Fri, Dec 4, 2020
The GCC economies this year faced multiple issues of COVID-19, lower oil production, lower oil prices and contracting non-oil sectors leading to fiscal deficits. In response to this, GCC governments have borrowed to support their economies, and according to Bloomberg there were bond issuances of USD 72 billion in H1 2020.
The UAE’s central bank is projecting GDP to shrink 5.2% in 2020, which is down from its previous forecast of 3.6%. According to GlobalData, the construction output growth forecast for the Middle East and North Africa (MENA) region, the UAE and the Kingdom of Saudi Arabia (“the Kingdom”) for 2020 is -4.5%, -4.8% and -2.8%, respectively. In the UAE, there have been announcements to delay projects to avoid cost overruns. That said, there is optimism in the medium-term given various government initiatives such as the Energy Strategy 2050, the Sheikh Zayed Housing Programme and the Dubai Tourism Strategy. As for Saudi Arabia, the construction industry has been boosted by several projects related to Saudi Vision 2030 and the country’s drive to become a tourism hub; for example, the “New Future” NEOM project, Diriyah Gate Development, Red Sea Development and Qiddiya Entertainment Project. The residential sector is the largest contributor in the Kingdom, and the government has put a lot of effort into increasing home ownership, with the aim to increase the country’s home ownership to 70% by 2030. Also, according to the National Centre for Privatization & PPP (NCP), Saudi Arabia has a pipeline of more than 100 upcoming projects.
Prior to COVID-19, the UAE’s construction sector had been slowing down due to a reduction in new projects leading to weakening cash flow and reduced margins. The slowdown of the construction industry is one that has a domino effect on the entire supply chain, impacting debt holders, sub-contractors, suppliers, banks and employees. The recent announcement of the insolvency of Arabtec, which reported a net loss of USD 216 million (mn) in H1 2020, is evidence of this, and it could have wide-ranging impacts throughout the sector. As liquidity continues to be an issue, access to lending remains the biggest challenge for most stakeholders.
The main issues the construction industry is facing include:
The residential sector contributes a large part to the construction output in the UAE and is currently facing an imbalance of demand-supply in certain sub-segments. Until recently, 30,000 units per year were being sold whereas only 10,000 were being handed over; now the situation has turned around. Therefore, supply now exceeds demand and may continue to do so for the next few years.
The government has created certain initiatives to balance the market, including:
COVID-19 has significantly changed and reshaped our behavior and the economy. Consequently, given this “new normal,” developers are revising their strategies:
That said, there are still winners as:
Overall, banks, governments and advisors have been working together in order to protect the industry and move towards a more sustainable model. A proactive approach must be taken, and this is where Duff & Phelps’ expertise can benefit contractors by:
In the face of uncertainty and distress, restructuring experts/financial advisors can make all the difference; however, the earlier companies ask for help, the more options that will remain available to them.
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