What is fuelling construction activity in Abu Dhabi?

Investment in energy and infrastructure has resulted in the development of various mega-project opportunities for construction and engineering companies in Abu Dhabi. These include strategic projects such as the Midfield Terminal Building at Abu Dhabi International Airport (AUH) and the Barakah Nuclear Power Plant, both of which are due to become operational in 2020. Real estate, meanwhile, has remained a buyers’ or renters’ market as the delivery of new retail, office and residential properties coincide with a softening of demand. This could change, however, as the government amends laws to allow foreigners to own freehold property in designated investment zones. As such, there is spare capacity in many segments that can be tapped in the future.

Looking ahead, while the construction pipeline remains robust in the medium and long term, the broader economic slowdown related to the Covid-19 pandemic in early 2020 may impact the pace of projects in the near term, especially those in the energy and hotels industry.

Structure & Oversight

Businesses operating in construction and real estate are subject to both federal and emirate-level laws and regulations. These include the national Civil Transactions Law, which allows moveable property to be secured by a pledge and includes a section on work contracts, as well as the Abu Dhabi Building Law, which was first passed in 1983 and regulates building works.

Businesses must be licensed by the Abu Dhabi Department of Economic Development, which operates a business centre to expedite the required processes. Construction companies, developers and contractors may also require approval from municipalities or other agencies to carry out civil works. Firms generally need a civil works permit, a building permit, a permit related to road access from the Department of Transport, approval from the Department of Municipalities and Transport (DMT), and a preliminary environment review and licence from the Environment Agency - Abu Dhabi, among other approvals.

In April 2019 the Abu Dhabi Executive Council published a circular instructing all government departments and government-owned companies to settle invoices with contractors and suppliers within 30 days. The government also mandated that contracts be amended to stipulate that all subcontractors be paid within 30 days of the receipt of an invoice. This was done to help resolve cash flow problems for companies operating in construction and to address the ongoing challenge of late payments. Previously, the government included stipulations on the settlement of payments to private suppliers in a Dh50bn ($13.6bn) stimulus package passed in June 2018. Additionally, a special committee managed by the Abu Dhabi Executive Office and the Department of Finance was created to accelerate payments.

Vision

The government of Abu Dhabi has been actively working to reduce the emirate’s dependence on hydrocarbons and stimulate a knowledge-based economy for some time, with optimising investment in the non-oil economy central to this objective. In line with this overarching goal, the government laid out an urban development plan for the capital, Abu Dhabi City, called Plan Capital 2030. It was first issued in 2007 and updated in 2015. The agenda presents a blueprint for two complementary city centres in the capital: Zayed City and the well-established central business district on Abu Dhabi Island. Aims include increasing citizen interaction through the creation of pedestrian areas and public gathering spaces, and developing public transit infrastructure. The DMT is responsible for implementing Plan Capital 2030, as its mandate includes urban strategy and municipal services.

Performance & Size

According to preliminary estimates in the “Statistical Yearbook of Abu Dhabi 2020”, published by Statistics Centre - Abu Dhabi (SCAD), the construction sector’s share of total GDP at current prices was 9.4% in 2019, unchanged from 9.4% in 2018 but down from 10.4% in 2017 and 11.2% in 2016. The sector’s share of non-oil GDP at current prices stood at 15.8% in 2019, compared to 16.2% in 2018, 15.8% in 2017 and 16.4% in 2016. At current prices, it contributed Dh86bn ($23.4bn) to GDP, down from the Dh88.1bn ($24bn) recorded in 2018, but closer in line with 2017 and 2016 figures.

Real estate’s contribution to GDP at current prices was Dh38.4bn ($10.5bn) in 2019, down from Dh38.8bn ($10.6bn) in 2018, Dh47bn ($12.8bn) in 2017 and Dh46.8bn ($12.7bn) in 2016. Its share of total GDP was 4.2% in 2019, unchanged from 4.2% in 2018, but less than 5.8% in 2017 and 6.2% in 2016. The real estate sector’s share of non-oil GDP followed the same trend – 7.1% in 2019, 7.1% in 2018, 8.8% in 2017 and 9% in 2016.

From an investment perspective, real estate is one of the emirate’s most important sectors. According to SCAD, real estate attracted Dh36.7bn ($10bn) in foreign investment, or 27.7% of the total, in 2016, the most recent year for which figures are available. This was up from Dh27.6bn ($7.5bn) in 2015. Meanwhile, construction attracted Dh8.2bn ($2.2bn) in foreign investment in 2016 – or 7.9% of the total – up from Dh7.2bn ($2bn) the year before.

Building Materials

In general, the cost of building materials rose in 2018 but was stagnant in 2019. According to SCAD’s construction cost index – where 2013 is the index year at 100 – overall prices fell slightly from 98.5 in 2018 to 98.1 in 2019. The increases over that period were in construction materials (from 96.7 to 97.5), finishing materials (from 104.2 to 105.2), and plumbing and drainage materials (from 101.7 to 102.2). Prices in other categories also declined: electrical works materials (101.7 to 101.3), mechanical works for fire fighting (112.2 to 105.3), mechanical works for air conditioning (107.9 to 107.4), manpower (87.4 to 85.7) and services (93.9 to 93.1). Equipment remained the same at 135.7. The change in costs of construction materials was a mixed bag, according to SCAD. In 2019 cement prices rose by 0.9%, concrete by 1.6%, block by 0.3%, waterproofing products by 4.3%, tiles and marble by 8.5%, and paints by 6.8%. The materials that saw prices fall were aggregates and sand (-8.8%), steel (-0.5%), wood (-0.8%), roofing materials (-3.6%), natural stone (-1%), false ceilings (-0.7%), glass (-14.1%) and power cables (-5%). The result of these changes was that the unit cost of constructing apartments, small buildings and residential towers decreased by 6.4%, 7.6% and 3.7%, respectively.

Producers

Abu Dhabi is home to the largest cement producer in the country – Arkan Building Material Company – in which industrial holding company Senaat has a 51% share. Arkan owns and operates manufacturing units in Abu Dhabi and Al Ain via four subsidiaries: Emirates Cement, which includes Al Ain Cement Factory; Emirates Blocks Factory, a producer of cement blocks and dry mortar mixes; Anabeeb Pipes, which makes plastic and glass reinforced pipes; and Arkan Bags, which specialises in producing paper and plastic bags.

Arkan’s 2019 annual report showed revenue was down from Dh967.6m ($263.4m) in 2018 to Dh902.4m ($245.6m), due to tough competition that resulted in lower sales prices. Profits, likewise, were down from Dh54.5m ($14.8m) to Dh46m ($12.5m). The company said the fall in revenue was mitigated by cost saving initiatives, income from the sale of scrap from its old cement factory, an insurance claim and its qualification for a preferential energy tariff reserved for industrial companies contributing to economic diversification. In February 2019 Arkan sold Emirates Cement Factory for Dh50m ($13.6m) to an undisclosed buyer. Trade publication CemNet reported that the sale took place against the backdrop of increasing clinker imports from Iran, declining clinker sales and competitive pricing in the wider UAE market.

In July 2019 Al Ain Cement Factory signed an agreement with Dubai’s National Cement Company to supply clinker to National Cement’s grinding mill in Abu Dhabi. Together, the two signatories have a production capacity of 3.1m tonnes per year of clinker and 6.6m tonnes per year of cement.

The emirate is also home to Abu Dhabi National Company for Building Materials, which makes materials for residential and commercial projects. The firm offers reinforcing steel, autoclaved aerated concrete and cement products. In 2019 the company’s revenue stood at Dh58.1m ($15.8m), down from Dh75.3m ($20.5m) a year earlier.

Hydrocarbons Development

A number of recent energy projects have supported construction activity. In November 2018 the Abu Dhabi Supreme Petroleum Council approved Dh486bn ($132.3bn) in funding for a five-year development plan for Abu Dhabi National Oil Company (ADNOC). This is especially important in light of ADNOC’s in-country value programme, designed to support local suppliers and ensure that Emirati businesses in the oil and gas supply chain benefit from ongoing and future development projects. The programme is expected to drive secondary contracts to domestic firms and suppliers, even if engineering, procurement and construction (EPC) contracts continue to be awarded to large international operators.

In November 2019 ADNOC announced that its programme had generated Dh26bn ($7.1bn) for the UAE economy in the first 11 months of the year, bringing the total to Dh44bn ($12bn) since first implementing the strategy in 2018. However, in the first quarter of 2020 global energy companies began cutting spending in light of rapidly falling oil prices, caused in part by the spread of the Covid-19 virus, and Russia and Saudi Arabia abandoning years of production cuts. In March 2020 ADNOC announced to its contractors and suppliers that it would be reviewing existing agreements to reduce expenses in an effort to deal with the steep oil price slide. Although in late April 2020 the benchmark Brent crude oil price had fallen to below $20 per barrel, by late May it had risen to just over $30.

Key Projects

The projects that could be impacted include ADNOC’s expansion of its refinery in Ruwais (see Energy chapter). The refinery is set to undergo a Dh62.4bn ($17bn) expansion, part of a Dh165.3bn ($45bn) downstream extension aimed at enhancing the diversity and volume of value-added products for sale. The project will include integration with a new facility to be built nearby in Ruwais. In February 2019 ADNOC awarded a Dh29.4m ($8m) pre-front-end engineering and design contract to UK-headquartered energy services company Wood Group for the 600,000-barrel-per-day (bpd) refinery. Wood Group will also provide licensor selection, site master plan development, the scope of work for the front-end engineering and design phase, cost estimates and a construction schedule. Once complete, the Ruwais plant will be the world’s largest refining and petrochemicals complex.

ADNOC is also making significant investments upstream. The second phase of its Nasr Full Field Development project – valued at Dh12.9bn ($3.5bn) – was completed in the second quarter of 2019. The offshore field’s capacity is set to triple from 22,000 bpd to 65,000 bpd. Another Dh11bn ($3bn) was invested in the third phase of the North-east Bab field, a project that is due to be completed in 2020 and includes both onshore and offshore facilities. International contractors Dodsal Group, GS Engineering & Construction, and engineering group Jacobs are involved in the scheme, which will boost the field’s crude production from 1.4m to 1.8m bpd.

Also in the works is the world’s largest underground crude oil bunker complex, with three tanks to hold 14m barrels of crude each. ADNOC’s facility will be located in Fujairah, the UAE’s only port on the Gulf of Oman, which will allow the company to bypass the Strait of Hormuz. The Dh4.4bn ($1.2bn) EPC contract for the construction of the bunker complex was awarded to South Korea’s SK Engineering & Construction Company in February 2019, with the work due to be completed by 2022.

The UAE’s bid to become self-sufficient in gas has also spawned a number of construction projects, including the liquid sulphur pipeline for the Shah sour gas field. The pipeline will bring molten sulphur from the 400-sq-km Shah field to ADNOC’s Ruwais complex, and was scheduled to be completed in the first half of 2020. Around 60% of the total value of the EPC contract was awarded to local businesses, in line with the in-country value programme.

Other Drivers

In addition to energy-related projects, those focused on utilities are helping to boost construction activity. The world’s largest reverse-osmosis desalination plant is being built in Abu Dhabi’s Taweelah complex. The Dh3.2bn ($871m) plant will begin operations in 2022, with a capacity of 909,000 cu metres of water per day.

Improvements in transport infrastructure are another key contributor to sector activity. The most significant of these is the Etihad Rail network, the second stage of which will be a 605-km track linking the Port of Fujairah to the Saudi border, connecting Abu Dhabi and Dubai by rail for the first time (see Transport chapter). The first stage was completed in 2015 and runs wholly through Abu Dhabi, from Shah and Habshan to Ruwais. In February 2020 Etihad Rail signed an agreement to purchase 38 locomotives from Caterpillar subsidiary Progress Rail, up from the current seven that service the intra-Abu Dhabi line.

Property

Abu Dhabi has been transformed by a number of real estate projects. The launch of new urban complexes, such as the 8000-ha Al Riyadh City housing development, has been central to this. Abu Dhabi has also planned to develop several mixed-use communities, such as the flagship Saadiyat Island, with cultural, residential and marina districts; Yas Island, with recreational facilities such as a Formula 1 race track, a Ferrari World theme park and the 235,000-sq-metre super regional Yas Mall to pair with residential offerings; and Reem Island, with mid-range apartment buildings.

The real estate sector received a boost when Sheikh Khalifa bin Zayed Al Nahyan, president of the UAE and ruler of Abu Dhabi, issued an amendment to an existing law in April 2019 that grants foreigners the ability to own land and property in investment zones (see analysis). While this is certainly a positive move, reform specific to the construction ecosystem is being encouraged by some stakeholders in the sector. “Construction is a vital sector in Abu Dhabi,” Manfred Wetzel, general manager at Züblin Construction, told OBG. “However, the sector can be made more efficient by consolidating the number of contractors and suppliers. This could be achieved by introducing regulations to streamline the industry, which would further unlock the sector’s potential.”

Real Estate Financing

Bank loan growth to the real estate sector slowed from 18.1% in 2017 to 8.5% in 2018, according to the latest “Financial Stability Report” by the Central Bank of the UAE (CBUAE). Around 24% of loans from wholesale banks were to real estate, while mortgages accounted for 34% of retail banks’ portfolios. Outstanding real estate loans at the end of 2018 came to Dh379bn ($103.2bn), or around 20% of the total. According to the report, the asset quality of commercial and real estate loans remained stable during 2018, while deteriorating for the construction sector. Even so, in October 2019 the CBUAE asked banks for feedback on a new regulatory structure that could include measures to cap lending to real estate companies. The rationale would be to limit banks’ exposure to a specific sector of the economy and encourage lenders to diversify their assets.

Bank credit for real estate has steadily ticked upwards in recent years. For residents, this figure increased from Dh153.4bn ($41.8bn) in the fourth quarter of 2014, to Dh197.9bn ($53.9bn) in the same period of 2016 and Dh243.6bn ($66.3bn) in the fourth quarter of 2018, according to CBUAE figures. For non-residents, lending was up from Dh3.2bn ($871m) in the fourth quarter of 2014, to Dh5.7bn ($1.6bn) in the same period of 2016 and Dh8.4bn ($2.3bn) in the last quarter of 2018. This trend continued into 2019, with the fourth quarter seeing figures reach Dh246.2bn ($67bn) for residents and Dh8.7bn ($2.4bn) for non-residents.

Moreover, the property market has seen the positive effects of government initiatives under Ghadan 21, or Tomorrow 21, which is a short-term accelerator programme running from 2019 through to 2021. In 2019 the government issued 6000 new housing loans, which – combined with houses and land provided – totalled Dh11.6bn ($3.2bn).

Developers

Abu Dhabi’s largest real estate company is Aldar Properties. Listed on the Abu Dhabi Securities Exchange, its primary institutional investor is Mubadala Investment Company, with a 38% stake. Since its establishment in 2004 the company has completed approximately 28,000 residential units, with another 9000 in the pipeline, according to its 2019 annual report. Developments in Aldar’s portfolio include Yas Island, Saadiyat Island, Reem Island, Al Ghadeer, Al Shamkha and Al Raha Beach, a mix-used zone near the motorway that links Abu Dhabi to Dubai. Aldar owns approximately 75m sq metres of land across Abu Dhabi.

In 2019 the company achieved record development sales, up 53% to Dh4bn ($1.1bn), driven by new launches such as Saadiyat Reserve, Alreeman, Alreeman II and Lea; and strong sales in established developments that include Yas Acres, West Yas and Mamsha Al Saadiyat. These developments helped to improve the company’s overall performance, with gross profit rising by 5% from Dh2.6bn ($707.7m) in 2018 to Dh2.8bn ($762.2m), and revenue increasing by 14% from Dh6.3bn ($1.7bn) to Dh7.1bn ($1.9bn).

In July 2019 the government announced it would partner with Aldar to deliver Dh5bn ($1.4bn) worth of social, economic and infrastructure projects across the emirate. This will include Dh2bn ($554.4m) to add 899 villas to the existing 4898 villas in Al Falah, a planned community for UAE nationals; Dh2bn ($554.4m) of public works on Saadiyat Island; and Dh1bn ($272.2m) to develop the new campus for media zone twofour54 on Yas Island, which will cater to up to 10,000 media and entertainment professionals. Phased completions for all projects are expected as early as 2021.

Another major developer in the market is Bloom Holding, a subsidiary of publicly owned National Holding Company. Bloom’s portfolio includes Bloom Marina, a waterfront development with 200 hotel rooms, 57 serviced apartments and 225 residential apartments; Bloom Central on Airport Road, which includes the Abu Dhabi Marriott and Marriott Executive apartments; and Park View, adjacent to New York University Abu Dhabi, which has 207 residential units and 217 hotel apartments. The company is also building Bloom District, a mixed-use development on a 2.2-sq-km site adjacent to AUH. The site will include hospitality, health care, education, civic and retail components. The company expects the project to be completed by 2028.

Several banks and holding companies are invested in the real estate sector through a network of subsidiaries. National Holding Company also owns Emirates International Investment Company, which in turn has a 39.4% stake in Abu Dhabi Islamic Bank (ADIB). ADIB owns 100% of the equity in investment firm Burooj Properties and real estate consultancy MPM Properties. National Marina Development Corporation is owned by SBK Holding, as is National Investment Corporation, which built Marina Mall.

Real Estate Transactions

In 2019 Abu Dhabi registered Dh58bn ($15.8bn) worth of real estate transactions, including sales and mortgages of lands, buildings and real estate units, according to the DMT. Of this, direct purchases accounted for Dh20.6bn ($5.6bn) and mortgages comprised Dh37.4bn ($10.2bn). The total number of transactions stood at 19,000. Activity was centred around Al Reem Island, which drew in Dh6.5bn ($1.8bn) worth of activity. This was followed by Yas Island (Dh3.4bn, $924.5m), Al Reef (Dh2.3bn, $626.1m), Al Shamkha (Dh1.1bn, $299.4m), Khalifa City (Dh687m, $187m)and Al Faqa (Dh303m,$82.5m). “The number of real estate deals was a result of the appropriate payment plans, offers and various facilities offered by several developers, along with the low interest rates offered by... banks and financing institutions,” Hamad Al Mutawa, executive director of operations affairs at DMT, told local media in March 2020.

Residential Sales

In its 2019 annual report, the CBUAE estimated the average price in Abu Dhabi’s housing market was Dh10,600 ($2885) per sq metre, 7.7% lower than 2018, when prices were about Dh11,500 ($3130) per sq metre. Prices have been ticking downwards since 2015, when they averaged around Dh13,800 ($3756). Prices nearly hit equilibrium towards the end of 2019, with real estate firm Chestertons estimating that villa sale prices in the emirate dropped by 1% and apartments by 2% during the fourth quarter. In the first quarter of 2020, prices remained relatively steady for villas in Al Ghadeer and Al Raha Gardens, according to Chestertons, decreasing by 1.4% quarter-on-quarter (q-o-q) to Dh685 ($186) and Dh690 ($188) per sq metre, respectively. The decline was greater in Al Raha Beach, falling by 2.4% q-o-q and 12.8% yearon-year (y-o-y) to Dh1070 ($291).

Meanwhile, apartment prices in Al Raha Beach were down by 1.6% q-o-q and 11% y-o-y to Dh1230 ($335) per sq foot, as were those in Al Ghadeer and Saadiyat Island to Dh715 ($195) and Dh1380 ($376), respectively. Apartment prices on Al Reef Island were the best performing, holding steady q-o-q and falling by 6.7% y-o-y, while prices on Al Reem Island contracted by 6.9% y-o-y.

Rentals 

In the rental segment, overall values fell by 7.5% in 2019, the fourth consecutive year of decline, but at a slower rate than 10.6% in 2018. From Dh81.90 ($22.29) per sq metre in 2015, average rent stood at Dh59 ($16.06) per sq metre in 2019, according to the CBUAE. The central bank reported that the continued fall in rental prices in the emirate resulted in rental yields of 6.8% in 2018 and 6.9% in 2019, compared to 7.4% in 2015.

As with sale prices, declines slowed in the first quarter of 2020, per Chestertons data. While Al Raha Beach, Al Reef Island, Al Khalidiya and Muroor Area all saw q-o-q falls of less than 1% for apartments, rents on Saadiyat Island declined by 3% q-o-q, though two-bedroom apartments there bucked the trend and witnessed quarterly rises in rent.

Villa rents as whole declined by just 0.6% q-o-q. Al Raha Gardens was the only location to see a quarterly increase of 2.3%, while villa rents at Mohammed bin Zayed City were stable. Al Ghadeer posted the largest q-o-q decline, at 2.3%, and also the steepest annual decline of 9.5%.

The easing of property price declines is one of several positive trends witnessed. “Going forward, it is unlikely there will be the same prolonged period of price and rental decreases as witnessed over the past five years,” Chris Hobden, head of strategic consultancy for Chestertons MENA, told industry media in January 2020. “More favourable supply and demand dynamics, coupled with market reforms including new business licences, long-term residency permits and allowing foreign nationals to own freehold property are all contributing positively to Abu Dhabi’s real estate sector.”

Office Space

At the same time, real estate consultancy Knight Frank projects office stock to reach 3.86m sq metres by the end of 2020, according to the firm’s quarter-one 2020 report, 4.6% more than in 2019. During the first quarter of 2020 office vacancy across Abu Dhabi City was approximately 23%, relatively unchanged from 24% in the same quarter of 2019. Rents, meanwhile, stood at Dh1635 ($445) per sq metre for prime offices and Dh1176 ($320) for grade-A space in the first three months of 2020. Overall, city-wide rents averaged Dh968 ($263) per sq metre. City-wide office rents fell by 7.8% between the first quarter of 2019 and the beginning of 2020, while the price for prime space declined by 6.8% and grade-A space by 6%.

The economic slowdown has prompted many public and private firms to downsize and release personnel. In 2019 the majority, or 60.8%, of office demand was for areas under 500 sq metres, with 15.6% looking for floor space larger than 1000 sq metres. “The market is also shifting from shell and core to fitted units because companies want fewer up-front costs on their books and quicker access,” Matthew Dadd, partner at Knight Frank, told OBG.

Hospitality

Key hospitality performance indicators rose across the board in 2019. The emirate’s hotels hosted 5.1m guests over the course of the year, an increase of 2.1% from 5m on 2018, according to the Department of Culture and Tourism – Abu Dhabi. Around 71.2%, or 3.7m, of guests in 2019 were not from the UAE, with visitors from India (450,000), China (396,000), the UK (267,000) and the US (204,000) among the largest source markets. Leisure was citied by 53% of tourists as their reason for visiting, followed by business (28%); meetings, incentives, conferences or exhibitions (9%); to visit friends and relatives (5%); and other (5%).

Full-year hotel occupancy was 73% in 2019, an increase of 1.6 percentage points from 2018, while average stays lasted 2.6 nights, up 1.8%. Occupancy rates were highest in Abu Dhabi City (75%), while Al Ain had an occupancy rate of 61% and the Al Dhafra Region saw 47%. Emirate-wide hotels earned revenue of Dh5.8bn ($1.6bn), a rise of 6.6% from the year before. Again, revenue was concentrated around Abu Dhabi City (Dh5.3bn, $1.4bn), with Al Ain hotels bringing in Dh284m ($77.3m) and Al Dhafra Region hotels recording Dh230m ($62.6m). Average room rates were Dh369 ($100.44), up 4.7%. Room rates were the highest in the Al Dhafra Region (Dh757, $206.06), followed by Abu Dhabi City (Dh436, $118.68) and Al Ain (Dh264, $71.86). Revenue per available room (RevPAR) measured Dh269 ($73.22), a 6.4% increase from the year before. Abu Dhabi City led with a RevPAR of Dh1688 ($459.47), while the Al Dhafra Region and Al Ain followed with Dh757 ($206.06) and Dh264 ($71.86), respectively.

At the end of 2019 there were 168 hotels and 32,800 rooms across the emirate. Most were centred in Abu Dhabi City, which hosted 138 hotels and 29,100 rooms; followed by Al Ain, with 19 hotels and 2300 rooms; and the Al Dhafra Region, with 11 hotels and 1200 rooms. There were 15,000 five-star hotels, 7600 four-star establishments, and 4500 one- to three-star hotels.

Looking to 2020, hoteliers are bracing for several months of economic disruption from the pandemic. In early March 2020 the UAE called on residents to avoid cross-border travel and imposed quarantine provisions on those returning from abroad. On March 17 the government announced it would temporarily suspend travel visas to the country.

Outlook

Real estate looks set to remain a market for buyers and renters in the short term, and it remains to be seen what impact the Covid-19 outbreak will have on both the hospitality segment and the economy as a whole. Even so, longer-term prospects are generally positive as rental and purchase prices seem to be moving towards an equilibrium.

On the construction side, a wave of private sector projects – combined with high levels of government spending and investment – is bringing renewed optimism to the market. Efforts to address late payments and increase domestic firms’ participation in and benefits from supply chains have attracted the attention of investors and developers alike.