2018: A busy year ahead for Dubai contractors


2018 will see the most number of construction contracts awarded related to Expo 2020, reckons JLL, a real estate consultancy.

The value of contracts directly related to Expo 2020 is $6.1 billion. “2018 will be a busy year for contractors who have bagged Expo contracts as they will be in delivery mode. They can tap new opportunities in the sectors of leisure, retail and hospitality. More than 25 million visitors are expected in Dubai during Expo 2020. Dubai has a shortage of rooms at the lower end of the market. This demand must be tapped,” suggests Alan Baker, head of project management, JLL Dubai.

The Expo forms a small part of a much bigger project, Dubai South, reckons JLL. It accounts for only 5 per cent of total land area in Dubai South.

“Infrastructure to support the Expo – such as extensions to Dubai World Central, Metro line and RTA road improvements – are proving to be catalysts for growth. Outlying residential locations – such as Dubailand – are gaining in popularity as a result of these infrastructure upgrades,” Baker adds.

However, some private sector developers are already scaling down projects to more realistic levels, exercising caution ahead of the legacy effect of Expo 2020.

China’s rising clout
Chinese contractors have a big presence among the top 5 contractors in the UAE. They also provide construction finance. The China State Construction and Engineering Corporation ranks as the second biggest contractor in the UAE with projects worth of almost $3 million and 16 ongoing developments.

There was a 49 per cent increase in Chinese visitors to Dubai in 2017, with the country ranking as the No 4 source market, estimates JLL.

“Chinese property buyers accounted for about 3 per cent of all sales in Dubai in 2017. They are taking a lot of construction projects and bringing in financing. They are also bringing in their own people for these projects. As those people tend to get familiar with Dubai, they will want to buy homes for themselves. This trend is bound to grow,” elaborates Craig Plumb, head of research at JLL Mena.

Market conditions
Residential rents in Dubai will see further softening this year as the market is close to bottoming out, says Plumb. Property buyers need to watch out for a potential oversupply as well as ‘overgenerous’ payment plans, he warns.

“The source of residential demand will be population growth and developers encouraging tenants to turn into property owners,” observes Plumb.
Abu Dhabi, meanwhile, typically lags Dubai by 12 to 18 months in its cycle. Rents there have more room to fall before bottoming out, the consultancy reckons.

VAT effect
The introduction of value-added tax (VAT) has not had a “market-moving” impact on the UAE property market. “It is more of a disruption than anything else. Since the market is soft, owners [commercial and retail] will have to absorb the increase in VAT costs and cannot pass it on to tenants,” Plumb adds.

VAT has no impact on UAE land values and residential rents, limited impact on construction costs, residential sales, commercial rents, commercial sales and the hotel sector and a significant impact on the retail sector.

“We saw a lot of activity in December because clients brought ahead a lot of transactions to avoid paying VAT. January has been relatively quiet. VAT has an impact on a company’s cash flow. You have to pay VAT before you can reclaim it. It remains to be seen how quickly merchants can reclaim VAT,” informs Plumb.

JLL estimates VAT to have a one-off inflationary impact of 2 per cent in the UAE in 2018.

“Developers can recover VAT costs incurred during construction on a quarterly basis. VAT incurred on operating expenses cannot be charged back to tenants during first three years after completion. Since bare land is VAT exempt, developers cannot recover VAT for legal fees, etc.,” clarifies Mireille Azzam, national director, JLL Mena.

Investment trends
UAE real estate is seeing increasing interest from institutional investors – asset managers, real estate investment trusts, pension funds and insurance companies.

“They are chasing yields in logistics, healthcare, education and staff accommodation. We expect to see much more transactions in that space. We expect little change in yields despite the three to four likely rate hikes in the US. This is because of the lack of quality assets in the UAE,” says
Gaurav Shivpuri, head of investment transactions, JLL Mena.

Middle East investors are also looking for alternative asset classes globally in the quest for yields (data centres, logistics, etc.). While the UK, US and the West have typically grabbed the lion’s share of funds invested outside the Middle East, the investor focus is now shifting to Africa, Latin America and Eastern Europe.

To ensure we at Forte Markets keep our finger on the pulse we’ve devised out VAT implementation course specifically for hotel and hospitality operations. Check out the workshop details here.

Read the full Khaleej Times article here.

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