The Construction Boom
The United Arab Emirates has in recent times experienced a construction boom that is unprecedented in the gulf region and even in some Western countries. The government of the UAE policy is mostly to thank for the increased rates of construction in the country. It has to be recognized that construction is fundamental in the developmental plans of any country. The UAE recognizes construction as fundamental in enhancing the country’s plans for urbanization, infrastructure and developments in the industrial sector. Construction in the UAE expanded a tan average rate of 11% from the turn of the century. The rate from 2007-2010 was well over 15% per annum which increased the contribution of construction in GDP From 8% to 11.7% in 2010.
From the turn of the century, the UAE especially Abu Dhabi and Dubai have experienced an exponential growth in construction. The municipality of Dubai put in place plans that are intended to modernize the city in order to make it a financial and manufacturing hub in the region comparable to major cities such as London and New York. It is estimate that the Dubai Emirate alone has about sixteen percent of all the cranes in the world.
The Driving Force for the Construction Boom
Construction in Dubai is driven by various factors which are as a result of government policy for the UAE. Construction work in the UAE is relatively faster since construction companies employ a larger workforce. The process is also cheaper than those of Western countries since the UAE has access to cheap labor from the neighboring Gulf States and from India.
Government policy towards the development of the municipalities of Dubai and Abu Dhabi has a lot to do with the construction boom. The UAE has for a long time relied on oil revenues to fuel its economy. The oil revenues of the nation are running low and are expected to be depleted by the middle of the next decade. The shift of policy towards a transformation of the UAE into a corporate and commercial hub is based on ensuring that the UAE diversifies from the oil sector. The growth in construction is also fuelled by the government policy of a free trade area in Dubai which has resulted into many companies setting up shop in the Gulf Nation. The setting up of corporate and industrial complexes has in turn led to an influx of professionals which has led to a demand for even more construction. This has led to the construction of shops, malls and residential property since the demand by far outstrips supply.
The Real Estate Boom
Just like the construction boom the UAE has experienced an unprecedented increase in the construction of real estate. The tons of Dubai and Abu Dhabi are the key areas in the UAE in which this real estate boom is being experienced. The UAE is one of the most vibrant real estate markets in the Gulf region if not in the world. There is a huge demand for housing property in the United Arab Emirates since there is a huge expatriate and corporate presence in the country. Real estate sector share of the GDP grew by about 10% since the investments in real estate for 2009 was estimated at Dh 815 billion according to a government report.
The real estate sector in the UAE has had exceptional development in the last decade with its share of GDP increasing from doubling from Dh7 billion to Dh 14 billion in 2010 which is a remarkable growth rate of 20% yearly.
Statistics by the UAE government show that there was a growth rate of 65% for fixed capital in real estate from 2005 to 2010. This also resulted into the real estate sector contributing to 18% of the economic business in the UAE as compared to 5% in the preceding year. This is a s result of an increase in investments in the real estate sector and an increase in the number of private individuals taking up loans to construct their own houses.
The Driving Force for the Real Estate Boom
The real estate boom in the UAE is driven by factors similar to the factors that drive the construction sector boom. The tax regime in the UAE particularly in Dubai offers a conducive a cheap alternative for investors seeking to find tax havens. The tax regime in Dubai has led to an increase in corporations in the region which has in turn has led to a demand for support services in finance, banking, insurance, transport, logistics among others. The increase in the number of corporations that have set up shop in Dubai has led to an influx in the number of professionals which has led to a high demand for real estate.
The high demand which outstrips supply in the UAE Has led o an increase in rents in the UAE. The increase in the rates for real estate has offered an opportunity for real estate developers to earn a nice return on investment by investing in the UAE. Real estate investment has also been driven by streamlined investment procedures that had a fast and good return on investment and were relatively low risk.
Risk Issues in the UAE construction and Real Estate
The construction and real estate sector has been growing at exponential rates that are unprecedented in recent history. While many investors have entered the UAE market in order to cash in on the lucrative returns the risk posed must also be taken into perspective. Many real estate and construction analysts have warned that the construction and real estate boom could very well be a bubble which could burst very soon.
The UAE economy especially Dubai offers a tax free haven and allows repatriation of profits to mother countries without charge. The boom is also likely to lead to high inflation since the markets are overvalued as it is.
The UAE is depending on revenues from the oil sector to fuel its development and the tax free haven in Dubai. This present a risk in that should oil reserves be exhausted the investment made in the gulf nation are likely to lose significant value.
The unchecked growth and inflation in the UAE if unchecked presents a risk that in the long run the UAE may become more expensive than the surrounding nations making it less attractive. This may lead to corporations shifting base which would negatively impact the property prices in the UAE. Latest statistics have indicated that the average person ion the UAE currently uses roughly a third of their income on rent.
The tax free benefits of the Dubai emirate are being eroded by a steep rise in inflation which is negatively impacting investment appetite ion the UAE. High inflation is eroding the benefits of a zero tax regime and unless this is addressed urgently it may result into corporations relocating to other more favorable nations.
Demand for construction and real estate after experiencing exponential growth has started showing signs of a slow down which has been exacerbated by the global economic crisis. With more construction and real estate projects nearing completion, demand is more likely to peter off leading to depreciation in property values.
While the UAE has so far not experienced a terrorist attack, it remains prone to terrorism. Security analysts have indicated that terrorists are unhappy with so much Western influence in the gulf state and that it is only a matter of time before they strike. Such a strike may make the UAE lose its allure to current and potential investors with catastrophic consequences.
Construction and GDP
The construction sector is deemed as one of the major drivers of the UAE economy. The construction industry has seen its share as a percentage of GDP increase from 7% to over 16% in a period of just over a decade. This is a tremendous growth and thus the construction industry is deemed as major growth engine of the UAE GDP. The construction industry also has spill over effects on other sectors of the economy which in turn result to a further increase in GDP growth. The construction industry affects the general productive function of the UAE in more ways than one and experts assert that it is the most significant factor that has led to the tremendous growth of the UAE economy over the last decade.
Construction has a direct effect on the development of technology in the UAE. An increase in construction means that more corporations are willing to set up shop in the UAE. With a high demand for construction professionals there is a marked increase in the number of construction professionals in the UAE. Construction professionals usually work with the local populace and even when they leave the UAE they will have transmitted some of the expertise to the local populace.
Statistics from the UAE government have indicated that there has been a steady increase in the number of construction professionals ranging from basic professionals such as fork lift and crane operators to engineers. Statistics show a marked improvement in the quality of construction and also there has been a marked improvement in efficiency. A study conducted by the ministry of state came up with the finding that the boom in construction showed a positive correlation between the improvement in technology and the construction boom.
The construction boom has led to a race to build the best and the most magnificent buildings which have led to improved quality of buildings which are more likely to attract investor. The race to build the best buildings entails that the best technology must be used in construction and more likely than not such technology will be helpful in influencing future construction.
Labor is an important aspect of the productivity function of GDP. Construction leads to the development of labor which is a fundamental aspect in the growth of GDP. The construction boom in the UAE has lead to an influx in the number of professionals who have gone to work in the UAE. The influx of labor not only offers a better chance in the development of labor in the UAE, but it also offers the government an opportunity to enhance revenue collection through income tax.
Statistics from the UAE government showed that the construction industry alone is responsible for up to a ten percent increase in immigration of people seeking employment in the construction sector. This increase in population has further led to increased productivity since this immigrant labor is cheaper than that found in other countries.
Construction sector is responsible for bringing in a expert labor which is instrumental in decrease in costs of construction and has also reduced the overall cost of labor in the UIAE. The construction industry has brought in expert professionals who have consequently transferred their knowledge to the local populace which has had a positive contribution in GDP growth.
According to the ministry of finance of the UAE, the construction industry accounts for up to 25% of the foreign direct investment in the UAE for the last five years. This has been growing at an annual rate of 2% per annum and therefore it has a chance of becoming an even bigger contributor to the national GDP than the oil sector.
There has been a marked increase in the number of financial institutions in the UAE. Many construction activities are funded by these financial institutions. A report released on the banking sector in 2010 showed that the many financial institutions were competing for lucrative deals of financing construction as a result of the lucrative returns. The boom in the construction industry has resulted into increased competition which has resulted into reduced costs of borrowing. A reduction in the cost of borrowing has consequently resulted into even more investment in construction thereby consolidating the construction sector’s position as one of the fundamental drivers of the UAE’s GDP growth.
According to the UAE central bank construction represents 23 percent of all the physical capital in the UAE. This figure has been growing at the rate of 3% per annum and the central bank estimates that it will account for over 35% of all fixed assets by 2020. A significant portion of this investment in construction is foreign direct investment which results into higher GDP figures for the UAE.
Construction affects GDP mainly through the influx of labor into the country which also results into improvements in technology and consequently this is reflected in the GDP.
Construction affects the natural resource situation in the UAE in that much of the money that is obtained from oil is invested in the construction industry. Since oil is the UAE’s most significant natural resource, this is deemed as a good use of the natural resources since construction has proved to have a better return on investment than oil. Construction also offers a more viable growth sector than oil which is expected to be exhausted by the middle of this decade.
Construction as a Fundamental Growth Driver
The construction industry is a fundamental aspect of any nation’s growth. Since the construction industry is relatively low risk, it usually serves as a safe haven where foreign direct investor can put their money with little fear of losses. Construction acts not only as a driver of GDP growth it also acts as a source of value. Since construction is a capital and labor intensive undertaking, it leads to the other subsequent benefits which result from the application of labor and capital. The use of capital follows the principle of production which asserts that investment always leads to a growth in GDP. The use of labor in its turn leads to the development of skills, and also offers improved incomes for labor which can then be useful in increasing economic growth through increasing income tax for the government. The construction industry also leads to the exploitation of natural resources such as cement while reducing negative aspects in an economy such as unemployment.
Construction is a fundamental growth driver since it acts a s a kind of indicator on investor sentiment with regard to a certain market. Markets that are deemed to be relatively safe and low risk are more likely to have booming economies. Since it is also capital intensive the construction industry unlocks a lot of needed capital into the economy which is important in fuelling economic growth.