Construction Enters Strong Growth Period

BMI View: The UAE's construction industry will perform strongly in 2014, following an impressive return to growth in 2013 and streams of news buoying confidence in the sector. The recovery in the residential and non-residential sector has been particularly strong with numerous major projects moving forward as Abu Dhabi follows Dubai in its recovery and investors try to capitalise on the World Expo 2020 in Dubai. The main downside risk to our forecast is growing concerns over another property bubble, although this is being mitigated by government and developer action to limit speculative property sales.

Provisional data published by the National Bureau of Statistics show real growth in the construction industry stood at 3.8% year-on-year (y-o-y) in 2013. While this figure is slightly below our estimates of 4.6%, we note that official historical data has been heavily revised for 2011 and 2012, which now show contractions of 1.8% and 6.7% respectively. Considering this big turnaround in the industry over 2013 and the positive momentum we have seen over 2014, we are increasing our positive growth forecasts outlook for 2014 and beyond. We now forecast real growth of 5.5% in 2014 and 5.8% in 2015. Average growth between 2014 and 2019 now stands at 6.2%, after which we forecast a slowdown to 2.4% between 2020 and 2023 on account of the World Expo no longer being a catalyst for growth.

Property Market Returns To Form

Bullish Outlook
Construction Industry Value LHS And Real Growth RHS (2012-2023)

Construction Enters Strong Growth Period

BMI View: The UAE's construction industry will perform strongly in 2014, following an impressive return to growth in 2013 and streams of news buoying confidence in the sector. The recovery in the residential and non-residential sector has been particularly strong with numerous major projects moving forward as Abu Dhabi follows Dubai in its recovery and investors try to capitalise on the World Expo 2020 in Dubai. The main downside risk to our forecast is growing concerns over another property bubble, although this is being mitigated by government and developer action to limit speculative property sales.

Provisional data published by the National Bureau of Statistics show real growth in the construction industry stood at 3.8% year-on-year (y-o-y) in 2013. While this figure is slightly below our estimates of 4.6%, we note that official historical data has been heavily revised for 2011 and 2012, which now show contractions of 1.8% and 6.7% respectively. Considering this big turnaround in the industry over 2013 and the positive momentum we have seen over 2014, we are increasing our positive growth forecasts outlook for 2014 and beyond. We now forecast real growth of 5.5% in 2014 and 5.8% in 2015. Average growth between 2014 and 2019 now stands at 6.2%, after which we forecast a slowdown to 2.4% between 2020 and 2023 on account of the World Expo no longer being a catalyst for growth.

Property Market Returns To Form

Indicative of the improving prospects within the construction sector, numerous private and government-owned developers have unveiled billions of dollars in new projects and restarted many of the more viable developments which were postponed in light of the financial crisis. Most recently, the USD1.9bn "Living Legends" scheme in Dubai, comprising 500 villas and 12 apartment blocks and part of the USD64.3bn Dubailand development, has announced it is set for completion by the end of the year after being halted in 2008. New major projects recently to emerge include the USD5.4bn Desert Flower development announced by Dubai's government which will follow Masdar's lead as a sustainable city.

Importantly, we recently noted that Abu Dhabi has begun its recovery, after the emirate continued to suffer from the financial crisis ( see 'Abu Dhabi Real Estate Showing Positive Signals' 23 April 2014). We also note that both Sharjah and Ras Al Kaimah are set to benefit from the uptick in activity we are seeing in the major Emirates. Property prices are rising rapidly and prime real estate plots are increasingly uneconomical for residential developments. As such we expect more developers to take advantage of lower prices in Sharjah and Ras Al Kaimah, capitalising on improving transport links between the emirates.

Bubble Warnings

In light of the property price increases we have seen over the last 12 months - with average survey results indicating around a 30% jump - there are growing concerns of the effect of speculation in the market rather than fundamental demand being the driver of growth. This presents the greatest downside risk to our construction industry forecasts, as confidence in the performance of the market is key for developers to implement projects.

However, measures are being taken to ensure that the property market does not overheat on speculative buying and selling, and as such we are maintain our bullish construction industry view. Dubai has doubled the fee it charges on real estate sales to 4% from 2%. The government has also proposed plans to limit first-time mortgages to 75% and 80% of the property's value, for foreigners and UAE nationals, respectively. The ratios for any subsequent home purchases are 60% and 65% for expats and locals respectively. Furthermore, Aldar Properties has now moved to only allow clients to resell their properties once 50% of the value has been paid to Aldar, echoing similar moves by Emaar Properties which require 40% payment before reselling is permitted. Following discussions with the IMF, Dubai is also planning to introduce fees and restrictions on the sale of off-plan properties - a move we have seen enacted in Bahrain to increase investor confidence ( see 'Banning Off-Plan Sales Offers More Sustainable Growth', 28 May 2014).

Bullish Outlook
Construction Industry Value LHS And Real Growth RHS (2012-2023)

Expo And Diversification To Catalyse Infrastructure Growth

The Expo 2020 will focus around a planned 438-hectare site, the largest ever created for a World Expo. Located in Jebel Ali, construction at the Expo 2020 site is expected to cost between USD2bn to USD4bn. The site will feature 180 purpose built pavilions, an underground service rail network and a photovoltaic canopy capable of producing 50% of the site's power. The master plan for the site will not receive approval until the end of 2015, with work expected to commence shortly afterwards and be completed for 2019. Given the centrepiece role of the project and full governmental backing, we see few risks to its realisation.

Away from the site itself, other major infrastructure projects are set to receive new attention and be driven towards completion thanks to the 2020 event. An estimated USD1.3bn is to be invested in transport to and from the expo event. This includes expansion to the Dubai metro, with the current Red metro line being expanded to reach the event site. Additionally, the Purple Metro line and the development of the Dubai World Centre airport are also likely to have their completion and expansion dates brought forward so as to be ready for the event.

Thanks to efforts to support the diversification of the economy of the emirates, through programmes such as Abu Dhabi's 2030 vision for development, there remains much opportunity in the infrastructure investment space, despite the gains already made in the UAE's market. In March 2014, Dubai Electricity and Water Authority (Dewa) announced three major power expansion projects worth USD5.4bn, including solar and clean coal. The USD25bn UAE rail system, including the Blue, Gold and Purple metro lines and the Jumeirah tram in Dubai have all been approved for construction, and are awaiting a new rail law which is expected within the next year to give the green light for the whole network's development.

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