Construction Industry Trends and How D&P Can Help Restructuring

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The GCC economies this year faced multiple issues of COVID-19, lower oil production, lower oil prices and contracting non-oil sectors leading to fiscal deficits. In response to this, GCC governments have borrowed to support their economies, and according to Bloomberg there were bond issuances of USD 72 billion in H1 2020.

The UAE’s central bank is projecting GDP to shrink 5.2% in 2020, which is down from its previous forecast of 3.6%. According to GlobalData, the construction output growth forecast for the Middle East and North Africa (MENA) region, the UAE and the Kingdom of Saudi Arabia (“the Kingdom”) for 2020 is -4.5%, -4.8% and -2.8%, respectively. In the UAE, there have been announcements to delay projects to avoid cost overruns. That said, there is optimism in the medium-term given various government initiatives such as the Energy Strategy 2050, the Sheikh Zayed Housing Programme and the Dubai Tourism Strategy. As for Saudi Arabia, the construction industry has been boosted by several projects related to Saudi Vision 2030 and the country’s drive to become a tourism hub; for example, the “New Future” NEOM project, Diriyah Gate Development, Red Sea Development and Qiddiya Entertainment Project. The residential sector is the largest contributor in the Kingdom, and the government has put a lot of effort into increasing home ownership, with the aim to increase the country’s home ownership to 70% by 2030. Also, according to the National Centre for Privatization & PPP (NCP), Saudi Arabia has a pipeline of more than 100 upcoming projects.

Prior to COVID-19, the UAE’s construction sector had been slowing down due to a reduction in new projects leading to weakening cash flow and reduced margins. The slowdown of the construction industry is one that has a domino effect on the entire supply chain, impacting debt holders, sub-contractors, suppliers, banks and employees. The recent announcement of the insolvency of Arabtec, which reported a net loss of USD 216 million (mn) in H1 2020, is evidence of this, and it could have wide-ranging impacts throughout the sector. As liquidity continues to be an issue, access to lending remains the biggest challenge for most stakeholders.

The main issues the construction industry is facing include:

  1. Reduction in contract awards and delays in ongoing contracts, driven by macro-economic factors
  2. Perceived over-supply in certain sectors such as segments of residential real estate
  3. Drop in expat numbers affecting both commercial and residential construction
  4. Contractor issues:

       

    • Financing and lending issues
    • Cash flow and receivable issues
    • Cost overruns 
    • Low margins 
    • Competition
    • High fixed cost base
    • Renegotiated contracts

The residential sector contributes a large part to the construction output in the UAE and is currently facing an imbalance of demand-supply in certain sub-segments. Until recently, 30,000 units per year were being sold whereas only 10,000 were being handed over; now the situation has turned around. Therefore, supply now exceeds demand and may continue to do so for the next few years.

The government has created certain initiatives to balance the market, including:

  • Stringent mortgage regulations
  • Changes in visa regulations providing residence visas up to 10 years 
  • The new law issued by Real Estate Regulatory Authority (RERA), to create an integrated system of regulatory and monetary procedures to protect the rights of developers and investors 
  • The formation of a new Real Estate Planning Committee to study the real estate market and control the pace of projects

COVID-19 has significantly changed and reshaped our behavior and the economy. Consequently, given this “new normal,” developers are revising their strategies:

  • The hospitality and leisure sectors have been hugely impacted by the decline in global travel; hence, new hotels and hotel refits might be delayed.
  • The retail landscape is evolving with a move towards digital delivery platforms, so new mall openings are being re-assessed.
  • The move towards working from home has reduced the demand for office space, so new commercial property developments are being re-examined.

That said, there are still winners as:

  • Tenants in the commercial space seek co-working spaces or opt to relocate to quality spaces.
  • Home ownership is increasing, with both apartment and villa in the ready property market in Q3 showing a slight uptick, despite still being lower on a YTD basis.
  • The GCC has huge infrastructure needs as it seeks to build efficient transport and logistics networks. The infrastructure ministry has a pipeline of over 100 projects worth AED 20 billion in the development stage, with plans to expand roads, airport capacity and public transport routes under the Traffic and Transportation Plan 2030.

Overall, banks, governments and advisors have been working together in order to protect the industry and move towards a more sustainable model. A proactive approach must be taken, and this is where Duff & Phelps’ expertise can benefit contractors by:

  1. Revising the firm’s strategy and focusing on the long term
  2. Increasing flexibility in the firm’s business model
  3. Tightly monitoring and controlling liquidity
  4. Focusing on closing out projects and cancelling retention bonds
  5. Consolidating locations, factories, labor camps, etc.
  6. Disposing of non-core assets and closing loss-making businesses
  7. Revising contracts to make sure they are efficiently managed
  8. Managing supply chains

In the face of uncertainty and distress, restructuring experts/financial advisors can make all the difference; however, the earlier companies ask for help, the more options that will remain available to them.

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