Dubai at the centre of regional construction and real estate sectors

Although perhaps no longer able to boast more cranes operating within its boundaries than in all the other cities of the world put together, Dubai is still comfortably one of the world’s leading centres for the construction industry. Major projects continue to roll out, while existing ones finish off or evolve into new developments. From a new airport to new highways – even via a new canal – and from mixed-use tower complexes to offshore islands, Dubai continues to redefine and reinvent the shape of its built environment.

This activity is not without its challenges. Past misfortunes have left a legacy of greater caution and tighter regulation. The global environment, too, poses challenges, with oil and gas prices at a low, the dollar – and thus the dollar-pegged dirham – at a high, and growth slowing in China and sluggish in Europe. All these factors impact the Dubai construction sector precisely because of one of its great strengths – its global interconnectedness and international status.

Going forward though, there is plenty about which to be optimistic, with contractors, building materials suppliers and manufacturers all seeing a major demand for their services as the emirate prepares itself for Dubai Expo 2020 and beyond.

Demographic Story 

As part of the UAE, Dubai is a party to the country’s overall development plan, UAE Vision 2021. This plan has a goal to place the UAE “among the best countries in the world” by 2021, the year of the state’s golden jubilee. One of the principle vehicles for the plan’s execution is a major investment in infrastructure, particularly that related to transport. This complements another objective of Vision 2021, namely to establish the UAE as a major shipping and aviation hub.

At the same time, Dubai is gearing up to host the World Expo 2020. The fair is expected to attract some 25m visitors, with 71% of them coming from outside the emirate. The event is also forecast to support the creation of around 277,000 jobs, with the bulk of these in the tourism and travel sectors, as well as many in construction in the lead-up to the event, as facilities are prepared and built.

A third growth driver is demographics. The population of the emirate has been growing fast. The Dubai Statistics Centre (DSC) put the population at over 2.4m in November 2015. During working hours, that number swells by over 1m as workers commute from other emirates – notably neighbouring Sharjah and Ajman. Population growth among residents has been roughly 100,000 a year for the last three years. In 2014 the total resident population was 2.3m, while in 2013 it was 2.1m, indicating a percentage increase of around 15% between 2013 and November 2015.

Growth Cycle

Population growth in Dubai is strongly linked to the construction sector, with labour-intensive projects attracting large numbers of workers, usually from abroad. Principle source countries for this workforce include Pakistan, Bangladesh, India, Sri Lanka and Nepal, with the foreign workers sponsored by their employers under the kafala (sponsorship) system. This system, while it has been widely discussed both within the emirate and abroad, highlights one of the principle characteristics of Dubai’s unique demographic situation, namely that the emirate is composed of around 85% expatriates and subject to a high population turnover, with many employees returning home at the end of their employment contracts. This can have significant implications for retaining qualified and trained staff.

The growing level of construction also creates population growth, as the workforce is largely imported. This, in turn, creates construction demand as the need to accommodate workers also increases. One recent estimate, for example, suggested that new hotel projects alone in the emirate would boost the population by some 20,000 people. Thus, three main drivers for growth are in play, all of which have major upsides for the construction sector.

These factors also build on the back of the already high value of construction to the overall economy. In the first quarter of 2015, construction contributed 8.1% to GDP in the emirate, or around Dh7.16bn ($1.9bn), according to the DSC, making it the sixth-largest sector of the economy. Moreover, confidence in the sector remains very high, outstripping other contributors, with a Markit and Emirates NDB Research report showing construction’s Future Activity Index, which measures future business expectations, surging from 60 points in August 2015 to 73.1 in September, far ahead of the emirate average of 65.8.

Transportation Hub 

Some of the most ambitious construction projects in the emirate, either in the planning stage or currently under way, are those related to ports, airports, roads and railways. Some of these are continuations of initiatives already started, while others are entirely new projects. Regarding the first group, the continued rollout of the Dubai Metro is among the largest construction works currently ongoing.

Overseen by the Dubai Roads and Transport Authority (RTA) the project is valued at $14.35bn and has a final completion date of 2030. At 75 km, the metro is the world’s longest automated, driverless system and is the first launched in the Gulf region. A new 15-km section is to be added to the Red Line, connecting the network to the Dubai Expo 2020 site. This new stretch of rail will include 4 km of underground track and serve seven new stations, including those in areas with high population density, such as Discovery Gardens, Jumeirah Golf Estate and Dubai Investment Park. Also known as Route 2020, the contract for this work was due to be awarded in early 2016. The project has wider effects as well. “RTA will play an important indirect role in helping determine which areas will be most sought after through transportation infrastructure. In the end nobody wants to be stacked in traffic. People are looking for more convenience,” Michael Lahyani, founder and CEO at real estate website Propertyfinder.ae, told OBG. A key pillar of the RTA’s plans is utilising smart technologies, such as system to oversee traffic signal timing, CCTV cameras to improve monitoring and response times, and 170 smart services as part of a new traffic apps programme. Also making tracks is the Etihad Rail (ER) project.

This is the UAE’s section of the planned pan-GCC railway, which will eventually run from Oman to Kuwait. With the whole ER rollout worth some $11bn, the 1200-km network is expected to significantly transform the regional logistics chain by enhancing overall connectivity and transport times – although it has been delayed. Dubai’s portion of the railway features in stages two and three of the three-stage network development, with the 628-km stage two linking Jebel Ali and the Jebel Ali Free Zone to Abu Dhabi and, via the Al Ain Junction, to Al Ain and the border with Oman. Stage three of the project will see Jebel Ali hooked up to Dubai itself and on across to Fujairah, on the Indian Ocean, and Ras Al Khaimah, the most northerly emirate.

Working In Extremes

Work began on stage one, which covers 264 km, in Abu Dhabi in November 2015, with testing of freight services on the Habshan-Ruweis stretch. Preliminary design and engineering work has been carried out for stage two, with preparations for the tendering of six construction packages under way.

The network will eventually offer both passenger and freight services, with maximum speeds of 200 km per hour for the former and 120 km per hour for the latter. This requires some high-end rail engineering, considering periodic summer temperatures of 50°C or more, dropping at night in desert areas to around freezing during the winter. Atkins has been given the role of preliminary engineering services consultant, with JV Parsons, PCM Strescon Ventures, Electro-Motive Diesel and CSR Corporation also involved. The main civil and track works contract for phase one went to Italy’s Saipem and Tecnimont and the UAE’s Dodsal Engineering and Construction.

The eventual aim of connecting the network to neighbouring Oman, as part of stage two, is to link the network to Oman Rail, which in late 2015 was pressing ahead with plans to connect the port city of Sohar with the Omani border town of Buraimi, which lies next to Al Ain. As with link-ups to other neighbouring countries, political and geo-strategic considerations are also likely to play a part in the eventual date of connection.

Roadrunners 

Meanwhile, the emirate’s road network is also continuing to expand and improve. The RTA’s Emirates Roads Master Plan is worth some $12bn and has a target completion date of end-2016, with a large mass of roads, bridges, underpasses and ancillary structures involved. Indeed, some 500 km of road, 95 interchanges, nine ring roads, 81 Dubai Creek crossing lanes and phases one and two of the Dubai-to-Abu Dhabi highway (the E311) all come under the plan. In the latter case, the project also involves the Abu Dhabi road and infrastructure authority, Musanada. This gives an expected completion date of August 2016 for the highway, which connects Abu Dhabi to Dubai at Seih Sheib – the current end of Dubai’s Emirates Road. Another key road project under the master plan is the New Lihbab Road, which connects Sheikh Zayed Road – Dubai’s main artery – with the Emirates Road. Worth Dh164m ($44.6m), this 9-km, four-lane highway includes two roundabouts and a directional bridge and supports development of Al Yalayes Road, itself a key interconnector between three major road transport corridors in the city – the Sheikh Zayed, Sheikh Mohammed bin Zayed and Emirates roads.

In The Air

Much of the road master plan also dovetails with the development of the World Expo 2020 site and the $32bn Al Maktoum International Airport expansion. The airport is a centrepiece of Dubai South (also previously known as Dubai World Central), billed as a “city within-a-city” that is taking shape on an area that will also include the Expo 2020 site and a range of other residential, office, retail and hospitality sector projects.

Al Maktoum International Airport began operating passenger flights as Dubai’s second airport in 2013, and aims to capitalise on the emirate’s good existing global connectivity – it lies within four hours’ flying time from around one-third of the world’s population – and growing power as a tourist destination in its own right. Initially, the airport had capacity for 5m people per year, with the current phase of expansion due to raise that figure to 26m by 2017. The final goal – nearly 10 times the size of the expanded version of the current facility – illustrates the scale of the emirate’s plans. Al Maktoum International Airport will not be an ordinary airport, but an “aerotropolis” covering 56 sq km. The expansion will go on to include two satellite buildings, with a total capacity of 120m passengers per year, and accommodation for up to 100 A380 aircraft at any one time. This means increasing the number of runways from the current one to five, each 4.5-km long, four concourses with a layout encompassing three nodes, each one the size of seven football fields, a six-track train system to hook up terminals and concourses; and an 8-sq-km cargo facility. This is in addition to the expansion of the existing Dubai International Airport. Under the Dubai Airports Strategic Plan 2020, a $7.8bn expansion to the airport is under way, boosting capacity from 60m to 80m passengers by 2018. This includes a boost in the number of stands from 144 to 230, cargo growth up to 4.1m tonnes by 2020, an additional 675,000 sq metres of terminal and concourse space, and an expansion of the arrivals terminal space by 2018.

All At Sea

Transport infrastructure development does not stop at the water’s edge. As part of its strategic vision to cement its role as the region’s premier maritime industry centre, Dubai is also investing large sums on port development. At Jebel Ali, owner and operator DP World announced it was starting work on a new $1.6bn container terminal in June 2015, aimed at meeting increasing demand. Phase one of this terminal four expansion will bring Jebel Ali up to a capacity of 3.1m twenty foot equivalent-unit, with a total quay length of 11,000 metres and some 110 cranes.

Yet some of the most spectacular and iconic sea-focused construction projects in Dubai are in fact driven by developments in real estate. Dubai grabbed headlines before the 2008-09 crash with its offshore, landfill-based residential projects, including the Palm Jumeirah – an artificial peninsula in the shape of a palm tree – and The World, a collection of artificial islands built in the shape of a map of the world. Palm Jumeirah was the first of three such peninsulas planned, with the second, Palm Jebel Ali, constructed but yet to be developed, and the third, Palm Deira, now redesigned and re-launched as Deira Islands.

Rising Residences

According to consultancy JLL, 2015 saw 7800 more apartment units and 700,000 sq metres of new office space enter the market. Future supply is expected to reflect recent slower growth with the planned 26,000 new residential units for 2016 likely to be delayed. However, the retail segment has seen more positive growth with 193,000 sq metres added in 2015 and the emirate expected to see retail mall space increase by 19% over 2016 and 2017 to reach 3.5m sq metres. Office construction also means an additional 600,000 sq metres between 2016 and 2017. In hotels, some 2700 more room keys came into existence in 2015, with another 18,000 rooms proposed over the course of 2016 and 2017.

According to Alpen Capital, between 2014 and 2020, an additional 51,000 housing units will enter the market in Dubai, with around 50% of these aimed at the upper-middle and high end of the market. Location is only one aspect of the property market in Dubai. Amenities are also key. Investors are speculating less and new developments are more end-user focused, which means quality is also generally higher. For example, apartments with a balcony are being sold at a premium.

A major push is also under way to build “affordable” housing units, with state-owned land allocated for these in areas such as Muhaisnah 4, and Al Quoz 3 and 4. A lot of the mid-upper and high-end construction is taking place in a handful of mega-project areas, where an increasing emphasis on mixed-use developments means that project developers are faced with providing residential, commercial, retail and entertainment clusters. Other mega-projects are targeted more specifically, however. These include the $136m Museum of the Future, near the Emirates Towers, the Dh25bn ($6.8bn) Mall of the World and the Dubai Opera in The Opera District of Downtown Dubai. This will combine traditional museum functions with a high-tech incubator, conference space for international scientific conferences and research facilities, and is set to open in 2017.

Another niche mega-project is the $43.5m Dubai Frame, a giant picture frame 150 metres high and 93 metres wide. This will likely be a major tourist attraction, offering views of old Dubai on one side and new Dubai on the other and a series of presentations on the emirate’s history. The Frame was reportedly 77% complete as of February 2016.

Attractive Themes

Other noteworthy attractions in the construction pipeline include three large theme parks and a water park, all due to open in October 2016. These are Motiongate Dubai, Bollywood Parks, Legoland Dubai and Lego-land Water Park. Dubai Parks and Resorts is behind these, with the parks all forming part of a single integrated resort complex which also includes a Marriot-managed hotel and Riverland Dubai, a retail, entertainment and dining facility. The entire project’s cost is around Dh10.5bn ($2.9bn), with a location in the Dubai South area on 2.3m sq metres of land. In 2018 a 20th Century Fox theme park will also be added to this complex, in a deal between Fox and the Al Ahli Holding Group.

Also among the mixed-use mega-projects is Meraas Holding’s Dh6bn ($1.6bn) Bluewaters Island project, which features residential units and the world’s largest Ferris Wheel on new land built next to the Jumeirah Beach Residence. Elsewhere, Emaar Properties and Dubai Holding’s Dubai Creek Harbour, a 6-sq-km development, will have 6.79m sq metres of residential property, along with over 1m sq metres of retail space, 22 hotels and 851,000 sq metres of commercial property. The Dh2bn ($544.4m) Dubai Water Canal connects Business Bay with the Gulf via a 3-km canal featuring a range of waterfront properties, while Nakheel will also bring some 2400 apartments and hundreds of hotel rooms to its Deira Islands master development with the new Deira Islands Towers and Boulevard developments, and several major hotel joint-venture projects.

In addition, the $10bn Mohammed Bin Rashid Al Maktoum (MBR) City District 1 project is nearing completion, with keys being handed over for its first phase in 2016. MBR includes an artificial water feature with 7 km of artificial beach, the world’s longest. Aladdin City, meanwhile, consists of three interconnected towers constructed over Dubai Creek and is due to be opened in 2016.

The Dh30bn ($8.2bn) Desert Rose satellite city, eventually due to provide housing for approximately 160,000 people, is expected to break ground in 2016, while the Dh10bn ($2.7bn) Al Mamzar Beachfront will also begin construction that year, eventually adding 4000 residential units, along with retail and hotel space.

These are just the mega-projects. Around Dubai, work continues apace on dozens of other smaller projects, many of which might be highlights in other cities. The year 2016 is set to see major work across town, with the DWC and Dubai Expo 2020 sites particularly active.

Sharing The Burden

Indeed, for contractors the landscape in Dubai is a healthy one, yet it has also changed significantly from the boom years that preceded the global financial crisis in 2008. Projects are currently being developed on a much more phased basis, with contractors each being given smaller slices of the pie. The multibillion-dollar projects of the past may be over for individual contractors, but there still remain lots of smaller multimillion-dollar projects up for grabs. This helps to spread the risk, with contractors, developers and the government all having learned valuable lessons from the property crash. This element of caution has also affected project financing, with lenders becoming more cautious and looking for much stronger guarantees from construction outfits and developers.

At the same time, one positive spin-off from the experiences of 2008-09 has been an effort to establish Dubai as a regional dispute settlement destination. The Dubai International Arbitration Centre, an autonomous non-profit based in Deira, is spearheading this, and many law firms based in Dubai also now undertake work resolving disputes in the emirate and beyond. Many of these disputes date back to the crash, which saw a surge in litigation. The Dubai International Financial Centre and the International Chamber of Commerce also provide services in this field. Firms working in this area are now looking for speedier dispute resolution mechanisms, including the further development of mediation services, to bring disagreements involving the construction sector to a more rapid conclusion. “There is a good indication that these improvements are now being considered,” Nick Carnell, a construction partner with law firm TaylorWessing in Dubai, told OBG.

Due Diligence 

In this cautious environment, contractors are much more specific about the developers they work with. Major state-linked entities are preferred. Private sector developers are sometimes less fortunate in this field, however, as contractors look to engage with clients that are well financed up-front and with good government connections – as do the banks. Previous practices, such as the use of off-plan income to fund other projects, have also been cut by enforcement of strict progress reports by the Dubai Land Department, with investors’ money only being released from escrow accounts when tangible work is done. This also keeps contractors closer to stated project delivery dates, while also favouring developers with deep pockets.

Competition among contractors for the more reliable contracts thus remains high. Top companies include Habtour Leighton, the Dubai-listed Arabtec, Brookefield Multiplex, China State, and Samsung C&T, in addition to the wide range of smaller outfits in the field. Competition also means bid prices continue to fall, pressuring margins even as materials costs remain low. Labour costs, however, have been rising, as competition for labour from other GCC countries increases – notably Qatar and Saudi Arabia, both of which also have major construction programmes currently under way. This has had some impact at the higher end of the labour market, too, as skilled and experienced professionals are lured by projects in those countries. The impact of falling oil prices has also proved a challenge, with projects in Dubai and some neighbouring countries being cancelled or put on hold. This has affected Dubai-based contractors with regional investments, in particular. Arabtec, for example, incurred a net loss of Dh1.3bn ($353.9m) in the first half of 2015, with much of this stemming from its Saudi operations.

Outlook

Despite the possibility of a protracted period of low oil prices, a slowdown in China, sluggish growth in Europe and the possible impact of US Fed rate rises on currency markets, Dubai’s construction sector is forging ahead at a time when many foreign investors may be tightening their belts. This is widely a result of Dubai’s fortunate position vis-a-vis these challenges. The emirate’s low dependency on oil, compared with many of its neighbours, should insulate it from the effects of sustained low prices, – indeed, the sector’s contractors will benefit from the lower price of energy. Added to this is the emirate’s long experience in the sector, with the regulations and safeguards put in place since the global crash in 2008 designed to prevent over-speculation and ensure sustainable growth and safety for investors and sector players. Moafaq Ahmed Al Gaddah, chairman of MAG Group, told OBG, “European investors are coming back to the market. Return on investment is high in Dubai – 8-10% – and the low taxation regime remains quite appealing to them.”

Dubai is also well placed to benefit from the opening up of Iran, while its active global promotion as a destination for finance, tourism, logistics and other industries continues to provide demand for new construction. Also, the demand generated from Dubai Expo 2020 and other mega-projects are further evidence that the emirate’s many contractors, building materials and equipment suppliers, architects and designers can all look forward to an involved project pipeline in the years ahead.

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The Report: Dubai 2016

Construction & Real Estate chapter from The Report: Dubai 2016

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