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Will UAE’s construction sector collapse after Arabtec’s liquidation decision?

Arabtec, builder of the world’s tallest building Burj Khalifa and other iconic structures, decided to dissolve, leaving behind a tailwind of repercussions that could cripple funding to the construction industry

Arabtec, backed by sovereign wealth fund Mubadala, posted $216 million in H1 losses this year Several UAE construction companies have sought to extend debt maturities or agree to better terms to avoid defaults Expect construction activity in the UAE to decline by 4% in 2020 with the risks skewed to the downside

The United Arab Emirates construction industry is ailing due not only to the devastating impact COVID-19 is having on the country’s and regional economy, but also to pre-existing conditions dating back to over a decade ago.

The latest in the saga of Arabtec, builder of the world’s tallest building Burj Khalifa and other iconic structures, is that it made the decision to dissolve leaving behind a tailwind of repercussions that could cripple funding to the industry and leave industry players and subcontractors in a bind.

Arabtec in liquidation proceedings

Shareholders of Abu Dhabi -based Arabtec Holding PJSC voted to dissolve the debt-laden firm and have a maximum of two months “to allow for discussions with the main stakeholders before a liquidation application may be submitted to the competent courts,” the company said in an e-mailed statement.

The liquidation plan is meant “to maximize value for stakeholders through a controlled and efficient program,” Arabtec Chairman Waleed Al Muhairi wrote. “Our current priority is to ensure that everyone directly affected by this decision is treated fairly during this challenging time.”

The move is likely to threaten thousands of jobs and scores of suppliers and sub-contractors in the Persian Gulf, according to Bloomberg

“The company has about 40,000 employees,” Jaap Meijer, head of equity research at Arqaam Capital, said in an interview with Bloomberg Television.

The company floated on the Dubai Financial Market in 2005. Its most recent annual report for its 2018 financial year shows it had 45,000 employees, but it had recently been cutting costs as its losses continued to mount.

Arabtec, backed by sovereign wealth fund Mubadala, posted $216 million in H1 losses this year.  It has total accumulated losses of 1.46 billion dirhams ($398m).

Around 15% of the total company shares are held by retail investors, according to Century Financial, while Aabar Investments is the single largest shareholder.

Established in 1975, Arabtec is also known for building the Louvre in Abu Dhabi. The company was valued at about 30 billion dirhams ($8.17 billion) at its peak in 2014 and is now worth 795 million dirhams (216.6 mn), with the stock down 60% this year alone.

Harshjit Oza, an equity analyst and head of research at Shuaa Securities, said Arabtec has about 5 billion dirhams ($1.35bn) in receivables, dues, and advances and warned that banks and creditors would find it difficult to recover losses from liquidation.

Construction sector already struggling

Bloomberg said that construction firms in the region have struggled for years with project delays and thin profit margins citing that in January 2020, Australia’s CIMIC Group took a $1.23 billion write-off on its 45% stake in BIC Contracting and exited the Middle East.

Several UAE companies have sought to extend debt maturities or agree to better terms in recent years to avoid defaults.

Recently, creditors started to enforce claims against Abu Dhabi-based Al Jaber Group, which has struggled since building up debt in the wake of a UAE real estate downturn.

Another Dubai-listed construction firm, Drake & Scull, is working under UAE bankruptcy law to reach an agreement with its creditors in an out-of-court process.

According to Reuters, Al Jaber Group began talks with creditors in 2011. 

Abu Dhabi Commercial Bank which is working as a restructuring and security agent said in a document dated September 21 and seen by Reuters that it had instructions from the majority of creditors to proceed with claims against Al Jaber.

The move follows delays in restructuring agreements, under which Al Jaber was to appoint a new board and sell companies and assets such as the Shangri-La hotels in Dubai and Abu Dhabi.

In exchange, creditors had agreed to extend the maturity of a 5.9 billion dirhams ($1.61 bn) loan, cut interest rates, and provide additional revolving debt.

Enforcement will also allow creditors to claim against Al Jaber’s chairman under a 4.5 billion ($1.22bn) dirham loan to the company.

Meanwhile, all creditors to Drake & Scull International have to submit their claims with the recently formed Financial Reorganisation Committee by September 30.

The company last year reported accumulated losses of Dh5 billion ($1.36 bn) plus and recently announced a new CEO, its sixth in the last two years. 

Read: The construction industry in the UAE is expected to grow by 3.8% in 2021, COVID-19 impact short-lived

Impact on the sector

With Arabtec heading into liquidation, cash availability is emerging as the single biggest threat to the industry.

Typically, banks put up the required financing instruments to match the funds advanced by the project promoter as well as to guarantee the performance of the contractor. In addition, banks also offer financing facilities such as monthly ‘progress invoice discounting’ and letter of credit limits for procurement.

Scott Livermore, ICAEW economic advisor and chief economist at Oxford Economics, told Arabian Business, he believed more trouble could be on the way.

He said: “The coronavirus crisis is reducing the likelihood of an orderly rebalancing of the real estate sector. The problem of excess supply has been long known and this is only being exacerbated by the expat exodus triggered by the coronavirus pandemic, and banks seem now to be calling time on support for the sector.”

“With the coronavirus pandemic likely to be an issue for some time yet, it would be surprising if other construction firms didn’t follow and find themselves in severe financial difficulties as a quick and significant pickup in demand is unlikely,” he added and continued, “We expect construction activity in the UAE to decline by 4% in 2020 with the risks skewed to the downside.”

Read: Construction Delay and Compensation- What you need to know in a COVID-19 situation

Market report on the construction industry

According to Research & Markets, the UAE construction industry is expected to record a growth rate of 6.2% to reach 278.7 billion dirhams ($76bn) by 2024.  The commercial building construction market in value terms is expected to record a 9.1% growth over the forecast period. The infrastructure construction was estimated to be 89.8 billion dirhams ($24.5bn) in 2019.

Over the next 8 quarters, the report expects growth across residential, commercial, industrial, and institutional sectors to remain impacted due to the economic downturn caused by the COVID-19 outbreak.