BMI View: In line with our view that the UAE construction market will become increasingly active in the coming years, plans to develop a US$1bn hotel on Dubai's Palm Jumeirah are the latest in a string of developments which underpin our improving growth forecasts over the medium term.
Reinforcing our view that the Dubai residential and non-residential sector is on a recovery path and will continue its upward trend over the medium-term ( see our online service, 17 January 2013, 'Strong Uptick In Project Awards' ), a number of major projects have been announced in recent months. Most recently, Viceroy has announced its US$1bn Palm Jumeirah waterfront hotel , which is bei ng backed by the real estate investment firm SKAI Holdings , with a sch eduled completion date in Q414. Zaya Dubai is the developer for the project and the substantial cost will be funded with a 50:50 debt to equity ratio. It joins a number of other major hotel developments on the Palm , with Sofitel announcing that its Polynesian-themed resort would open by mid 2013 and the Anantara Dubai Palm Jumeirah Resort and Spa is set to launch in the third quarter.
As Dubai's construction market recovers after bottoming out, new builds are largely being driven by Dubai's goal of positioning itself as a global tourism hub - a focus which has been sharpened since the emirate received a significant rise in tourist numbers on the back of broader regional instability during the ongoing political upheavals. After a 9.3% increase in the number of arrivals took the total past 11 million in 2012 (of which 8 million were destined for Dubai), BMI forecasts that arrivals into the UAE will grow by 10% in 2013.
Other major tourism focussed projects recently progressing include:
Phase one of the Mohammad Bin Rashid City project was announced in May. Meydan Group and Sobha in a joint venture will develop 1500 villas and surrounding parkland on the project site which has an estimated value of AED21bn (US$5.7bn). The city will include several tourist attractions; including a Universal Studios theme park and 'The Mall of The World' which will be the world's largest.
In late 2012, investment of AED10bn was announced as being planned for five theme parks in Dubai. We highlight the risk of these projects as they look similar to grandiose projects announced in the past which have fallen off the grid in light of financial and demand side factors. However, they are in line with the trend of promoting Dubai as a tourism destination, especially in the underdeveloped family market.
Dubai Safari, with a cost of AED150mn, will replace the Dubai's current zoo. Due to be completed in 2014 the development will cover 120 hectares.
The Taj Arabia, a full size replica of India's Taj Mahal, will begin construction in June. The AED3.7bn (US$1bn) is one of the planned projects in the Falconcity of Wonders development.
The Dubai Sustainable City project will begin construction in July, with a completion date in mid-2015. The AED1bn project will create 500 new homes, an environmental sciences university, school, commercial centre, shopping mall and a deluxe sustainable hotel as well as tourist attractions such as a planetarium and event amphitheatre.
|UAE Prospects Improving|
|UAE Construction Industry Value (AEDbn) And Real Growth (% Year-on-year)|
These projects contribute to our positive 2013 forecasts for the UAE's construction industry. This year we forecast that in real terms the UAE construction sector will grow by 4.8% on the previous year, which will then rise t o 5.3% by 2017.W e highlight the risk of this many projects coming into the pipeline at similar times creating a glut in the market, as developer confidence returns and signals suggest the possib ility of another period of boom. That said, we note a number of risks that weigh our forecast to the downside - debt-laden developers and tightness in project financing. Th ese factors should help to keep over ambitious projects in check and that lessons have been learnt from previous over capacity issues . Th us development will be better implemented to more accurately reflect demand. We also point to the potential danger of the '2014 funding cliff' BMI 's Country Risk team has highlighted, which could temper our positive outlook (see our online service, 13 November 2012, '2014 Funding Cliff Looms Large') .
Reflecting our view that the UAE's construction industry will perform well over the short to medium-term, the largest UAE-based construction company Arabtec saw profits rise by 20 % in the first quarter of 2013, with their order backlog increasing by AED735.8mn to AED20.1bn . The UAE accounts for over half of their revenue and the tourism sector theme continues to be present with the expansion of Dubai International Airport contract worth AED561mn to the company. Simila rly, Dubai listed Drake and Scull International 's order backlog rose to over AED10bn in May. Our view that there would a reversal in the downward trend of real estate prices has also played out nicely (see our online service, 26 November 2012, 'Sheikh's City Emphasises Both New Potential And Old Threats'). In the first quarter of 2013 property prices rose 5.4% in Dubai, which is an 18.3% increase on Q112.