Monday, August 7, 2017

UAE H1 contract awards improve; hit $22bn

The first half of this year saw an improvement in construction contract awards across the UAE compared to the same period last year with the deals totalling $22 billion, a report said.

The full year contract awards are expected to total $45 billion, if not slightly ahead, said the Faithful + Gould Construction Intelligence Report – UAE Update, written by David Clifton, regional development director.

The year 2016 yielded a total of $43 billion awards and was the most difficult year since 2012.

With the backlog of work for the UAE construction market having shrunk by around $17 billion in 2016, there has been a decrease in market size. The quantum and value of projects planned or being delivered is broadly flat, although major announcements such as Marsa Al Arab and Emirates Towers Business Park are keeping the pipeline more promising, the report said.

Given that the Emirates, similar to other GCC states, has historically back ended awards in Q3 and Q4, there would appear to be some cause for optimism, especially when combined with the time is has taken for liquidity to move into the broader economy, the report said.

The drag on certain parts of the market is the downward trend in real estate prices, with between 4 and 10 per cent decline year on year depending on asset type. However, with the cyclical nature of these prices, certain parts of the market will look to progress schemes forward based on positive market expectations, it said.

"When reviewing this year’s awards, it is evident that mega projects are a rarity, making up a small percentage of the values compared to previous years. The stand out schemes in real estate that moved to site are Nakheel’s Deira Mall ($1.14 billion) and ICD’s One Zabeel (around $1 billion).

"The reduction in mega schemes can be broadly explained by a level of high selectivity by developers, constrained funding and a bias towards areas where the masterplan is complete and therefore infrastructure burden is minimised (For example: Downtown and Business Bay Dubai). As funding issues start to ease, we expect new masterplans will move through to construction," the report said.

Such is the diversified nature of development in UAE that the number one developer isn’t dominating the market – Nakheel is the most active by value and one of the few to award a mega project. For the rest of 2017 and early 2018, the industry is looking at Dubai Holdings and its plans. If their schemes move swiftly, significant growth could return in the short term, it said.

Tender price pressure is still being exerted in the UAE even though the market for awards has improved compared to 2016, it said. "We’ve already seen this year that major international players have withdrawn from the market and others have been caught out financially. There is continued evidence of unsustainable low tender pricing, which will no doubt require some future management through the supply chain," it said.

The Ministry of Finance has clarified the VAT exemptions and as expected the majority of goods and services in construction are included in the non-exempt items. Furthermore, flagged previously, residential real estate is confirmed as exempt. This may yet pose a point of difficulty for real estate developers as the point at which the VAT ‘chain’ stops is with them and the 5 per cent levy on construction cannot be passed on. Given the downward pressure on sales prices across the Emirates, this could cause certain schemes feasibility issues which may require replanning, the report continued.

On a positive note, with the expected revenue of Dh12 billion ($3.27 billion) in 2018 from VAT, the federal government will have further flexibility to invest in social infrastructure - such as schools, hospitals and roads – which should act as a boost to the market, the report said. - TradeArabia News Service

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