Published On: 30-12-2012

Dubai, UAE: After going through a slowdown during the global financial crisis in 2008 and with the current recovery in GCC economies, the UAE construction industry is projected to exhibit sustainable growth prospects in the next few years, finds out a recent Dubai Chamber of Commerce and Industry study.

In its analysis of the recent trends of the UAE construction industry, the study links the importance of UAE construction industry to the domestic economy stating that as one of the most rapidly growing economies in the Middle East, the UAE has experienced enormous investments in the construction industry from public and private enterprises during the past few years.

Specifically, construction sector as a percentage of GDP of the UAE reached 10.6% in 2008 and 10.3% in 2011 while for 2015 and 2021 the sector’s contribution as a percentage of UAE GDP is projected to record 11.1% and 11.5% respectively (Figure 1).

According to the International Monetary Fund (IMF), the population of UAE is expected to reach 6 million by 2015 from 5.4 million in 2010 while the increase in expatriate population, which accounts for more than 80% of the country’s population, constitute the main growth drivers for increasing demand for residential and commercial property units in the country.

Added to that, the growth in real GDP is projected by the IMF to reach 4.4% in 2015 from 3.3% in 2011, signifying a revival of the overall economy which augurs well for the construction industry, says the study.

In 2011, the UAE recorded the highest construction project value, reaching USD 319.1 billion accounting for 51.1% of the total construction project value in top 100 projects in the GCC region. Indicative of the above statement is the list of the key construction projects both commercial and residential (Table 1).

The UAE was followed by Saudi Arabia at USD 218.9 billion (accounting 35% of the total construction project value). Additionally, Qatar accounted for 8.9% of the total construction project value followed by Oman and Kuwait accounting for 3.2% and 1.8% of the top 100 projects respectively.

According to Meed Projects, there were 46 construction projects (in oil and gas, real estate, infrastructure, transport and petrochemicals) recorded across the GCC region in 2011. The total value of these projects reached USD 625 billion last year compared to USD 756 billion in 2010.

In its quest to become an international investment hub, the UAE has pushed forward major construction projects in infrastructure and residential/non-residential segments. Namely, extraordinary growth in transport infrastructure has been observed, especially in significant leading projects such as the USD 7.8bn expansion of Dubai International Airport, and the USD 6.8bn Abu Dhabi International Airport re-development project.

According to Business Monitor International, the majority of projects in the UAE’s construction industry involve 38% of the total projects to be finalised in energy and utilities, 31% in construction, 29% in transport and 2% in social infrastructure.

The study informs that favourable government policies, such as permitting non-UAE/GCC national freeholds and leaseholds in designated areas of the UAE, will prospectively attract Foreign Direct Investment (FDI) in construction as an increasing number of foreigners will focus on acquiring properties across the country.

Added to that, as of 2010, Abu Dhabi Urban Planning Council has engaged multi-unit building developers to allocate 20% of residential gross floor area to middle income population groups. This is expected to increase housing supply for the middle and low income population groups.

Last but not least, in 2011, UAE’s federal government extended visas of real estate investors from six months to three years offering a significant boost for new investments into UAE’s construction industry.

Challenges facing the industry

In 2011, the UAE residential construction industry showed limited signs of recovery, struggling to reach its pre-crisis levels, while putting on hold a number of significant big projects across the country.

However, from the beginning of 2012, the residential construction industry revealed some signs of stability (particularly in Dubai) driven mainly by the repercussions of the regional Arab Spring, reinforcing UAE’s reputation as a safe haven in the MENA region.

In the short term, the outlook of the UAE construction residential industry may be affected due to the prevalent oversupply of residential units in the market but, in the long term, it will gain momentum based on the optimism of a rising population and a more stable economic growth path.

The UAE commercial office construction sector has historically witnessed robust growth leading to an oversupply of commercial office units. In turn, this oversupply led to high vacancy rates finally resulting in a moderate decline in UAE property prices.

The study indicates that rental yields in the short term will continue to be under pressure due to declining rentals and high vacancy rates. However, the commercial construction industry will continue to benefit from the premium on rental yield as compared to US and EU markets attracting significant FDI’s in the long term.

In the near future, favourable government policies of the GCC countries, particularly that of the UAE, are projected to attract more overseas companies to the country’s construction sector. This trend is expected to continue over 2013 as a stream of new construction and infrastructure contracts and ongoing projects will further boost UAE’s construction industry growth, concludes the study.