Questionable Sustainability Of Buoyant Pipeline

BMI View: Based on data from BMI 's Key Projects Database, we highlight construction activity in the UAE is set to grow over the coming years thanks to over US$200bn worth of projects already in the construction phase. However, in comparison to its regional peers there are much fewer projects in planning suggesting that once this building cycle is over, there will not be enough momentum to sustain growth over the longer term, reinforcing our real growth forecasts for a slowdown in the industry post 2019.

In line with our view that the construction sector in the UAE is finally recovering after years of poor growth, we have logged US$313bn of construction projects in our Key Projects Database across the infrastructure and residential and non-residential construction sectors. Increasing confidence in the industry has seen a number of large scale projects restarted or moved forward, which looks set to boost activity over the medium-term, especially since Dubai was awarded the World Expo in 2020 (see 'Expo Win: A World Of Opportunities', 28 November 2013).

While the 'under construction' figure is impressive - indeed there is more currently under construction in the UAE than anywhere else in the GCC - we highlight that our Key Project Database reveals a worryingly thin project pipeline with only US$25.3bn in the tendering or pre-tender phase. Without the projects to replace ones currently under construction, the solid return to growth we are currently forecasting will not be sustainable. We also note that while there will be numerous projects announced over the coming years related to the Expo, including the actual site of the event and related infrastructure, after large scale events we often see a major drop in new project announcements which may affect the long-term pipeline.

Medium Term Promise, Long Term Concerns
UAE Projects, By Phase (at time of writing), US$bn

BMI View: Based on data from BMI 's Key Projects Database, we highlight construction activity in the UAE is set to grow over the coming years thanks to over US$200bn worth of projects already in the construction phase. However, in comparison to its regional peers there are much fewer projects in planning suggesting that once this building cycle is over, there will not be enough momentum to sustain growth over the longer term, reinforcing our real growth forecasts for a slowdown in the industry post 2019.

In line with our view that the construction sector in the UAE is finally recovering after years of poor growth, we have logged US$313bn of construction projects in our Key Projects Database across the infrastructure and residential and non-residential construction sectors. Increasing confidence in the industry has seen a number of large scale projects restarted or moved forward, which looks set to boost activity over the medium-term, especially since Dubai was awarded the World Expo in 2020 (see 'Expo Win: A World Of Opportunities', 28 November 2013).

Medium Term Promise, Long Term Concerns
UAE Projects, By Phase (at time of writing), US$bn

While the 'under construction' figure is impressive - indeed there is more currently under construction in the UAE than anywhere else in the GCC - we highlight that our Key Project Database reveals a worryingly thin project pipeline with only US$25.3bn in the tendering or pre-tender phase. Without the projects to replace ones currently under construction, the solid return to growth we are currently forecasting will not be sustainable. We also note that while there will be numerous projects announced over the coming years related to the Expo, including the actual site of the event and related infrastructure, after large scale events we often see a major drop in new project announcements which may affect the long-term pipeline.

Projects Under Construction Support Growth
UAE Construction Industry Real Growth (% Change year-on-year)

Reflective of this project pipeline our real growth forecasts for the construction industry over the coming years is increasingly positive. For 2014 we forecast real growth of 5.3% year-on-year (y-o-y). Over the medium term in the run up to the Expo in 2020 and as the confidence in the market increases, growth will average 6.2% per annum between 2015 and 2019. However, as the large number of projects currently under construction and the preparations for the Expo come to an end, we then see real growth dropping to average 2.9% per annum between 2020 and 2023.

That said, those currently working on projects or that have exposure to the UAE market look set to benefit over the coming years. We expect that cement players will perform particularly well over the medium term, as will those with a large presence in the construction sector, such as Arabtec or Drake & Scull International. Indeed indicative of the positive environment for construction companies in the UAE at present, Arabtec's share price has jumped around 47% since mid-January on the back of just one, albeit large at US$700mn, project win in Abu Dhabi.

Limited But Varied Opportunities
UAE Key Projects In Pre-Tender Stage, % of Value

In terms of those companies looking to gain exposure to the lucrative UAE market, our Key Project's database highlights that projects which are still to come to market are evenly split between those in general construction and those in the infrastructure sector. That said, at a more granular level, with projects such as the Abu Dhabi Metro, the extension to Dubai's metro and the various elements of the Ethiad rail network, point towards the railways sub-sector as being an out performer.

Similarly as the UAE attempts to diversify its economy, industrial construction will provide opportunities. We expect that over the longer term, the residential sub-sector will increase its share of the planned projects as the real estate industry across the UAE regains the confidence which was so badly damaged in financial crisis. Indeed, with projects such as the Mohammed Bin Rashid City moving forward, we expect the residential elements of such projects to be rolled out over the coming quarters.

Exposure To Saudi Arabia Prudent
UAE and Saudi Arabia, Projects In Pre-Construction and Under Construction Phases, Value (US$bn)

However, over the longer term we believe that if companies are looking to enter the GCC market, Saudi Arabia will certainly hold the most opportunities. According to our Key Projects Database, Saudi Arabia has over US$389bn of projects in the pipeline - from projects waiting to be awarded such as the new lines of the Mecca Metro to projects such as the planned construction of sixteen nuclear power stations which are still at very early planning stages. While we note that many of these projects may never get off the ground, the scale of the project pipeline is such that even if that is the case, the rewards from exposure to it look set to far outweigh those gained from the UAE. As such, our average real growth forecast between 2014 and 2023 for Saudi Arabia is 6.9% per annum, in comparison to 4.8% in the UAE.

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Related sectors of this article: Infrastructure, Transport Infrastructure, Residential Construction, Industrial Construction, Railways, Housing
Geography: United Arab Emirates
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