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Construction has always occupied a top position in the UAE, providing the engine for growth in the non-oil sector. Evidence of a slowdown since the final quarter of 2014, especially among private developers, sparked some concern. But examining the project finance scene and input from real estate experts and developers reveal that prospects are good and a large project pipeline will boost the sector in the next few years.
Despite project financing shortfalls and a drastic drop in oil and gas prices, Standard & Poor’s analyst Karim Nassif says the overall cost of funding for regional projects is likely to go up, even though it is unlikely to have a widespread impact on the credit quality of project finance debt. According to the GCC Project Chart Book
for the first quarter of 2015 by Abu Dhabi Commercial Bank, the weaker oil prices reflected in the wider Gulf. “The UAE saw a 35.6 per cent quarter-on-quarter fall in the value of projects awarded in [the] first quarter, to the lowest level seen since 2013,” it says.
While many real estate projects were cancelled or placed on hold in the UAE, experts point out that most of these were by smaller developers. The larger mixed-use projects and most of the UAE’s core development plans remain largely on track, according to the report.
Strong project pipeline
The project pipeline for the UAE remains strong and broad, with many to be awarded linked to key developments, the report says. These include hospitality, residential and health-care developments in Dubai and Abu Dhabi.
Meanwhile, construction firm Arabtec announced in May that it had incurred a loss of Dh279.8 million in the first quarter, compared to a net profit of Dh137.9 million during the same period last year. But the company maintained increased revenues at Dh1.8 billion, with slight growth compared with last year. The cost of revenue increased by about 28 per cent on a quarterly basis, reaching Dh1.93 billion as a result of the high cost of the projects.
Arabtec said the construction sector generally witnessed significant pressure due to economic and political circumstances in the region, prompting developers to reprioritise projects and control costs.
In addition, there are negative implications on the spending levels in the region as a result of lower oil prices, which, in turn, adversely affected Arabtec’s profits.
Other major developers have had a good run in the first quarter. Emaar Properties recorded a net profit of Dh1.026 billion, which was 7 per cent higher than the net profit of Dh957 million last year. Revenue reached Dh3.01 billion, 25 per cent higher than fourth-quarter revenue of Dh2.4 billion and 26 per cent higher than the Dh2.39 billion during the first quarter of last year.
“In Dubai, in addition to committed delivery schedule, we are launching new real estate assets that meet demand from buy-to-live customers,” says Mohamed Alabbar, Chairman of Emaar Properties.
“We have made significant progress in two mega joint venture projects, Dubai Creek Harbour at The Lagoons with Dubai Holding and Dubai Hills Estate with Meraas Holding.
“These smart cities of the future support the ongoing preparations for Expo 2020 and will meet current and emerging demand for homes, serviced residences, retail and hospitality services in the city.”
Aldar Properties, Abu Dhabi’s listed property development, investment and management company, announced a 36 per cent increase in net profit in the first quarter to Dh620 million, compared to Dh456 million in the first quarter last year. This was a result of the growth in recurring revenues and handover of high-margin land plots.
In April, Aldar announced three new residential developments at Cityscape that will bring more than 2,000 homes to market in prime areas of Abu Dhabi, including investment zones where property can be purchased by non-UAE nationals. These are West Yas, a Yas Island villa project for Emiratis; Mayan, an investment zone residential development that offers beachfront apartments, town houses and villas on Yas Island; and Meera, a mid-market apartment development at the popular Shams Abu Dhabi on Al Reem Island.
Meanwhile, Deyaar announced a Dh55.2 million net profit, compared to Dh52.1 million during the same period last year. “The results we have achieved validate Dubai’s strong economic performance,” Abdullah Al Hamli, Chairman of Deyaar, said in a statement. “The diversification of the economy is clearly evident and can be credited as a key reason that allows us to continue earning profits.”
Damac Properties generated a net profit of Dh793 million during the first quarter on revenues of Dh1.79 billion and a gross profit of Dh1.14 billion. Hussain Sajwani, Chairman and CEO, said in April that the firm’s home market, Dubai, is continually outperforming real estate markets around the world with long-term, stable growth patterns. “We have seen demand for luxury property remain solid, underlining Dubai’s position as the region’s primary business and tourist destination. I believe we are set for a period of steady, sustained growth in the medium term.”
Damac has also announced that it has awarded more than Dh2.8 billion in construction contracts in the first five months of the year.
On the growth path
With total investments of Dh143 billion last year, the construction sector saw a growth of 5.5 per cent, says Porush Jhunjhunwala, Director at Banke International Properties. “This investment is being driven by substantial population growth, particularly in the areas of housing, education, health care and tourism. At the same time, private sector real estate has regained confidence as new projects launch every week.”
He notes though that the past 12 months have seen some pressure on UAE real estate prices.
“There was a strong [positive sentiment with] the announcement of the Expo 2020 in December 2013, with the effects felt during the first half of last year, after which we have seen lesser uptake in property.”
Ahmet Kayhan, CEO of Reidin, a real estate information company, says that in line with the drop in real estate transaction volumes, a slowdown in the UAE’s construction sector has been observed. “One of the main indicators of the slowdown is [a decline in] the number of construction permits.”
But Robin Teh, Country Manager - UAE at Chestertons Middle East and North Africa, says construction activity in the country is strong. However, most of the contracts are old, and he concurs that there has been a slowdown in new contracts.
“This can be attributed to a couple of factors, including the high price of land and [an expected] oversupply in the market,” he says. “A fall in oil prices has also been a major factor resulting in caution in spending.”
B.S. Pillai, Executive Sales Manager at United Precast Concrete, Dubai, agrees: “There is a slowdown. However, the Expo 2020 will be the main driver for construction and infrastructure projects this year and beyond.”
Pillai adds that the slowdown is a combination of many factors, including the fall in oil prices, oversupply and an overemphasis on high-end projects. He believes local and overseas investors will remain the main sources of real estate project funding in the UAE.
Jhunjhunwala also attributes the slowdown mainly to the plunge in oil prices and oversupply. “More importantly, realty prices rallied pretty fast from 2012 until end 2013, in the run-up to the announcement of Expo 2020,” he says.
Not much to worry
However, the slowdown should not bother long-term investors. “Going forward, as the market matures further, developers who could offer better financial options can strike good mortgage deals with banks for their projects,” says Jhunjhunwala. “Families with household incomes of Dh20,000-Dh30,000 could move into freehold homes, [directing] rents into mortgage payments.”
Kayhan thinks falling oil prices have a direct negative impact on the construction contracts awarded, since the sector is mainly driven by major government projects. “On the other hand, it is hard to consider oversupply as a reason as the numbers do show that the supply levels are below market demand,” he says.
However, when it comes to real estate project funding, there is definitely strong interest, says Jhunjhunwala. “Real estate funds provide the necessary liquidity and financial support for developers to implement high-value projects, which, in turn, will contribute in achieving equilibrium between demand and supply.
“Investors are [also] gaining confidence in the coun-try’s hospitality sector. The emirate’s growing number of tourists has immense potential that investors have gradually started to discover.”
in the past two years suggests it has become more stable. “Foreign investment accounted for roughly half of the $30.7 billion [Dh112.7 billion] in real estate sales last year,” says Jhunjhun-wala. “The government slowed price increases by [implementing various] regulatory measures.”
Apart from this, banks, financial institutions and private equity are a few other sources of real estate project funding, adds Jhunjhunwala.
Depending on the client and facilitator, Kayhan also believes there will always be appetite for real estate project funding in the UAE. Teh adds that real estate projects are a key revenue generator for banks, which are also a primary source of capital for real estate projects.
There are quite a number of mixed-use projects that will boost activity in the construction sector. Jhunjhunwala cites examples such as Dh800-million Dubai Wharf by Dubai Properties, Emaar Forte in the upcoming Opera District, Arabella Townhouses in Mudon by Dubai Properties, the luxurious Ashjar 2 in Downtown Dubai and The Nest villas in Nad Al Sheba by Al Barari.
Nakheel has also unveiled a range of new retail, residential and leisure developments in Deira Islands, Ibn Battuta Mall and Dragon Mart, spanning a total built-up area of more than 23 million sq ft. A lot of development and buying activity is also expected around Business Bay due to its proximity to Downtown Dubai.
While Kayhan says there is not one project that will carry the industry on its shoulders, he notes that the Dubai Canal and Mall of the World are the kind of projects that will have the biggest impact on the industry.
Additionally, more than 20 off-plan residential projects have been announced in Dubai, says Teh. He expects these to revive the construction sector, in tandem with various infrastructure projects.
Pillai expects the sector to remain active in the short term with major residential and commercial projects like Damac Akoya, Nshama’s Town Square, Meraas’ Blue Water island project off Jumeirah Beach Residence, Dubai Holding’s Dubailand, Mohammad Bin Rashid City, the 5,000-villa Al Zawyeh development in Al Ain, Majid Al Futtaim Properties’ Al Zahia development in Sharjah comprising 1,500 villas and town houses and Emaar’s Spring Village.
Furthermore, over 117 major programmes are already being planned for completion by 2030, costing in excess of $1 trillion, says Jhunjhunwala. Some of the major projects under way include Etihad Railway, Al Maktoum International Airport, the Dubai Metro expansion and Dubai Waterfront development, among others.
$1tr - The value of ongoing Dubai projects for completion by 2030.
“Real estate funds provide the necessary liquidity and financial support for developers to implement high-value projects.”
Porush Jhunjhunwala - Director, Banke International Properties
While not one project will carry the industry forward, Dubai Canal and Mall of the World will have some of the biggest impact.
Ahmet Kayhan - CEO, Reidin
Off-plan Residential projects will revive the construction sector, in tandem with various infrastructure developments.
Robin The - Country Manager, UAE, Chestertons Mena
“The World Expo 2020 will be the main driver for construction and infrastructure projects this year and beyond.”
B.S. Pillai - Executive Sales Manager, United Precast Concrete
Source: N. P. Krishna Kumar, Special to Property Weekly