The UAE’s construction industry represents a rich area of research with respect to both the prospects and challenges facing the construction industry in the Middle East and the world. With the construction boom being witnessed in the UAE, the construction sector continues to hold promising returns for the UAE government, investors and job seekers. Following the relentless drive to reduce dependency on oil revenues, UAE authorities saw a healthy construction industry as a key driver of sustained economic growth (Low, 2012, p. 62). While Abu Dhabi remained comparatively conservative with respect to its attitude, Dubai, whose oil reserves are relatively smaller, adopted a much bolder diversification policy.
Dubai’s revolutionary land reclamation projects, which include the Palm Islands, represent the epitome of UAE’s construction industry (Legrenzi & Momani, 2011, p. 39). UAE’s construction industry has witnessed rapid growth in the recent past. Analysts estimated the UAE’s construction industry to be worth $39.5 billion as of 2012, and this figure is expected to grow at a mean rate of approximately 9.5 percent between the years 2012 and 2016 (Held & Ulrichsen, 2012, p. 66). This projected boom in the construction industry is buoyed by several factors including UAE’s anticipated growth in the Gross Domestic Product (GDP), the substantial investments in essential pipeline construction project, friendly construction tender price levels, the ability of the UAE economy to raise debt funding and prosperous support industries such as hospitality and tourism.
The significance of the construction industry in the UAE is observable from the country’s project value in relation to its GDP (Calhoun & Derluguian, 2011, p. 27). Due to the heavy construction that is currently going on in the UAE, there are roughly 30,000 construction cranes in Dubai alone, which represents a whopping twenty-five percent of the total cranes operating globally (Olimat, 2013, p. 166). Nevertheless, the economy of UAE also continues to experience several setbacks. The UAE has been facing stiff competition from a raft of developed nations. While UAE’s investments continue to grow, escalating world oil prices have proved a key impediment, notwithstanding the high levels of per capita income. With this blend of setbacks and opportunities, the construction industry in the UAE provides an interesting area of research.
The UAE has been striving to reduce the reliance on oil exports through the diversification of its economy (Davidson, 2009, p. 112). UAE has invested significantly in the construction industry that attracted a huge influx of foreign workforce, primarily from India. According to Afram and the World Bank (2012, p, 8), an unstable currency market together with global and regional competition are making the process of sourcing workers extremely hard in the UAE.
The escalating property value is making it difficult for the middle class to live in the UAE. The prices of essential commodities have increased significantly over the past years because of increased tourism and glamorous lifestyles (Calhoun & Derluguian, 2011, p. 31). Despite the fact that the government has employed this method as a strategy to safeguard UAE’s wealth long after the oil wells dry up, the locals continue to suffer. However, the economy seems to provide positive prospect for both foreigners and the people of UAE going forward.
The rising number of foreign investors has also been a significant setback. This is because even though they invest in the UAE, they repatriate the bulk of the benefits to their home countries. The chief causes of these setbacks have been technological, cultural and political diversity (Keddie, 2007, p. 44). Policy formulation and legislative processes have led to most of the problems faced by the country’s development activities. The place of construction in the economy must be put into perspective, to facilitate a lucid understanding of its function.
Project Focus and Working Thesis
This research examines both the negative and positive effect of the construction boom on the economy of UAE. The research will use data on the construction output and the GDP. It attempts to investigate the link between the aggregate economy and the construction sector.
The primary force behind UAE’s formation was Abu Dhabi’s ruler the late Sheikh Zayed, who was also the first president of the Emirates. He held this post for thirty years between 1971 and 2004. The UAE consist of seven monarchies, and it largely experiences a hot and dry weather condition. As of 2012, the UAE had a population of about 9.206 million (Rubin, 2012, p. 28). Its population growth is ranked among the highest globally, mostly because of immigration. The national and official language of the country is Arabic, with the Emirati people speaking the Gulf dialect. Muslims make up about fifty-five percent of the foreign population, with Hindus constituting twenty-five percent, Christians making up ten percent and Buddhists making up five percent. Geographically, the UAE is located in Southwest Asia and covers an area of 83,600 square kilometres (Rubin, 2012, p, 31). The UAE is home to the seventh largest reserves of natural gas and crude oil in the world. Since gaining independence in 1971, the UAE has continued to rely on its vast deposits of hydrocarbon in supporting its economy. However, increased efforts over the past few decades have altered this scenario.
The economy of the UAE largely depended on fishing and a moribund pearl industry before the discovery of oil in the 1950s (Ehteshami, 2013, p. 77). This situation changed after 1962 when Abu Dhabi begun exporting oil. The late Sheikh Zayed, who was Abu Dhabi’s ruler and the UAE’s president at the time of its inception, quickly seized the opportunity and took advantage of the potential that the oil industry promised (Low, 2012, p. 60). Sheikh Zayed directed the development of the UAE and channeled the revenues from oil export into education, healthcare and the development of national infrastructure. While the oil industry acted as the backbone of the UAE economy, it gave rise to a booming construction industry that attracted a huge influx of foreign workforce. Petroleum related industries are still essential to UAE’s economy (Ehteshami, 2013, p. 77). However, the country has made positive steps in diversifying its economy, which now also relies on financial services, tourism, a booming construction sector, international banking and regional corporate headquarters.
Presently, foreign workforce constitutes more than seventy-five percent of the population. However, the UAE has been striving to reduce the reliance on oil exports through the diversification of its economy (Davidson, 2009, p. 112). This has led to the establishment of booming tourism, business and the construction industry. While the UAE continues to make remarkable progress in diversifying and transforming its economy through trade, manufacturing, tourism and construction, the petroleum industry will continue to account for most of the economic activity.
The main problem is that, while the construction industry in the UAE offers positive prospects for the economy of the Gulf region and indeed the entire Middle East, it also faces substantial challenges and setbacks that need to be considered. It is feared that the double-digit level of growth experienced during the construction boom will never be witnessed again. As a result, many players in the construction industry are beginning to look abroad (Gorgenländer, 2011, p. 62). During the past few years, Asian countries, particularly India, have witnessed brisk economic growth, higher wages and improved career prospects. Wages in India grew at about fourteen percent in 2007 compared to an increase of about 10.7 percent in the UAE during the same period (Olimat, 2013, p. 17). For the UAE, this represented a marginal rise from a figure of about 10.3 percent in 2006. In essence, the wage gap between the Gulf and Asian countries is reducing. However, the diminishing value of the dirham against other currencies such as the dollar and the rupee has continued to compound the situation. In addition, regional and global competition has also made it hard for construction firms in the UAE to find workers. The rich blend of opportunities and numerous setbacks and challenges for the UAE construction industry presents a deep area of study, which forms the core of this research.
Even though the diminishing value of the dirham mostly affects workers from Asian countries, it is also having an effect on expatriates from Australia, Canada, Europe, and South Africa. Labor costs, account for between fifteen and twenty percent of construction related costs, went up during the period between 2008 and 2009 (Low, 2012, p. 73). Labor shortage represents a probable capacity constraint compared to financial shortages. Shortage of appropriate staff may hinder the ability of a contractor to undertake new projects and accomplish extensive expansion plans. Another key factor that is affecting the construction industry is the cement and steel prices. These two account for approximately thirty percent of the net construction costs. The escalating prices are putting the margins of the contractors under increasing pressure. The UAE manufactures its own cement and has fifteen cement companies with a combined output of 13.2 million tons per year (Low, 2012, p. 80). Nonetheless, increased demand has surpassed this production following the construction boom that has been witnessed since 2003.
While the UAE imports some of the cement to bridge the gap between the demand and supply, the prices have soared up from Dh150 for every metric ton in 2003 to approximately Dh300 per metric ton as at 2012 (Edwards, 2012, p. 1). This price, however, has reduced compared to the Dh420 that manufacturers charged per metric ton during the construction boom. Presently, several construction projects are facing delays. Analysts anticipate this number to decline as the government takes measures to address these bottlenecks. Purchasing off plans has proved a popular practice in the region. Negative interest rates coupled with high liquidity has reduced lending rates and increased off plan investments in real estate (Gorgenländer, 2011, p. 63). Nonetheless, the escalating costs of construction mean that planned developments that were initiated in the market, in the past two or three years, are no longer lucrative to develop.
The obvious strategy for countering currency fluctuations is to institute far-reaching monetary policies. While some solutions to some of UAE’s problems are straightforward and the government has strove to make amendments, some appear to be intricate and out of the government’s control. This strategy must start by adjusting the depreciating currency value through the adjustment of monetary policies. However, this might be a temporary reprieve as this is largely determined by market forces (MacDonald & Al Faris, 2010, p. 51). The UAE can only continue to develop its flourishing industries such as tourism, trade and the construction industry. This will not only enable the country to achieve complete independence from oil revenues, but it will also assist it in stabilizing the economy. A balanced workforce is also essential to a healthy economy of the UAE (AlSadik & Elbadawi, 2012, p. 57).
With respect to the high and fluctuating cement and steel prices, the best solution is for the UAE government to make agreements with steel and cement manufacturers that will cap the prices at a certain ceiling and make them more stable (World Bank, 2007, p. 21). However, even in the absence of government intervention, the construction companies may adopt purchasing policies that provide them with timely and accurate costs, including undertaking a cost analysis forecast over a certain period. In this manner, the construction companies will be able to gain an in-depth understanding of the supplier’s cost structures together with the market dynamics.
The above approach will offer the construction firms several benefits including a better position to evaluate price quotes and come up with composite cost indexes. They will also be able to identify viable suppliers, time their purchases strategically, and most importantly, accurately determine the project risks, validity, and long-term costs. Adjusting the monetary policies will help the country deal with the discrepancy in the wage gap that is made compound by fluctuating exchange rates. Conversely, harmonizing steel and cement prices will help in cushioning the construction firms and the construction industry as a whole from the effects of fluctuating prices.