The Covid-19 pandemic looks set to spur long-lasting changes in the UAE construction sector. The pandemic is compounding challenges for the local contracting community, which was already pressured by low liquidity in 2019.
More than 35,000 homes were added in Dubai during 2019 in anticipation of Expo 2020 Dubai. It was also hoped the now-delayed expo would absorb much of the oversupply in the retail and hospitality sectors.
However, opportunities to win new work appear to be plateauing as property prices face downward pressure and demand wanes for real estate projects such as residences, offices and malls.
Some construction projects in Dubai were suspended earlier this year and, in several cases, contracts are also under review to achieve discounts.
Salary reductions and unemployment caused by Covid-19 could add stress to the oversupplied real estate market, and further dent capital expenditure plans by privately held developers.
The pandemic has expedited the downward trends that were expected as an eventuality in the post-Expo 2020 market, and US ratings agency S&P said in March that real estate developers could record lower margins and more payment defaults given the negative macroeconomic outlook.
Covid-19 has forced a rethink of capital spending on infrastructure projects in the GCC, and the UAE is no exception.
While the majority of critical ongoing infrastructure schemes in the region will be unaffected by the pandemic in the long term, the financial uncertainty caused could affect non-essential project spending.
Salary reductions and unemployment caused by Covid-19 could add stress to the oversupplied real estate market, and further dent capital expenditure plans by privately held developers
Dubai has reportedly asked state departments to delay new construction projects and value-engineer ongoing schemes to save costs. Similar cash conservation measures have been rolled out in Saudi Arabia, Bahrain and Oman.
These reductions do not mean government spending on infrastructure projects will stop in 2020 or beyond. Demand for roads, bridges, refineries and power plants will continue to generate project opportunities for regional contractors.
However, with private sector demand also expected to decline as governments seek savings and reprioritise their spending, contractors that do not specialise in the transport, oil and gas or utilities sectors may feel a notable drop-off in opportunities during 2021.
This trend is visible in Dubai, where projects worth a total of $7.8bn were completed during the last quarter, and $2bn of contracts awarded during the period, according to data from regional projects tracker MEED Projects.
The $5.8bn net difference between completions and new awards was in line with the underlying trend of negative growth witnessed in the emirate since the fourth quarter of 2018.
The figure underscores the challenges that Dubai’s contractors and consultants have faced as they seek to replace the pipeline of work they completed in Q1 2020.
Covid-19 is likely to be only a blip in the road to achieving the UAE’s long-term goals as enshrined in its Vision 2021 and 2071 programmes. These mandates will continue to create work opportunities for private sector stakeholders in the country.
In April, the Abu Dhabi Executive Committee formed an infrastructure committee to accelerate projects and provide the private sector with more clarity about the procurement of major infrastructure schemes in the capital.
Dubai’s Roads & Transport Authority (RTA) also announced plans to launch public-private partnership (PPP) projects in the city. Investors will be invited under build-operate-transfer agreements to fund the construction and operation of 1,550 bus shelters over the next three to four years, and share the proceeds of advertisements with the RTA under a 12-year contract.
Power plants and bus shelters are the type of infrastructure projects that currently make most sense to develop under PPP models in the UAE. However, it is likely that, as is the case in other parts of the GCC, hospitals, schools and road projects too will be developed through private sector collaboration in the future.
Moreover, while neither development has come in response to Covid-19, the timing of their launch will provide optimism for cash-strapped local contractors forecasting their order books for 2021 and beyond.
Covid-19 has inspired introspection in the typically traditional construction industry, compelling a review of health and safety, technology and business continuity plans. Notably, the pandemic has also forced stakeholders, particularly contractors, to revisit existing supply chain models.
Power plants and bus shelters are the type of infrastructure projects that currently make most sense to develop under PPP models in the UAE
China will remain an important trading partner for economies in the GCC, and its price point will remain a competitive advantage in the declining post-pandemic economy.
However, in the medium term, contractors may well explore new international markets, especially in Asia, to ensure they have back-up import partners in case a second wave of Covid-19 gains traction globally.
Low-liquidity conditions are at the heart of the crisis faced by local construction firms amid the pandemic. Private sector investment may be stunted as Covid-19 threatens to dent consumer spending power — and, by extension, real estate demand — in the medium to long term.
While the prevailing market downturn is indeed a formidable business challenge to overcome in 2020, for many real estate clients, consultants and construction companies in the UAE, 2021 could pose the true test of survival.
This report is produced under the MEED Mashreq Construction Partnership.To learn more about the report or the partnership, log on to: www.meedmashreqindustryinsight.com
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