UAE construction sector faces another tough year

Dubai: The UAE’s construction sector is headed for another tough year with the number of new contracts likely to end up lower than in 2015, according to forecasts by the consultancy JLL. Also, a significant number of newly tendered contracts will be for refurbishments and extensions rather than greenfield projects, as “developers try to generate more out of existing assets”, according to JLL.

If these forecasts prove founded, it will be a further burden for a construction industry that has already seen an erosion of margins and extended payback periods. “Fewer tenders will mean there will be more competition for less,” said Craig Plumb, Head of Research at JLL Mena. “There will be some softening in construction prices and developers will try to extract more favourable terms for themselves.“

These assumptions also suggest that the much anticipated top-down boost to the construction sector from the Expo 2020 build-up could take another 12 months or so to materialise.

For the broader real estate market, “2016 is likely to be a more challenging year than 2015, but it must be recognised that the overall economy is still expected to grow at around 2.7 per cent, so there remains opportunities as well as challenges,” said Alan Robertson, CEO, JLL MENA. “With subsidy cuts, reduced spending and the potential introduction of a Goods and Services Tax (GST), the government is already realigning its strategy to further reduce its reliance on oil revenues.”

But what the market could see is greater participation by the private sector in infrastructure development through the PPP (public-private partnerships) initiative Dubai and Abu Dhabi are embarking on. “These arrangements will shift beyond the traditional use of PPP, which has been in power and water projects,” said Plumb. “The private sector will show a marked willingness to participate in infrastructure — it’s a space they can’t afford not to be in.”

Another big push could come in for ‘affordable housing’. “More than anything, this would require the cost of land to be adjusted from the current high levels in select locations before (private) developers can actually do something about building,” said Plumb. “Land prices have to fall for affordable projects in Dubai to be viable.

“This is a potential area where PPP arrangements can work — with the government subsidising the cost of land. The government support has to be there to make it work. It will be a bigger boost for such housing rather than having “zoning laws” (where developers must create a certain number of affordable priced units within their projects).”

As such, Dubai and the rest of the UAE’s property market will not see a flood of new homes being delivered this year and start to pull down rents in a significant way. In all likelihood, only about 10,400 units are likely to be delivered in Dubai alone against the 25,000 homes based on developer forecasts.

Recent data have a bearing on JLL’s more muted estimates on actual delivery — last year, new supply of homes totalled only around 8,000 units against the 30,000 that were supposed to have been delivered. “Based on the materialisation rates in the last three years, the eventual year-end tally can’t be more than 10,400,” said Plumb.

Source: Manoj Nair, Associate Editor, gulfnews.comGN


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