Dubai’s robust project pipeline boosts construction sector prospects

Construction demand in Dubai continues to be strong in the run-up to Expo 2020, supported by new tourism and hospitality projects, and public spending on infrastructure, although rising materials costs and funding constraints are exerting pressure on profit margins.

New hospitality projects increased in value by 6.1% year-on-year (y-o-y) in the first quarter to around $43bn, according to a report from construction analytics firm BNC Network issued at the end of July.

Seven new hospitality developments with a combined value of $370m were announced between January and March, and a further 25 with a ticket price of $2.2bn are expected to be awarded in the next few months. In total, there are 356 active hospitality projects.

One of the latest big-ticket developments is the AD10bn ($2.7bn) Dubai Square mall, which was announced in late July by Dubai Holding and Emaar Properties.

The mixed-use project, part of the companies’ flagship Dubai Creek Harbour development, will include 1500 hotel rooms and a free metro link to Dubai International Airport to attract in-transit tourists.

Dubai’s efforts to increase visitor numbers to 20m ahead of Expo 2020 should continue to boost construction activity well into 2019. In the hotel industry, for example, the number of new rooms is forecast to grow at a compound annual growth rate of 11.1% during the period, according to the Department of Tourism and Commerce Marketing. However, this is not expected to lead to oversupply, as occupancy levels are projected to remain high, at around 76-78%. 

Construction activity is also being supported by high levels of public spending, with 21% of this year’s budget – the largest the emirate has ever approved – allocated to infrastructure development.

One of the latest projects to get under way is in the power sector. In early July the Dubai Water and Electricity Authority (DEWA) announced that it had awarded contracts worth AD1.05bn ($408.4m) for the construction of transmission infrastructure, including three substations, and the supply and installation of 75 km of 132-KV underground cabling.

This spending is part of a larger infrastructure commitment by DEWA, with the authority planning to invest over AD11bn ($3.1bn) over the next three years on new transmission capacity.

Construction costs climbing

While the pipeline of new projects will ensure contractors’ order books remain full, increasing costs for materials and other supplies, coupled with capital constraints, are exerting pressure on profit margins.

Construction costs in Dubai rose 4% quarter-on-quarter in the first three months of 2018, according to a report issued by the Dubai Statistics Centre (DSC) at the beginning of July. The y-o-y increase was even steeper, at 5.7%.

This was well above broader inflation in the emirate, with the consumer price index up 2% at the end of June, according to the DSC.

At the same time, contractors are under pressure to make contract bids more competitive, as developers continue to face funding constraints in spite of improved macroeconomic conditions.

Because of this, contractors’ profit margins average 4-7%, compared to 20-25% in 2014, according to Rajesh Kumar Krishna, chairman and CEO of Beaver Gulf Group, who spoke to local press in early August.

Rise in construction business licences

Despite these pressures, the market is seeing a steady flow of new entrants. According to data from the Department of Economic Development, 14.6% of the 1185 new business licences issued in June were for companies in the construction sector. This was behind only the trade and repair, and real estate, leasing and business services sectors, which accounted for 37.8% and 25.1% of licence approvals, respectively.

Construction-related licensing was solidly up on the 12.3% share it recorded in May and 11.6% in April.

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