26 April 2017

UAE construction companies ramp up investment drive

With only three years until the much-awaited Expo 2020 in Dubai, raising capital has become a priority for many construction companies in the UAE.

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UAE’s construction sector is once again gearing up with a string of corporate developments, as the industry looks to rightsize itself and prepare for the next wave of expansion.

Balfour Beatty, the UK-based international infrastructure group, said it had reached an agreement with its joint venture partner to sell its entire share in Balfour Beatty and BK Gulf to its Dubai-based partner Dutco for a total cash consideration of GBP 11 million.

UAE-based Arabtec Holdings, which built Burj Khalifa, the world’s tallest tower, has also secured approval to raise AED 1.5 billion in a rights offering. The company has outlined a three-year recovery plan that would involve the selling of non-core assets, maintaining a backlog of new projects of at least USD 2.2 billion and resuming dividend distribution.

Arabtec made a net loss of USD 803 million in the three months to December 31, according to Reuters calculations.

Another major construction company, Drake & Scull International (DSI), which posted a AED 767 million loss in 2016, also secured a AED 500 million capital injection from UAE’s Tabarak Investment, as part of a broader capital restructuring effort.

“Against the backdrop of the significant liquidity challenges in the regional construction sector, the Groups’ results for the fiscal year 2016 were impacted by major revenue reversals, profit adjustments, cost overruns, and investment impairments, emanating primarily from several disputed legacy projects in the construction business in the KSA,” DSI said in a statement.

The company said it’s working on a turnaround strategy with PricewaterhouseCoopers (PwC) to assist the management on a number of business transformation and strategic initiatives that includes the sale of non-core assets, and renewed focus on clients in the UAE market.

SHIFTING SANDS

The past year has seen a drop in large orders being placed, as low oil prices eroded state finances, and the government (except Dubai) and parastatal sector curbed spending on infrastructure schemes, said the Economist Intelligence Unit (EIU).

“Although the government has hinted at some pushback from the tightened spending on capital projects seen in 2016, there are still likely to be delays to previously announced projects and the delivery horizons for many big schemes are set to be stretched out,” the EIU said.

While construction companies persevere through the challenging two years, they are looking forward to more work in the UAE.

Dubai's 2017 emirate-level budget expects a 27% increase in allocations for infrastructure projects, which comes off an increase in planned capital spending in 2016. The hike should encourage UAE contractors to start repairing their balance sheets and prepare for the next wave of expansion, albeit in a more competitive landscape.

Project management consultancy Faith+Gould forecasts development work of around USD 45 billion this year in the UAE, as constructions related to Expo 2020, Dubai Creek Harbour, and Dubai South begin in earnest.

“The effect on the UAE’s pipeline of planned projects won’t be dramatic, but it will extend the delivery horizon of USD 860 billion-plus (AED 3.16 trillion-plus) of schemes from approximately 10 to 25 years,” according to David Clifton, director at Faith+Gould.

This year will see continued strength in contracting awards in Dubai as the critical path to Expo 2020 starts to be met for numerous schemes, which have been committed to completion prior to the event, Clifton said in a report on the company website.

“Sharjah is also emerging with the emirate approving its largest ever budget (AED 22 billion) with infrastructure development at its heart.”

However, the scope of the projects is changing, as existing domestic and international players face rising competition from China and Korean contractors, which often secure financing from their governments.

The regional unit of China State Construction Engineering Corporation (CSCEC) expects to secure more Middle East work by tapping Chinese banks and credit agencies, as it targets up to USD 1 billion in revenue this year, according to its chairman Yu Tao.

 

"With the lower oil price, probably the government will be even more open to this kind of approach," Tao said in a media interview, adding that the company is keen to participate in the Al Maktoum International Airport and Expo 2020 projects. "We are capable to construct and furthermore we are confident that we can bring in very efficient project finance."

Projects are currently being developed on a more phased basis, with contractors each being given smaller slices of the pie, according to the Oxford Business Group.

“The multibillion-dollar projects of the past may be over for individual contractors, but there still remain lots of smaller multimillion-dollar projects up for grabs,” OBG said in a report.

With bank credit to UAE construction and real estate sector rising, the all-important segment of the economy is showing signs of a strong comeback.

 

CREDIT TO CONSTRUCTION AND REAL ESTATE SECTOR



QUARTER

MN AED


Dec-13

204,351


Mar-14

199,711


Jun-14

207,692


Sep-14

211,558


Dec-14

212,550


Mar-15

210,620


Jun-15

216,166


Sep-15

223,646


Dec-15

235,010


Mar-16

241,790


Jun-16

242,382


Sep-16

250,827


Dec-16

264,681


Source: UAE Central Bank


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