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Construction sector's output value reached Dh68.8b in 2004

The construction industry has became the basic input for socioeconomic development. It generates substantial employment and provides a growth impetus to other sectors through backward and forward linkages. In the past few years the global construction market suffered from exposure to several effects. Despite these effects, 2004 saw improved performance with the global market picking up as demand was revived by some delayed projects.

Global construction spending reached nearly $4.2 trillion in 2004, a 4.6 per cent increase over 2003, and future growth rates are expected to exceed 5 per cent annually over the next four years. Increased spending on infrastructure and non-residential development is largely driving this growth. The US market (with $970 billion spending in 2004) still dominates the global scene as the largest national construction market, with Japan remaining second ($670 billion). China has become now in third place ($480 billion) in terms of global construction spending.

At the domestic level, the value of production in the construction sector reached Dh68.8 billion in 2004. Dubai, followed by Sharjah, took the lead at the domestic and regional levels in terms of urban real estate development.

UAE's construction sector output grew at an average annual rate of 11 per cent over the last decade, rising from Dh14.5 billion in 1996 to Dh25.4 billion in 2004. Given the wave of real estate development during the last few years, the average growth rate during 2002-2004 exceeded 16 per cent per annum.

As a result of this consistent growth, the share of construction activities in the country's GDP rose from 8.6 per cent in 1996 to 11 percent in 2004. The drivers of this growth, which began mainly in 2001, are the rise in public spending on infrastructure, the remarkable boom in private housing, initiation of freehold properties for expatriates in Dubai and Sharjah, and expansion of commercial and hospitality activities.

Since buildings and facilities enter as an input in all sectoral activities, construction is considered the most intensive sector in terms of forward and backward linkages. On average, around 32 per cent of construction activities in the UAE during 1995 to 2000 were in the real estate sector.

Other sectors that demand sizable shares in construction output include transport, storage and communication (19.4 per cent), manufacturing (11.9 per cent), government services (11.6 per cent), and oil (8.3 per cent). Overall, construction activities constituted 52 per cent of the total fixed capital formation in the country during that period.

The nature of how the construction industry impacts other industries through subcontracting and exchange can be understood by reviewing the sources of intermediate inputs demanded by the construction sector. In addition to labor utilisation and capital equipment and accumulation, the construction industry demands many types of domestically available or imported inputs.

Available data for Sharjah for year 2003 shows that the value of intermediate consumption for the construction industry is divided into 59.8 per cent costs of subcontracts and 41.2 per cent costs of other services and consumables. The costs of subcontracts represent links with various categories of the industrial sector, trade and various services.

The majority of other services and consumables are in the form of rents of machinery and equipment (with 8.7 per cent share of total intermediate consumption), fuels and lubricants (5.4 per cent), rent of nonresidential facilities (3.9 per cent), electricity (3 per cent), communication and postage (2.7 per cent) and insurance (2 per cent).

Although the landscape of construction activities has changed significantly over the last few years (where there was a shift towards Dubai and Sharjah), available official data extend only to year 2000.

During the period 1995-2000, the annual share of Abu Dhabi in construction activities averaged 55.2 per cent, while the shares of Dubai and Sharjah stood at 27.3 per cent and 9.5 per cent, respectively. However, although the shift of activities was more visibly pronounced after 2000, the trend had already started before then. This is clear from the fact that Abu Dhabi's share in construction output declined from 58.7 per cent in 1995 to 51.1 percent in 2000.

On the other hand, during the same period, Dubai's share rose from 25.4 per cent to 29.4 per cent and Sharjah's share edged slightly from 9.1 per cent to 10.1 per cent. In general, the three emirates house around 92 per cent of the country's construction business.

The growth of output in the construction sector lead to rising demand for labour at an annual rate of 18 per cent per annum during 2001 to 2004. The number of workers in construction activities rose from 242,000 workers in 1996 to 305,000 in 2001, and jumped to 498,000 workers in 2004.

Rising demand for labour coupled with some official restrictions on the inflow of foreign workers lead to a noticeable rise in the average wage in the construction sector.

Between 2002 and 2004, the average wage jumped from Dh24,300 to Dh30,600 per annum. Nonetheless, despite this rise and due to being a non-skilled activity, wages in the construction sector remained much below the average of Dh38.4 thousand for the whole economy.

At the emirate level, with the exception of Abu Dhabi, sectoral average annual wages were highly comparable. For example, the average wage in the construction sector in Abu Dhabi was Dh35,900 in 2000, while it was Dh34,400 in Dubai and Dh33,600 in Sharjah.

Two factors are responsible for driving the highly visible residential construction activities in the UAE. First is the opening of the real estate market and allowing expatriates (despite lack of regulation) to own residential properties in the UAE. Second, the initiation of governmental support programmes for housing construction to UAE Nationals through land grants and financing facilities in the form of no-interest bearing mortgage loans.

As a result, the UAE witnessed the construction of more than 544,000 residential units in 2002. More than 35 per cent of this residential boom was originated in Abu Dhabi, while Dubai and Sharjah's shares stood at 29.1 per cent and 18.8 per cent, respectively. Other emirates that command significant shares in the housing boom include Ras Al Khaimah (6.6 per cent) and Ajman (5.6 per cent).

The nature of these built residential units has been determined largely by market demand and the type of governmental housing programmes. Around 53.2 per cent of the 544 thousand residential units built in the UAE in 2002 were in the form of apartments. Villas and public housing constituted around 11.5 per cent each of the total built units.

The construction boom is expected to continue in the UAE for years to come, especially in Abu Dhabi, which has launched one of the biggest real estate development companies in the country. However, several codes on environmental matters, safety, efficiency, dispute settlement and quality control need to be established to ensure a progressive construction industry.