A office space, and The Domain, a 382-metre-tall residential building. In December 2011 Aldar sold the World Trade Centre project to the government of Abu Dhabi as part of a deal that also included the transfer of several hundred homes at the Al Raha Beach development. In total, the government agreed to pay $4.6bn to the developer, with Aldar receiving $1.2bn within two months and the remaining payments spread over the next four years. This followed an agreement between Aldar and the government in January 2011 with the latter buying $2.97bn of the firm’s Yas Island assets, including the Ferrari World theme park. Aldar announced in March 2012 that it was studying the possibility of a merger with Sorouh.

FINANCING: As a result of the global financial crisis, some developers and construction companies could be facing challenges when it comes to financing. Indeed, some banks may be hesitant to lend now, particularly to developers who had difficulties paying back loans that were taken at the peak of the market and based on appraisals that were too high. In general, lenders are demanding more in terms of collateral and charging higher interest rates. However, for developers with a good credit history, securing financing may not be difficult, Chammas of Saudi Oger told OBG. “Project financing has not dried up for real estate projects; banks are willing to lend to those groups with the right project and financial track record,” he said. For example, Aldar secured a Dh4bn ($1.1bn) revolving credit facility with National Bank of Abu Dhabi in April 2012.

For those with viable projects and an ability to secure financing, now may be a good time to build. The boom in the UAE in the years leading up to 2008 created substantial construction capacity that is now being underutilised, meaning contractors are willing to sacrifice margins to win new business. Moreover, not only local and regional firms are offering their services in Abu Dhabi – competition is also coming from further afield, as the global economy slows. For example, Spanish construction powerhouse ACS was awarded the contract to build the Al Mafraq hospital in Abu Dhabi. Additional competition from international construction firms could put further downward pressure on prices. “Many Western companies are moving towards the region, and Abu Dhabi in particular, because of the crisis they are facing in their home markets,” Syed Basar Shueb, the CEO of PAL Group, told OBG. “This has put pressure on prices and increased competition overall.”

CONSOLIDATION: With profit margins falling, one possible response from market participants could be to merge, as companies look to benefit from economies of scale and scope. “The market is saturated and the presence of many contractors has caused a decline in profit margins,” Saeed K Al Mehairi, the CEO of Pivot Engineering & General Contracting, a locally owned general contractor headquartered in Abu Dhabi, said. “There should be consolidation and additional support for local contractors.” Ultimately, consolidation could strengthen the sector, according to Adel Gad, the COO of CPC Emirates, a Saudi Arabia-based firm that supplies construction materials. “The current down-cycle in building activity will lead to consolidation in the construction market. This creates a healthier competitive environment and will put the sector in a better position to execute projects starting in 2013,” he told OBG.

MATERIALS: Another factor that may be contributing to lower margins is the cost of materials. When demand for construction was high, contractors were able to negotiate escalation clauses into their agreements with developers, but they no longer have the leverage to do so. The price of cement demonstrated no clear pattern in 2011, according to a report from Statistics Centre – Abu Dhabi (SCAD), with the average monthly prices of the cement group posting increases that ranged from 0.9% in September and 7.6% in July, while declines were between 0.6% in June and 3.8% in January.

This variability seems to be continuing into 2012, with SCAD reporting a rise of 4.2% in January, followed by a decline of 0.3% in February, with a slight increase of 0.9% in March. Prices rose sharply in April (8.7%), but then fell by 3.4% in May. Typically contractors buy ready-mix rather than cement, but pricing of this product is often tied to cement such that ready-mix manufacturers can pass on any cost increases that they incur.

Meanwhile, SCAD reported that the price of steel increased in 2011 by 15.7% over the year, with the biggest jump coming in February at 27.2%. However, the price fell in other months, including April 2011, when it decreased by 4.1%. During the first four months of 2012, the price of steel steadily fell, most notably in January at 5.9%, but the rate of decline subsequently slowed, with prices decreasing by 0.9% in April. In an interview published in local newspaper The National in April 2012, Farouk Toukan of Abu Dhabi-based Cicon said that he expects steel prices in 2012 to be around $675 a tonne, plus or minus 2%, “barring any unexpected development”. Cicon has steel cutting and bending facilities in Abu Dhabi and Dubai with a capacity of 60,000 tonnes a month. Toukan added that any developments in steel prices can be largely attributed to regional market conditions. “This has nothing to do with the China market. Steel prices in the GCC – and particularly in the UAE – are determined by the regional producers like Emirates Steel Industries, Sabic, Qatar Steel Company and the many Turkish steel mills,” he said.

REGULATORY DEVELOPMENTS: Another factor that could affect costs is an emirate-wide building code that has been proposed by the Department of Municipal Affairs (DMA). According to the DMA, the International Building Codes for the Emirate of Abu Dhabi, as the new code is officially known, will create better, safer, greener and more economical buildings, as well as improve disabled access and fire safety.

The building code, which has been under development for several years, is based on the International Codes from the International Code Council in the US. Prior to selecting this system, the DMA studied best-in-class building codes from various countries, concluding that the International Codes would best meet the current and future requirements of the emirate.

Sector participants have responded well to the proposed new regulations, with Wassim G Merhebi, the executive director at Arabian Construction Company, telling OBG, “The new building code will be a welcome development for the construction industry provided it is adopted from building codes in developed markets. This will help to raise professional and safety standards among the local industry.” The DMA has worked to customise the codes to meet local specifications for the emirate. For example, officials removed references to snow loads and modified energy standards to be consistent with the Estidama Pearl Rating system. Estidama, the government’s sustainability initiative, grew out of the Urban Planning Council’s Plan Abu Dhabi 2030 and presents a series of guidelines that are now referenced in documents such as the Urban Street Design Manual, the Coastal Development Guidelines, the Abu Dhabi Development Code, the Community Facility Guidelines and Sustainable Urban Design Principles.

The Pearl Rating system is a component of Estidama that deals with the built environment and its performance in relation to economic, environmental, cultural and social aspects, with particular emphasis placed on optimal energy and water consumption. There are five levels, with one pearl the lowest and five the highest. A one pearl rating is the mandatory minimum to secure a building permit. For government buildings, plans must meet the two-pearl standard. As is the case with the new building code, the response from the market has been positive. Sami Asad, the CEO of Aldar, told OBG, “The market is becoming more rational and regulated from a specifications point of view. Unified building codes will protect end-users and initiatives such as Estidama help to bring issues such as sustainability and energy savings to the forefront.” In addition, providing more sophisticated data for decision-making is increasingly important as the market matures and authorities seek to improve regulation and project implementation. As such, construction-related services like data collection can be attractive for firms that can bring new expertise to the market. “We see potential for hydrographic surveying and charting services as the emirate continues to develop its offshore oil and gas assets and expand its ports to accommodate for the increasing marine navigation-based trading activities,” said Khaled Al Melhi, the CEO of Bayanat, a mapping and surveying company established in 2011 by Mubadala.

OUTLOOK: The construction sector in Abu Dhabi may well be coming to the bottom of a cycle, with demand expected to rise again as the government begins to tender a number of additional projects. Indeed, as Nizam Baki, the general manager at Sultaco, a local supplier of building materials, told OBG, “There has been a slowdown in business in the last couple of years as a result of the decrease in new building activity, but we expect the construction environment to gradually improve throughout 2012.” Moreover, with the infrastructure in place at important development areas like Reem Island and Al Maryah Island, additional investments – and thus additional work for contractors – could be on the horizon.