Economic Update

Abu Dhabi’s construction industry is shifting its focus from residential and commercial development, which has long dominated the trade, to a rising number of infrastructure projects. However, supply pipeline bottlenecks could cause costs to rise and delay the rollout of some plans.

A report issued by Citigroup in mid-September showed hundreds of construction projects across the Middle East and North Africa (MENA) region had been rescheduled or cancelled, with more than half of all cancellations and delays in the UAE.

“Unsurprisingly, cancellations in the UAE relate predominantly to real estate,” Citigroup said. “This market is becoming less attractive for contractors.”

However, the Abu Dhabi government has found another market for the construction industry’s skills, one that will help bridge the gap left by the real estate sector’s slow recovery, with many new infrastructure projects coming off the drawing boards. Craig Plumb, the head of research for MENA at global property services firm Jones Lang LaSalle, said the government’s move to invest in infrastructure developments was pronounced both in Abu Dhabi and the rest of the UAE.

“There is a big shift away from real estate projects into infrastructure,” he told local media on September 13. “Certainly in the UAE the major spending is going to be on infrastructure – whether that’s power stations, nuclear power or railway lines.”

Among the big ticket items the Abu Dhabi government supports is the majority of the $11bn national rail network, which, when completed in 2018, will stretch for 1200 km and connect Abu Dhabi to the UAE’s other emirates and ultimately Oman and Kuwait.

With up to $25bn to be spent under the Emirate’s Surface Transport Master Plan (STMP), which is intended, in part, to provide the necessary infrastructure to meet the emirate’s passenger and freight requirements by 2030, the emirate’s construction industry should find itself fully employed for the next two decades.

According to David McElveney, a partner responsible for projects and construction at the Abu Dhabi office of international law firm Clyde & Co, such public developments are increasingly important to the local construction sector.

“With real estate activity generally down, infrastructure projects have become the main driver of construction activity in the region – this is particularly so in Abu Dhabi, as well as in Saudi Arabia and Qatar,” he said in late September. “The Abu Dhabi government remains committed to developing transportation networks, and power and water facilities.”

While committed to strengthening the emirate’s infrastructure backbone, the government and contractors will have to contend with rising materials prices and increasing regional demand.

The past few years have seen materials costs fluctuate as the regional and global industry went through a cycle of boom, bust and – in Abu Dhabi’s case – a return to vibrancy. In particular, prices for steel and some other materials hit record highs before the international financial meltdown, which prompted a scaling back of construction projects and a subsequent fall in costs. That fall is now being reversed, according to William Dewsnap, the head of valuation for Abu Dhabi at property consultancy Cluttons.

“But then as developments were stopped, and the economy slowed down quite considerably, those raw material costs dropped quite sharply,” he said in report carried by The National in late August. “What you’re seeing is something of a correction.”

The most recent monthly report on building materials costs by the Statistics Centre – Abu Dhabi (SCAD) showed the prices for many construction products and services were rising, with transport equipment leasing costs up 37% year-on-year as of the end of August, while cable and wire costs increased by 31.8% and 27%, respectively.

There was a more modest rise in labour costs, which climbed by 6% in the 12 months from August 2010. While some of these increases were offset by falls in prices – with aggregates and sand easing – the general trend in the mid-September SCAD was of climbing costs.

There are several factors that could significantly impact materials costs for the Abu Dhabi building sector, many of which are external. Both Saudi Arabia and Qatar have announced a series of massive construction schemes, with Qatar focused on staging the 2022 FIFA World Cup while Saudi Arabia embarks on a programme to expand housing, industrial and infrastructure stocks. These projects, along with planned increases in construction activity by other Gulf states, are expected to put additional pressure on the still limited materials supply stream in the region, which in turn will push up prices.

Though there will likely be budget fluctuations over the coming years, with even more pressure applied as residential and commercial property markets recover further, increasingly full order books will help offset any pain Abu Dhabi’s builders are feeling due to rising costs.