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UAE Construction Update

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GlobalData has provided an update on the construction sector in the UAE

Dubai construction spending cuts are unsurprising amid COVID-19

The Dubai Government’s decision to put future projects on hold is unsurprising as COVID-19 weighs down on global economies. While the government will consider reining in spending a necessary step, the move will deepen the cracks in the local construction sector, which has been operating in a low-margin and high-risk environment for several years, says GlobalData.

Neha Bhatia, Construction and Infrastructure Editor at GlobalData, comments; “A large number of projects in Dubai, as well as the wider Middle East, typically exceed the original awarded contract value for reasons such as design changes and contractual disputes. With a zero-tolerance approach to cost overruns, local contractors now face the prospect of making a loss on their ongoing projects.

“While construction is one of the sectors exempted from the Emirate’s 24-hour restrictions on outdoor movement, contractors are concerned that onsite works will slow down as the pandemic continues to spread regionally. Precautionary measures such as those imposed on worker transportation are already reducing onsite productivity.”

The COVID-19 pandemic has accelerated the downward trends that were expected in Dubai’s post-Expo 2020 real estate market. Local development giant Emaar Properties has suspended work on projects in Downtown Dubai, Dubai South and Dubai Creek Harbour, as well as enforced salary cuts at all levels to mitigate the financial risks brought on by the virus.

Bhatia continues: “Dubai is not immune to economic shocks, and its sweeping spending cuts will understandably daunt the local construction sector in the foreseeable future. However, conserving its residual resources now may be one way for Dubai to jump-start its recovery in the post-pandemic economy.”

Abu Dhabi committee formed at critical time for construction

The move by Abu Dhabi’s Executive Committee to form an infrastructure committee to oversee the development and operation of infrastructure in the Emirate is an important step at a critical time for the construction sector, says GlobalData.

Colin Foreman, Deputy Editor at GlobalData, comments: “In the future, new projects – including public-private partnership (PPPs) – should move into delivery faster, while at the same time providing a mechanism to more quickly resolve problems on existing projects. Both of these issues have been a major bugbear for the construction industry in the past, and while decisions may not always be favourable, the fact that decisions will be made more promptly will be welcomed.”

The timing of setting up the infrastructure committee is also important. The economic disruption caused by the COVID-19 pandemic has been far reaching, and while work on construction sites continues, there are growing concerns from the industry about the outlook for the future.

Foreman continues: “Companies are concerned that as the virus spreads, project activity will slow down, and as that happens a cash flow crisis will emerge, leaving contractors unable to settle their dues or pay salaries.

“The federal government was the first to publicly address these cash flow concerns in late March when the UAE cabinet approved another round of measures to support the economy, including improved payment terms for contractors working on government contracts, as well as exempting companies from penalties that arise from delays caused by the coronavirus crisis.”

For payments, the cabinet directed federal ministries and bodies to pay contractors and supplies within 15 days, while for contract delays, suppliers affected by the virus are exempted from fines for delays on federal government contracts for a renewable period of three months.

Foreman adds: “The Abu Dhabi infrastructure committee was not formed in response to the coronavirus crisis, but it can help the construction industry at what is arguably its most challenging time.”

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