Affordable housing to spur bank lending in Abu Dhabi

While funding remaining a constraint in the UAE’s and the region’s construction sector, Bank of America Merrill Lynch has said that it expects the UAE’s banks to grab “better lending opportunities in Abu Dhabi” in the affordable housing segment as developers start fulfilling pent-up demand there.

“In the medium term, we expect the banks to see better lending opportunities in Abu Dhabi as the market starts to cater to the affordable residential segment,” BofA ML has said in a report on the MENA construction sector, titled ‘The race to diversify.’

The report maintains that a slowdown in Dubai’s construction sector has made contractors flock to the Abu Dhabi and Qatar markets, pushing margins south due to an overcrowding of those markets. “Lower barriers to entry in Abu Dhabi and Qatar have resulted in overcrowded construction markets,” it says.

“In our view, MENA contractors faced with diversification obstacles have no choice but to contend with the low-margin projects in Abu Dhabi and the increased risk of slower execution schedules.”

The report, however, maintains that despite the headwinds, “[t]he MENA infrastructure and construction market remains among the world’s most attractive given its sheer size.”

It adds: “The MENA construction and infrastructure sector is the second largest in the emerging markets after China, with an expected total spend of estimated $600bn over the next three years.”

It goes on to say that the “uneven spending boom between 2005 and 2008 left several MENA countries suffering from infrastructure underinvestment. In the medium term, we believe that construction and infrastructure spend will even out – spreading from the UAE to underinvested countries, such as Saudi Arabia and Kuwait.”

Nevertheless, the BofA ML report says that a tight funding environment might continue to put pressure on the contractors’ bottom lines. “While we believe that the long-term outlook for the MENA construction sector remains intact, contractors continue to grapple with the aftershocks of the collapse of the Dubai construction market.

“Their urgent need to diversify away from Dubai is met with a wait-and-see attitude from clients, private and government alike, owing to lack of visibility on the macroeconomic outlook,” the report says.

Infrastructure spending in the GCC is likely to remain strong over the next three years although it will be more restrained compared with pre-crisis activity. “A sharp, sustained slowdown in oil prices accompanied by a marked deterioration in the external demand environment, as well as scarcer funding opportunities, represents the downside risks to regional spending plans.”

Analysts at BofA ML expect “most consolidation in the UAE [within the GCC] in line with the bloated real estate sector and continued deleveraging by its quasi-public entities.” The report states that, within the UAE, the Abu Dhabi construction market was far less affected by the global credit crises than Dubai’s.

It points put that the value of cancelled and on-hold projects in Abu Dhabi is $66.5bn compared with $367bn in Dubai. Further, in 2009, Abu Dhabi outpaced Dubai for the first time in three years in terms of project awards.

“Relatively low barriers to entry in Abu Dhabi, especially for Dubai-based contractors, made the local construction market an easy target for contractors looking to reduce exposure to Dubai. In 2009, 66 per cent of the total UAE construction market was won by foreign contractors,” it says.

However, the financing constraints might be spreading, the report adds. “The Abu Dhabi construction market, which was relatively buoyant until the beginning of year is, we think, being dragged down by Dubai’s woes. The connection is taking shape in the form of funding constraints to the real estate sector.”
 

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