How demographics and tourism trends affect the construction industry

 

Dubai’s economy went through several years of expansive growth in the years following the turn of the millennium, with much of this driven by an active and rapidly expanding construction sector. Indeed, such was the pace and scale of activities at the time that a popular claim had it that the emirate was home to around 20% of the world’s cranes at the height of the boom in 2006.

Even though growth levels are not what they once were, Dubai’s construction industry continues to play a significant role in its economy, and the emirate has become a global leader in terms of the value of its ongoing projects. Although the economic slowdown that followed the drop in the global price of oil in 2014 has dampened demand in some real estate segments – particularly retail, office and residential – construction is still continuing apace in other areas, most notably on the major infrastructure projects that are pushing ahead in the run-up to the opening of Dubai Expo 2020.

Size & Performance

A 2018 report by GlobalData ranked Dubai first among cities worldwide in terms of the total value of planned and ongoing construction projects, toppling London from its top spot in the prior year’s list. The “Construction Mega Cities” report assessed the value of Dubai’s projects at $374.2bn, followed by London at $328.7bn and Moscow at $191.5bn.

As Yasmine Ghozzi, an economist at the analytics firm GlobalData, told local press, “The ranking of Construction Mega Cities in the Gulf states shows they are spending the most on major development projects relative to the size of their populations. Dubai, for example, has a population of 3.2m, but it holds the top position in terms of value of the construction mega-projects pipeline per capita.”

Other studies confirm the scale of Dubai’s construction activities. In January 2017 the total value of Dubai’s 4000 active construction projects was estimated at $313.6bn, up from 3700 projects worth $316bn in 2016, according to the “Dubai Overview Report”, a publication of the global real estate intelligence provider Building and Construction Network (BNC). The bulk of projects under way in 2018 – 3200 ventures worth $245bn – were in urban construction, including accommodation, offices and other buildings. Transportation infrastructure accounted for a further 187 projects valued at $32.4bn, while 592 projects in utilities, industry and oil and gas projects made up the remaining $34.7bn. Meanwhile, according to BNC, the UAE as a whole was the site of 11,800 active projects worth $870bn in 2017, accounting for 52% of all such activities by count and 33.6% by value in the GCC, making the country the largest construction market in MENA region.

As those figures suggest, construction still contributes significantly to the overall economy. According to Dubai Statistics Centre (DSC), the sector was valued at $24.5bn and contributed 6.3% to Dubai’s GDP in 2017, up 3.5% from $23.7bn and 6.2% in 2016. While construction makes up a smaller share of GDP today than it did at the height of the boom a decade ago, and in spite of an oversupply in many real estate sectors, ongoing investment in infrastructure should sustain growth in the short term. In the longer term, it is the emirate’s demographic forecasts that are likely to sustain investor confidence: according to the director-general of Dubai Municipality, the city’s public service provider, the emirate’s population is set to grow to 5m by 2030.

Structure & Oversight

A number of federal and emirate-level laws and bodies are involved in the regulation of the Dubai construction industry. The most important of the federal statutes are Federal Law No. 5 of 1985 on civil transactions (as amended), which lays out the terms for negotiating and enforcing contracts; and Federal Law No. 8 of 1980 on labour law, which covers labour relations, workplace health and safety, and other issues related to employment.

At the emirate level, Dubai’s Legal Affairs Department (LAD) drafts or reviews all legal agreements to which the Dubai government is a party, including those related to building. The emirate government itself is the single-largest contractor in Dubai, giving the LAD a significant role scrutinising a large number of awarded contracts. Dubai Municipality also plays a significant role in issuing a range of health and safety regulations, issuing building permits and maintaining a series of property codes and guidelines. These cover issues such as fire prevention and sanitation, technical specifications (the Code of Construction Safety Practice) and environmental standards (the Green Building Regulations and Specifications). In Dubai’s numerous free zones, similar regulations are independently administered by their respective authorities, since they do not come under Dubai Municipality’s legal jurisdiction.

The municipality is also responsible for carrying out the Dubai 2020 Urban Masterplan, a medium-term urban development strategy organised around three central goals: identifying the parameters of urbanisation; facilitating competitive and sustainable spatial planning; and promoting the system’s responsiveness to future needs. Furthermore, the plan stipulates the terms of land use across the emirate, and allows the Municipality to define which areas can be developed for construction and what kind of construction is permitted within them.

The Dubai Land Department (DLD) provides a range of public services related to real estate, including documenting property sales, organising and promoting property investment, and raising public awareness regarding the sector. Within the DLD, the Real Estate Regulation Authority (RERA) regulates property exchanges and the relationships between contracting parties, particularly vis-à-vis off-plan – or pre-construction – properties. RERA requires that developers wishing to sell off-plan sites open escrow accounts in order to ensure that these property developments – irrespective of purpose – cannot go ahead until sufficient funds have been allocated to secure their completion.

Projects & Demand Drivers

Expo 2020, which will be the first world fair hosted in the MENA region, was the major driver of construction throughout 2018, and is expected to remain so until construction on the 483-ha site and related infrastructure – including extensions of the city’s two metro transit lines and a significant expansion of the passenger terminal at Dubai World Central airport – are complete. The construction pipeline looks robust, and industry leaders view the six-month event as their single-biggest opportunity.

“With Expo 2020 drawing closer and developers wanting to ensure they are ready to capitalise on the increased number of visitors to the city, there is going to be massive demand and pressure on contractors to deliver,” Kez Taylor, CEO of Al Jaber LEGT Engineering & Contracting, a leading Dubai-based construction firm, told regional media in July 2018.

Thus far, builders have responded well to that pressure, as progress reports indicate that most expo-related projects have been realised on or ahead of schedule. BNC estimated that investments in those projects reached Dh156bn ($42.5bn) by the end of March 2018, following the awarding of an additional Dh10.8bn ($2.9bn) in 2017. Per a breakdown by BNC, Dh63.8bn ($17.4bn) had been allocated to infrastructure, Dh48.4bn ($13.2bn) to commercial and residential projects, and Dh40.4bn ($11bn) to hospitality and theme parks.

Construction Companies

Dubai is home to several of the region’s largest property developers, including Emaar Properties, Nakheel Properties, Damac Properties and Dubai Properties Group. As the industry passed through a period of contraction following the financial crisis of 2008, competition between a wide range of developers consolidated market share in the larger developers who were better able to weather the economic downturn.

A large number of domestic and foreign contracting companies are currently operating in the emirate, with Dubai Municipality maintaining a registry of over 600 engineering consultancy firms. However, the bulk of construction work is carried out by several large firms, such as CSCEC Middle East, the regional arm of China State Construction Engineering Corporation, the world’s largest construction company by revenue.

The firm began operations in Dubai in 2005 and has since grown to employ some 10,000 people and accrue contract value in excess of $7bn. The company is involved in a mixture of infrastructure projects, including roads and bridges, and urban office and residential developments. Recent contract awards include a $351m deal to work on Emaar’s Dubai Downtown View II project. Other prominent contracting companies include Al Habtoor Group, the Arabian Construction Company, Arabtech Construction, Wade Adams Contracting and Acto.

Building Materials

According to a report published by Colliers International in May 2018, an increase in the cost of building materials between the first quarters of 2017 and 2018 added 3.1% to the cost of an average building. The price hikes of various materials – rebar steel by 30%, electrical cables by 13-16% and timber by 6-12%, among others – were in turn tied to higher local production costs, the closure of Chinese factories by enforced pollution regulations and fluctuations in the global market for intermediary goods.

Developing trade tensions between China, the US and the EU, set off largely by the imposition of tariffs on steel and aluminium imported into the US and subsequent retaliatory measures, threaten further volatility in the market for building materials, and disputes surrounding these tariffs remained unresolved as of mid-January 2019.

Despite these underlying factors, Colliers estimates that the effective increase in construction costs over the course of 2017 ranged, depending on the building type, from 1.8% to 2.3%, due to steep competition among players in the contracting market. Moreover, even accounting for these climbing costs, Dubai remains a globally competitive location for construction on a per cost basis. The average building price per sq metre averaged across six unit types – high-rise apartments, office block prestige, warehouse distribution, general hospitals, primary and secondary schools, and shopping centres – was significantly lower in the UAE ($1455) than in metropolises like New York City ($3900) Hong Kong ($3704), London ($3618), Paris ($2629) or Tokyo ($2560), according to a 2018 survey from the professional services provider Turner & Townsend.

Moreover, while global construction costs were expected to inflate by 4.3% in 2018, the report projected costs in the UAE to rise by just 2%. The report cited the UAE’s cheap labour as a significant competitive edge, as the $7.40 average hourly wage is lower than those of many of the largest cities in Europe, North America, Australia and parts of Asia.

3D Construction

In April 2016 the emirate launched the Dubai 3D Printing Strategy, a forward-thinking initiative spearheaded by Dubai Future Foundation (DFF) and Dubai Municipality that intends for 25% of building materials to be 3D-printed by 2025. The plan aims to cut the labour required to carry out building by 70%, construction times by 80% and overall costs by 90%.

While 3D-printed materials have already been used in building development, these reductions constitute ambitious targets, given that the technology is yet to be used at such scale. Accordingly, the DFF’s first target is for 3D-printed materials to make up 2% of each new building developed in 2019, with this share set to increase incrementally until 2025.

Together with medical products, construction is one of two focus areas for the strategy, which outlines specific materials and products that can presently be 3D-printed, including lighting products, bases and foundations, construction joints, buildings for humanitarian causes and mobile homes. The strategy’s ultimate aim is to make the emirate the world’s centre for 3D printing by 2030.

Industry forecasts for the growth of the 3D printing suggest that the global market will be worth $32.8bn by 2023. Should the Dubai 3D Printing Strategy come to fruition, it will set the emirate ahead of the curve in the segment and be a key driver of growth worldwide. On top of the economic gains that it offers, 3D printing is more efficient than older production methods and can drastically reduce the carbon footprint associated with a given project. Moreover, the strategy’s implementation should drive down demand for manual labour and eventually result in the growth of more skilled jobs.

In a demonstration of the technology’s feasibility in construction, the DFF partnered with Chinese firm Winsun to erect the world’s first fully 3D-printed building in 2016. Located at the base of the Emirates Towers, the Office of the Future was rendered by a 6m-high, 12m-wide printing unit in 17 days. DFF estimates that the technology halved the price and substantially reduced the work force that would have been required by more conventional means.

Outlook

While investments related to Expo 2020 have been among the main drivers of sector growth in recent years, industry players have begun looking beyond the event to identify new prospects. Among these are likely to be developments related to tourism, with authorities aiming to sustain visitor numbers at 25m per year beyond the expo. To achieve this, officials need to capitalise on the event’s pulling power and persuade one-time tourists to become regular visitors. Meanwhile, if the demographic forecasts for the decade ahead prove accurate, major infrastructural and residential capacity expansion will be required to keep pace, and local construction firms should expect to remain busy as a result.

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The Report: Dubai 2019

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