Construction sector sentiment
Market conditions
The construction industry is the essence of the UAE economy and plays an important role in the economic uplift and development of the country, as such, we expect to see rapid growth in the industry over the coming years.
The UAE construction market is currently growing at a CAGR (Compound Annual Growth Rate) of 4.69 percent over the next five years.
Our survey, which we’ve used to gain industry insight from across the full construction value chain, found market sentiment to be generally positive, with 74 percent of respondents believing the market to have warmed since 2021, with a common sense of buoyancy for the immediate period ahead.
From a consultancy standpoint, we’ve noted an increase in tendering activity within the market, with an array of new products being released by developers, particularly across the mid-to-high-end residential sector.
Of those respondents who work for developers, 93 percent believed the market had warmed, compared to only 60 percent of those respondents working for main contractors.
believed the market had warmed, compared to only 60 percent of those respondents working for main contractors
“Demand for real estate is at a peak, sales are being achieved prior to launch. Once launched, 100 percent sales are being achieved on certain types of products.”
Anonymous respondent, (Developer)
The difference in responses correlates with the lag typically encountered from a project’s initiation to the time in which it is tendered to main contractors.
Although the majority of design consultants surveyed said they thought the market had warmed since 2021, 10 percent understood the market to now be cooling.
In the fit-out arena, only 70 percent of contractors believed the construction market was warming, with some respondents noting a decrease in enquires received from verified clients. At Turner & Townsend, we continue to see an increase in tender requests for commercial office fit-out projects, however, the results from our survey perhaps suggest that there is a census that the fit-out market presents an uncertain future, as businesses look to address the growing calls for more flexible or agile working environments in what is now being referred to as the post-COVID-19 world. This aligns with the broader post-pandemic macro-economic picture, as demand for hybrid working rises.
On-going, possibly intensifying, geo-political instability along with rising global inflation, has created a growing opinion that recessions may occur in several markets around the world.
Historically, the UAE has demonstrated a level of resilience to varying types of headwinds. The country’s construction activity has so far, shown an upward trajectory this year, with construction costs remaining fairly benign. Nevertheless, we can perhaps expect to see fluctuation in construction costs as global supply chain friction remains a concern.
Inflation rates
Globally, inflation is currently one of the leading economic issues on the minds of economists, policymakers, businesses, and the general public.
In some markets, we have seen the highest inflation increases since the 1970s, with some central banks aggressively raising their rates, consumer sentiment at record lows, and commodity prices near all-time highs.
In May 2022, the inflation rate in the UAE was 2.5 percent. However, in more recent times, UAE inflation hit 6.77 percent during the second quarter of 2022, and whilst this is a significant jump, one could consider this modest when comparing to the recent annual inflation rates recorded in August 2022 for Europe (8.1 percent) and America (8.3 percent).
If we consider the key elements which generally impact inflation, markets where tendering conditions are cold or lukewarm, typically experience high competition between contractors for work, resulting in competitive, lower pricing and, therefore, lower cost inflation. Likewise, markets where tendering conditions are hot or overheating, have a higher number of projects underway, meaning there is less competition for work, order books are full, and consequently, prices tend to rise. This is not always the case, particularly considering the current volatile market conditions. High construction material costs or labour shortages can lead to higher input costs and therefore, increase overall construction costs, even if there is only a modest amount of construction activity underway.
Despite the strength in current workloads, the impact of global supply chain shortages is impeding activity across the UAE. Rising energy prices and ongoing supply-chain disruptions against the backdrop of volatile market conditions are having a considerable impact on costs in the UAE, which has already materialised into higher prices over the first half of 2022.
Rising construction cost inflation: monitoring the impact on the UAE
Short term impact:
Higher prices for commodities like metals and energy will filter into construction materials and components, which will push up tender price inflation further.
The UAE construction market will wrestle with disrupted trade, supply chains and remittances.
Long term impact:
Reduced construction confidence and higher investor uncertainty will weigh on asset prices.
Tightening financial conditions, together with rising inflation, may restrict construction growth prospects.
believing that UAE tendering conditions were moderate with strong competition
When we collate those respondents who believed tendering conditions in the market were either moderate, strong, or intense, we find that this jumps to 72 percent, which suggests a positive outlook for the UAE construction industry, where a strong pipeline of projects is set to boost the market.
On the other hand, our survey results noted that 28 percent of respondents believed that tender prices were high as a result of low levels of competition or due to a shortage of contractors. This generally correlates with the sentiment feedback in that 60 percent of the main contractors we surveyed, do not see the market as warming, and hence are experiencing large, strong competition. Perhaps this may shift in the foreseeable future as the market heats and inflationary pressures come into play.
Procurement and supply chain
It’s no surprise that the most prevalent form of tendering in the UAE construction market is single stage.
This has and will likely continue to be the preferred means of tendering as the market continues to mature and thrive on competition, although it could be argued that at 47 percent, we would have still expected more of our survey respondents to have noted ‘single stage’ as their most common form of procurement route. 21 percent of respondents noted they had experienced ‘design & build’ as their most common form of procurement route over the last six months, whilst 17 percent of respondents said ‘two stage’ or ‘framework’ was their more common route.
Felt the supply chain had been significantly disrupted
When asked about supply chain disruption, all survey respondents noted that they felt supply chains had been disrupted or significantly disrupted over the last six months.
Globally, there continues to be a growing risk of rising construction costs in overheated markets. As inflationary pressures bite, contractors are starting to feel the impact of claims, cash flow, and supply chain solvency issues.
Shipping costs have increased five-fold, with port and transport bottlenecks in the global shipping sector continuing to cause disruption. It is likely to be a further 6-12 months before we see the ease in the flow of goods, which will help cut shipping times and lead times.
The expectation of ongoing disruptions to global energy supplies as a result of eastern European conflicts, could in some ways create an opportunity for the region’s energy sector, which should in turn further the realisation of major in-region construction and engineering projects.
Whilst the UAE, given its strategic location between east and west with strong transportation links, has been arguably less affected than other regions in terms of disruption, one key supply issue that it hasn’t been immune from is microprocessors. Like the rest of the world, the UAE has experienced significant disruption with any goods or equipment requiring microprocessors.
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