Over recent years, many firms have invested in the UAEs infrastructure sector, particularly in construction projects in the lead-up to Expo 2020.
According to Pinsent Masons recent GCC construction report, overall sentiment in the GCCs construction sector has improved over the last two years by approximately 7% (from 32% to 39%). The findings show that the UAE remains the number one market expected to deliver growth in 2018, with 38% of respondents expecting the country to provide the most opportunity over the next 12 months, compared to 35% in 2016.
Meeting the changing geopolitical environment
While there has been a slight increase in optimism over the past two years, the industrys responses to questions about order books, contract, payment periods, cost of capital, and number of disputes show areas of concern that are lingering on. Where there is more pressure on project delivery, there is likely to be a hardening of major procurers’ positions, resulting in tougher contract conditions. Similarly, payment periods are still being extended, when they are already quite lengthy in the region, and are likely to become an increasing concern for those in the supply chain.
20% of those surveyed the majority of which are companies involved in larger projects with a value of over AED500mn said that their 2018 order books had declined by over 10%. This compares to 16% who said the same thing in 2016. Asked about contract conditions, 86% of businesses said they had become less favourable during 2017, representing a 7% decrease compared to two years ago. In addition, 86% said payment periods were longer last year, and 67% said they were involved in more disputes during 2017 than had been expected before the year started, as opposed to 59% in 2015.
The results are indicative of a hardening economic environment as the construction industry, like many others, grapples with the impact of ongoing low oil prices, simmering geopolitical tensions in parts of the MENA region, and a general concern related to emerging markets from many global investors.
Respondents optimism surrounding the future of the UAE saw definitive growth since 2016. Asked which country will provide the strongest growth opportunity in 2018, 38% stated the UAE, representing a 4% increase of respondents who believed it would be the strongest market during 2016. The UAE also ranked the highest when 38% said that they have the most payment exposure to the UAE out of all the GCC countries.
Dubai, in particular, is seen in a positive light as 71% of respondents view the emirate as the most appropriate venue for regional dispute resolution. It is due to this combination of positive factors that 89% believe the UAE is the easier market in the Middle East and North Africa (MENA) region to do business in.
Also significant were the survey results on public private partnerships (PPPs), which are increasingly being used as a means of attracting more inward investment. More than one third (40%) of respondents are currently involved or expect to be involved in PPP projects during the next 12 months, up slightly from 32% for 2016.
PPP arrangements could offer a favourable solution for numerous major infrastructure and construction developments, and there have been legislative changes made to make them more accessible and attractive. PPPs provide an opportunity for the private sector investors and developers to access the various sub-sectors of the regions infrastructure market. We anticipate a rise in PPPs now that regional governments and the private sector have developed longer-term strategies designed to adapt to a new reality of lower oil prices.
Meeting the challenges
Whilst analysts predict a slight economic revival across many GCC markets during 2018, the survey results, while they may show a slight increase in optimism, are indicative of what has been a challenging time for the construction sector – which has grappled with the impact of lower oil prices and ongoing geopolitical tensions. The UAE, in particular, is set to see an increase in the number of projects during 2018 and we expect the country to remain in top position, particularly in the lead-up to Expo 2020.