The preparations for Expo 2020 are acting as a catalyst for growth in the construction sector in Dubai, according to the Coface economic report.
“Despite lower energy prices, Abu Dhabi and Dubai will continue to invest in infrastructure projects which could attract private developers to the area”, Seltem Iyigun, Coface Mena economist, wrote in their latest report.
“The outlook for construction remains positive though the wider economic slowdown is weighing on the sector,” he added.
A total of 7,800 residential units were delivered in Dubai during 2015, compared with the scheduled delivery of 25,000 units estimated by developers at the start of the year.
Although the hydrocarbon sector remains the backbone of the UAE’s economy, the large contribution made by non-hydrocarbon activities to gross domestic product is mitigating the effects of lower energy prices on economic growth.
For several decades, the UAE has been investing in infrastructures, transportation, financial services, trade and construction, in order to increase the level of diversification in the economy. This diversification has become especially important since mid-2014, with plunging oil prices. The share of non-hydrocarbon sectors in GDP increased to around 75 per cent in 2015, up from around 65 per cent in the mid-2000s.
“The United Arab Emirates’ economy is the most diversified within the Gulf region” said Iyigun.
“The country’s relatively high level of economic diversification has made it less vulnerable to the shock in oil prices. Diversification efforts have helped the UAE to build up solid financial buffers that allow the government to continue supporting the economy’s non-hydrocarbon activities such as real estate, construction, trade, retail and tourism”.
In addition to its diversification, the UAE’s safe haven status, its political stability and its resilient financial system have also helped the country to limit the negative effects of lower energy prices.
“The UAE remains a very attractive economy for international investors” he added. “Its favourable business environment benefits from high productivity, excellent infrastructures, strong connections to international markets and a dynamic private sector”.
Although lower oil prices dampened investor sentiment at the end of 2015, household consumption remained solid, on abundant liquidity, low interest rates and continued tourism inflows. Loans to the private sector increased by 8.5 per cent in February 2016, compared to a year earlier. The country’s economic diversification is supporting this outlook, as the slowdown in the oil sector has had less impact on employment levels.
Retail & Tourism
Retail and tourism are the country’s key sectors, but are facing some challenges.
According to Dubai Chamber, retail sales in the UAE reached Dh173 billion in 2014, more than 6 per cent higher than 2013 sales. Total household spending in 2016 is forecast to reach Dh267.1 billion in 2016, up from an estimated Dh241.8 billion in 2015. High levels of disposable income and a large consumer base of wealthy local residents, expatriates and tourists have supported this growth.
“The retail industry currently attracts 23 per cent of total foreign direct investment inflows to the UAE” said Iyigun. “Despite its saturation, the retail sector still offers investment opportunities, encouraged by the country’s robust infrastructure, advanced environment and mega-development projects.”
Tourism under pressure due to lower energy prices and depreciation of the Russian rouble and the euro
UAE visitor spending totaled $23.5 billion in 2014 and $26 billion in 2015 - the equivalent of 60 per cent of all service exports and 5.4 per cent of all exports including goods and services. This is forecast to increase by 3.3 per cent in 2016, as the UAE is expected to attract more than 15 million foreign visitors. In order to support the growth of mid-range hotels, the government has decided to waive the 10per cent municipality fee (for an initial period of 4 years from the date of granting construction permits) for properties with construction beginning between 2013 and 2017. Tourism investments are also expected to rise by 2.8 per cent, to reach Dh28.2 billion in 2016.
Nonetheless, challenges remain. During the first two months of 2016, hotel occupancies remained almost flat in Dubai, compared with a year earlier, at 84 per cent. Increased competition and the strength of the dollar pulled down average daily room rates from $272 to $237 during the period.
Furthermore, lower energy prices and the depreciation of the Russian rouble and euro against the dollar, are making the UAE a more expensive destination for Russian and European visitors. This is putting pressure on corporate performance in the hospitality sector.