UAE Quarterly update July 2021

During the month of July, the OPEC basket price reached $72 per barrel, rising to a pre-pandemic high. With the OPEC+ ministers reaching an agreement in July to boost oil supply by a further 2 million bpd from August to December, oil price increases are expected to cool off in Q4. This agreement is expected to create further financial stability for the UAE but is unlikely to change spending plans for the short-term, as the government focus is on the delivery of fiscal reforms.

In terms of GDP, Emirates NBD reported that “with no official estimates for Q1 2021 GDP, we retain our forecast of 3.5 percent non-oil sector growth this year, slightly lower than the UAE central bank’s forecast of 4.0 percent”. Noting the agreement reached on oil production, the oil sector is likely to subdue the overall GDP growth expected this year and therefore Emirates NBD expect the figure to reach 1.5 percent.

With the release of Dubai’s Urban Master Plan 2040 and its aspiration to grow the population from 3.3 million to 5.8 million, with an emphasis on sustainable urban development, this presents the UAE’s construction industry with new opportunities for housing, civic and social infrastructure upgrade projects. Additionally, the increasing focus on sustainable construction practices and the incorporation of Environmental, Social and Governance (ESG) principles across the UAE, with these requirements now included in public- private partnerships (PPPs) projects, it has the real potential to unlock significant green funding sources internationally and contribute considerably to the overall buoyancy and growth of the construction market in the UAE.

Furthermore, post-Expo 2020 is expected to see renewed growth in construction due to the expected improvement in investor confidence, sustained oil prices and the implementation of new government initiatives. Post-COVID-19 presents many challenges for countries and businesses across the globe in terms of construction, as new project awards become delayed or placed on hold due to the basis of their feasibility being rethought under these new conditions. For example, as businesses re-evaluate footprints required for retail and office spaces due to the growth of digitised working settings (such as remote working and online retail). However, post-COVID-19 also presents new opportunities and ways of thinking for construction as countries look to focus on impacts experienced during the pandemic and safeguard their futures in areas such as food security, localisation of manufacturing / supply chains and repurposing of existing built assets.

With new working environments adapted from the coronavirus pandemic, the UAE Government continues to drive its digital transformation program (including paperless transactions and management) and its artificial intelligence (AI) agendas, as it aspires to lead regionally and internationally. According to the MEED digital transformation index, which factors digital infrastructure, human capital, government policy regulation and the developmental progress made so far in the digital economies, the UAE is the top scorer in the region followed by Qatar and Saudi Arabia.

AECOM’s tender price index (TPI) maintains only a slight upward growth over Q2 compared to the previous quarter, despite the continued increases in commodity prices such as steel, copper, and plastic.

This slight upward growth considers that although the market is experiencing considerable commodity price hikes, this is being offset by overall increased competition of tenderers in the market.

Tracked steel and copper prices both experienced circa 25 percent increases from end 2020 to H1 2021, with plastic prices indicating increases around 35 percent. With the current supply chain delays and shortages in supply, prices are expected to continue to increase for the remainder of 2021. AECOM’s TPI is still forecasted to grow at a moderate pace for the remainder of 2021, anticipating a Y-o-Y change by 2021 end of between 0.5 - 1.0 percent.

The UAE’s Purchasing Managers Index (PMI) sentiment remains positive for non-oil activity and new business, due to markets confidence in the easing of COVID-19 restrictions and with a view that the upcoming Expo 2020 will improve overall economic conditions. The IHS Markit United Arab Emirates PMI data remains positive throughout Q2 2021 and increased to 54 in July 2021 from 52.2 in the previous month. This increase indicates a continued rebound in demand, considering the COVID-19 pandemic and is the highest recorded reading since July 2019.

The increase is attributed to an overall increase in purchasing activities, with both outputs and new orders reaching highest levels since July 2019, backed by the marginal rise in UAE employment figures and the fastest increase in job creation recorded since January 2019. As a note of caution, suppliers’ delivery times during this period worsened by the largest amount since April 2020, mainly due to delays in shipments coming from Asia, which is putting pressures on input cost inflation and as a result businesses output charges rose for the second month in a row.

MEED reported a considerable increase in the UAE’s construction project awards during Q2 ($4.2bn) compared to Q1 ($1.1bn) reaching the highest level since Q1 2020 (pre-pandemic). The post-Expo 2020 construction activity in the UAE is anticipated to focus on more tactical growth projects with a move away from the large-scale masterplan projects of previous years.

Key non-oil and gas construction project awards during Q2 2021 include: April: Jubail Island Investment Company awarded Arabian Construction Company (ACC) a contract to build the first phase of 300 villas for its AED5bn ($1.36bn) Jubail Island development in Abu Dhabi.Dubai Electricity and Water Authority (DEWA) awarded Hassyan Water Reservoir Water project to Utico, Ghantoot Group. Union Properties awarded a mixed-use development in Motor City (Plot No 6740221) to Ginco Contracting Company.

May: Dubai South awarded the project The Villages: The Pulse Villas to Ginco General Contracting. Emaar Properties awarded The Valley: Eden Villas (NH01) construction contract to Ginco General Contracting and also Dubai Creek Harbour: Creek Edge to ASGC Construction. Meraas Holdings awarded La Mer: La Voile project to Al Sahel Contracting Company LLC.

June: Vincitore Real Estate Development awarded Arjan: Vincitore Benessere (Plot No. 6734123) construction contract to KBJ Contracting LLC. Al Shirawi Group awarded Al Furjan: Primary and Secondary School Construction to Naresco Contracting.

One of the key challenges to be faced by the construction industry halfway through 2021, is the pandemic induced, escalation of commodity prices. Notably, since the start of 2021, average prices for steel (structures and reinforcements), aluminium, copper and chemicals have risen by 25 percent. According to a MEED report “As the construction industry grapples with higher costs, clear communication and consensual project adjustments are key to addressing stakeholder interests”.