Confidence in construction market

Sinking to an all-time low in 2008, the one-time construction boom seemed to have well and truly bit the dust. But are signs of a comeback in the midst? TRENDS reports.

It was everyone’s favorite story about Dubai: the phenomenal rise and the ultimate fall of its construction sector, which seemed like it was on a crazy adrenaline rush. When the bubble burst in 2008/2009, many companies were left stranded and all around Dubai there were half-built structures – an end to the city’s fairytale. But the city has shown its resilience, even as the eurozone suffers due to the Greek debt crisis. Many of the stalled projects have been completed, and the industry is slowly starting to come out of its deepest crisis.

At the Arabian World Construction Summit in Abu Dhabi, many of the industry’s top players came together to discuss the vital issues facing the construction sector in the GCC and how to overcome these challenges. They talked about the mega projects being discussed and constructed all over the region with a large concentration of these going up in Saudi Arabia and Qatar. Many of them reiterated that the regional market had indeed started moving and picking up pace. Samer Khoury, president of the Consolidated Contractors Company, said last year was a turning point for the regional construction sector and that Qatar will see a change in the future. The 2020 FIFA games combined with the development of Qatar’s Vision 2030 will lead to a lot of new projects.

The UAE Market
Within the UAE construction market, the bulk of the construction is being done in Dubai, with Abu Dhabi following a close second. According to Matthew Green, head of research and consultancy at CBRE, Dubai is leading the way in the 
recovery of the sector and has already stabilized post-crisis. Abu Dhabi, on the other hand, is just reaching its peak because it is behind Dubai in the construction timeline. According to him, while the market is in recovery, it will not get close to the peak it reached in 2008. 
It seems like the market is very speculative right now. However, he strongly believes Dubai has already stabilized post-crisis and while some areas are slower in their recovery, others have definitely moved forward.
Hassan Sha’sha’a, the vice president of strategy and development at Emirates Steel, confirmed this optimism, saying that there had been a $22 billion growth in the UAE construction industry.
One of the main effects of the decline in construction was that a lot of companies were in dire financial straits. While companies such as Nakheel were taken over by the government for a cost of $2.5 billion to save them from bankruptcy, others joined with their counterparts to better weather the storm. Although there are no solid figures on how many companies “disappeared” during the financial crunch. One of the main reasons Green cites for this is because there were many small private companies who had announced projects pre-crisis just to get in on the growing market and not to actually develop properties. They could have easily left the sector and avoided losses.

Office Space
According to a CBRE research, approximately 45 per cent of office space, 20 to 25 per cent of residential space and 10 per cent of retail space is still vacant in Dubai. People moving in from older buildings into newer ones are primarily leasing new office space. Although there has been interest from new tenants, the majority – about 73 to 75 per cent according to CBRE – of office space is in the strata form and thus, unsuitable for people looking for multiple floors. Standard Chartered Bank is building its own structure to meet its space needs. According to Alan Robertson, CEO of Middle East & North Africa at Jones Lang LaSalle, this could emerge as a common theme in the market. As multiple owners are present on each floor of an office building, it is sometimes hard for larger firms to deal with one owner.
According to JLL research, two major transactions have already occurred in 2012, one of which was the sale of Building 6 in Gate Precinct, DIFC. The other was a debt to equity swap of office and residential space in Index Tower and Limestone House in DIFC between Emirates NBD and Union Properties for AED1.1 billion. Robertson says they are also working on another high-profile deal with a big international client. Major office completions expected in Dubai in 2012 include the Central Park in DIFC by Daman, the SIT Tower in Silicon Oasis, DWC in Logistics City, Regal Tower in Business Bay and Amesco and Platinum Towers in JLT.
On the other hand, the retail and hospitality sectors are pretty buoyant in Dubai. Over the first quarter in 2011, the hospitality sector is up 10 per cent. In retail, while the bigger malls like Dubai Mall and Mall of the Emirates are almost at 100 per cent occupancy, many of the smaller establishments are suffering. According to Robertson, these malls will have to come up with alternatives to their retail style or they will not be able to survive the competition. The overall average city-wide rent remained stable over the first quarter of 2012 at AED1,885 per square meter, according to Jones Lang LaSalle.
The recovery of the hotel sector witnessed during 2011 has continued further over the first quarter of 2012, with occupancy levels increasing to 86 per cent, which is similar to the levels experienced in 2007 and 2008. A number of new projects have also been announced in Dubai over the past few months including the redevelopment of the Metropolitan Hotel site and the launch of a new arts district with an opera house in Downtown Dubai featuring a hospitality component.


In Abu Dhabi, two major branded hotels were added to the market in the first quarter of 2012 comprising over 500 rooms, including the Sofitel Capital Plaza and the Premier Inn at Capital Centre.
Within the residential market, investment has been slow in picking up. Investors are showing interest in completed properties and not those still under development. A lot of Indian and European investors are back in the market, but banks are still cautious in providing financing options. According to JLL, a total of 28,000 units are scheduled to complete in 2012, representing an eight percent increase on the current stock.
In Abu Dhabi, 23,000 units are to be delivered this year and handovers are at their peak. But rents and sale prices have taken a nosedive in the Emirate as the supply of high-end homes increased.
A lot of the downtown area is being redeveloped in Abu Dhabi. According to Robertson, unlike Dubai, Abu Dhabi builds along certain themes. Their hospitality sector has focused more on culture and history rather than the resort and shopping approach. They have also focused on a lot of infrastructure development, including the Masdar City project for renewable energy. “Abu Dhabi, until recently, appealed to a narrower range of businesses, but because Dubai did not have the same oil and gas resources, it has always been an international trading hub,” Robertson said. “While Dubai had general trade and commerce, Abu Dhabi has been quite innovative in targeting the industries they want to get involved in and have used their wealth quite creatively to encourage inward investment.”
Tim Burbury, a partner at King & Spalding, said at the Summit that he sees the bulk of the UAE construction market to be in Abu Dhabi. But in Dubai there were a lot more disputes in the market in 2012 than in 2011.
On the other hand, developers don’t have a lot of new projects coming up; they are trying to finish all of the projects that were announced before 2009 or were stalled in the past two years.
Experts at the Construction Summit said that there is a lot more logical and sensible development happening in Dubai with a concentration on infrastructure. One example of this is the Jumeirah Beach tram project, construction on which has restarted.
Further, authorities have intervened and concentrated on revamping finance. Greg Christofides, CEO of Arabtec Construction, said there has been more cooperation to make payments in time so that the sector develops faster.
Approximately 40 per cent of the new space in Dubai is coming up in the 
Business Bay area.

Significant Developments
The Dubai and Abu Dhabi governments are doing quite a few things to attract investment into the markets. The Dubai Free Zones Council has been set up to streamline the free zone system and to allow greater movement of companies between the Emirate’s 22 free zones.
In Abu Dhabi, there are plans to enhance the airport, activate Yas Island, grow Etihad Airways, deliver museums and boost other economic and social development.
One of the most significant events in Abu Dhabi’s real estate market is the proposed merger of developing giant Aldar Properties and smaller rival Sorouh 
Real Estate.
The proposed merger is being conducted under the auspices of the government and will lead to a single company with assets of $15 billion. When reports emerged that all was not clear in the merger, many asked for an explanation from the two companies. Currently the due diligence process is under way for the companies and it could take months before any solid results emerge.

The construction industry has always been a backbone of the overall economy of the UAE. Besides increasing employment, the construction boom really put Dubai on the international map and attracted foreign investors to come explore a part of the world that until then had been shrouded in mystery. While everyone loves to tell the story of the collapse of the construction industry, many are working to rebuild what the industry has lost.
Paired with the increased government intervention, there is a good chance the current growth rate will be sustainable in the long run. “The 
market is now showing more signs of maturity and is more sustainable. Its good to grow, we hope, and we think the growth will be more sustainable,” 
Robertson concluded.