THE TOP OUT

UAE, Dubai 2012 | REAL ESTATE & CONSTRUCTION | REVIEW: CONSTRUCTION

New projects are starting to invigorate demand for building materials in Dubai, and as work on unfinished projects begins to accelerate, improved prospects have risen on the horizon.

Home to 229 buildings greater than 100 meters tall, Dubai today boasts a larger number of skyscrapers than Shanghai. The UAE, and Dubai in particular, has witnessed unprecedented activity in the construction sector over the last decade and has one of the GCC region's most well positioned trade regimes. Attracting strong international capital flows has not proved difficult for the UAE, which boasts some of the highest levels of construction activity per capita. Dubai has been a particularly attractive investment destination, with a large number of expatriate workers and a minimized vulnerability to oil price movements as a result of a progressively diversifying economy.

Dubai construction projects in 1Q2012 were valued at an estimated $581 billion, representing almost one-quarter of the total value of contracts awarded in the UAE. With regional projects estimated to be valued at around $1 trillion, the UAE continues to host the bulk of activity. The industry witnessed $28.8 billion worth of construction contract awards in 2011, which is expected to increase to $32.8 billion in 2012 and $37.9 billion in 2013.

The impact of the global liquidity crisis undeniably continues to reverberate throughout the local construction sector, with large swathes of mega development plans on indefinite hold. According to figures released by Citigroup, construction projects scrapped or on hold in the UAE soared to $958 billion in the 12 months from October 2010 to October 2011. High levels of debt resulted in a scaling back of investments and scrutinizing of construction project budgets in Dubai to cut spending, leading to numerous delays and cancellations in a variety of projects. However, there has been a genuine uptake of activity in Dubai, particularly signified by the completion of a number of delayed master developments. Although slowed, the market has certainly not halted, and for each abandoned construction site, there is a handful of completed developments.

The Dubai government has announced the recommencement of a number of major development projects and an increase in spending on social infrastructure development. In 1Q2012, the government unveiled its revised construction program, putting a number of formerly stalled projects on top of its investment agenda. There is expected to be an increase in government-supported infrastructure spending in transport, power, and utilities to keep up with the 6% annual growth in electricity demand, creating opportunities for construction companies operating in these fields. State-owned utilities companies such as Dubai Electricity and Water Authority (DEWA) have expressed a willingness to take on majority equity stakes in projects and provide government guarantees in order to attract investors. DEWA also announced a $19 billion CAPEX plan beginning in 2012, designed to triple power generation capacity to 22 GW by 2017.

Although public-private partnerships (PPP) have historically received little interest from other governments in the region, Dubai has recently been displaying a greater level of openness regarding private participation in infrastructure projects. It has been announced that a dedicated PPP law may be introduced in the UAE in the near future, in anticipation of the procurement of new PPP projects.

Access to funding remains the main obstacle impeding accelerated growth in the industry, with project finance operations remaining arduous, and credit markets still wary of the viability of the post-crisis real estate sector. Notwithstanding this, investors are expected to benefit from the clear regulatory environment governing private investments, which has created a favorable climate for infrastructure projects. Coupled with this is a decline in cement and steel prices in the region, which has significantly reduced the cost of new projects. Opportunities are appearing on the horizon for Far Eastern contractors operating in the UAE, who appear to be securing much of the new work. Access to inexpensive labor and an ability to work on lower margins continues to make Far Eastern contractors particularly competitive.

PROJECTS

Dubai's development projects have revolved around the Palm islands, Dubai Marina, Dubai Downtown, and numerous skyscrapers along Emirates Road. Local construction continues to break records, with the most recent being the world's tallest residential building, Princess Tower at Dubai Marina, and the world's tallest hotel, the JW Marriott on Emirates Road. The world's longest fully automated metro network, Dubai Metro, opened its second line in 2011, with further extensions planned. The third phase of the expansion of Dubai International Airport is ongoing, and significant activity concerning Dubai's proposed second mega-airport, Al Maktoum International, is expected to resume in the short term. When completed, the airport will be three times the size of the world's largest commuter airport and freight hub combined, with the capacity to accommodate 70 million passengers annually.

A central business district near downtown Dubai, the Business Bay project is currently underway and will feature numerous skyscrapers in an area along Dubai Creek, which is set to be dredged and extended. In total, the district will have upward of 240 buildings, comprising commercial and residential developments, including the iconic Burj Al Alam, a hyperboloid skyscraper designed to resemble a crystalline flower rising 108 stories above the desert floor. The infrastructure of the district was completed in 2008, and the entire development is expected to be completed by 2015.

Despite a number of high-profile, ambitious developments being put on hold, the thirst for innovative, awe-inspiring projects has not been completely quenched, evidenced by recently announced plans for the Dubai Water Discus Hotel. The hotel is set to be the first of several underwater buildings in the Emirate and will feature an underwater section of 21 rooms, a diving center, and a bar up to 10 meters below the sea's surface. According to Dubai Drydocks World, this unique project will cost from $50 million to $120 million and will be funded by BIG InvestConsult, a firm that also represents Deep Ocean Technology, the owner of the technology and design concept for the hotel.

CEMENT

Demand for cement in the UAE peaked in 2008, when levels of demand rose to 21.7 million tons, up three fold on the 6.9 million tons consumed in 2003. During this period, per capita consumption reached 4,345 kilograms—over 10 times the worldwide average. Cement demand fell 16% in 2009 to 18.25 million tons, as half of all construction projects in the UAE slowed to a standstill. Cement sales continued to be slow through 2011, although there is renewed optimism that levels will rise in 2012 as regional projects reinvigorate demand for building materials. In stark contrast to the boom years, where projects were frequently delayed due to the short supply of cement, oversupply currently plagues the market, coupled with increased production cost. The GCC cement sector quarterly report, released by Global Investment House in 4Q2011, noted that regionally in the first nine months of 2011 the cement sector realized a 10.9% top line increase to cap out at $3.4 billion, but the industry, faced with increasing production costs, suffered a 3.5% decrease in profits year-on-year. The report indicated that the UAE top line increased 1.2% to $888.9 million during the first nine months of 2011, as compared to the previous year, and costs increased by 9% during the period, bringing the gross margin to an all-time low of 4.8%. Average cement prices across the GCC fell by 3.8% due to continued weakness in demand. Realization prices decreased 5.3% from $51.8 per ton to $49 per ton in the first three quarters of 2011. Many local cement companies continue to struggle, although industry experts are hoping for an increase of 15% in demand for materials over 2012. E.R. Memon, Managing Director of Emirates Beton, states that the Dubai market as a whole has shrunk to less than 20% of the pre-crisis market, with a demand for only 400,000 cubic meters per month, compared to 2.5 million cubic meters per month pre-crisis.