We are maintaining our outlook for real growth in the UAE's construction sector for 2014. We highlight there has been increasing volumes of positive news surrounding the industry over 1H2014 and that with the awarding of the Expo 2020 to Dubai, there is going to be concentrated activity in the infrastructure, and residential and non-residential sectors in future.

The UAE experienced a particularly harsh construction slowdown after the 2008 financial crisis; average real growth went from 15.8% in the four years prior to the crash to 0.9% average real growth for the subsequent four years. However, over 2013, we saw an increase in confidence in the market, based more on positive fundamentals rather than growth from speculation in the real estate market, which created the property bubble of 2008.

Measures have been taken by the UAE authorities to prevent such speculation in the real estate market and to prevent unwarranted price increases, i.e. measures by Emaar Properties banning estate agents from reselling homes before their completion. Further, Dubai has doubled the fee it charges on real-estate sales to 4% from 2%. The government has also proposed plans to limit first-time mortgages to 75% and 80% of the property's value, for foreigners and UAE nationals, respectively. The ratios for any subsequent home purchases are 60% and 65% for expats and locals respectively. This regulation has been watered down following substantial opposition from commercial banks, but was implemented at end-2013. It is important to note that the effectiveness of this measure will be weakened given that many of Dubai's property purchases are made in cash. However, it shows the government is making tentative steps in the right direction to encourage a sustainable housing recovery, differing from its inaction in the run-up to the housing crash five years ago. Such measures should lead to more protracted rather than frenzied growth, which is a major supporting factor in our bullish view on the UAE's construction industry's prospects in the medium term.

Indicative of the improving prospects within the construction sector, numerous private and government-owned developers have unveiled billions of dollars in new projects and restarted many of the more viable developments which were postponed in light of the financial crisis.

Expo Opportunities Will Catalyse Growth

The Expo 2020 will focus around a planned 438-hectare site, the largest ever created for a World Expo. Located in Jebel Ali, construction at the Expo 2020 site is expected to cost between USD2bln to USD4bln. The site will feature 180 purpose built pavilions, an underground service rail network and a photovoltaic canopy capable of producing 50% of the site's power. The master plan for the site will not receive approval until the end of 2015, with work expected to commence shortly afterwards and be completed for 2019. That said, it is expected that the site will see the construction of more than 2,000 apartments, banks, retail outlets and restaurants. Given the centrepiece role of the project and full governmental backing, we see few risks to its realisation

Away from the site itself, other major infrastructure projects are set to receive new attention and be driven towards completion thanks to the 2020 event. An estimated USD1.3bln is to be invested in transport to and from the expo event. This includes expansion to the Dubai metro, with the current Red metro line being expanded to reach the event site. Additionally, the Purple Metro line and the development of the Dubai World Centre airport are also likely to have their completion and expansion dates brought forward so as to be ready for the event.

Dubai's real estate sector has registered a timid recovery over 2013 after a serious collapse during the financial crisis. We have expounded the view that a recovery in the residential and non-residential construction sector is on the cards, albeit at much more muted levels than we saw before the crash in light of cautious investors and fewer 'white elephant' projects in the pipeline. With news of the Expo win, we expect this view to be confirmed over 2014, with greater upside potential over the medium-term thanks to a reinvigorated confidence in the construction industry. Projects such as Nakheel's The World are reportedly being fast-tracked to be ready in time for the expo and we also expect activity at major projects such as the Mohammed bin Rashid City and residential and business districts in and around Dubai World Central Airport to pick up.

Diversification of the Economy

With a view to support the diversification of the economy of the emirates, through programmes such as Abu Dhabi's 2030 vision for development, there is a lot of investment in infrastructure. The transport and energy and utilities projects backlog is growing, fuelling construction industry value. The Mirfa Independent Water & Power Project (IWPP) in Abu Dhabi has been awarded to a joint venture between GDF Suez and Sojitz, which when in construction will be one of the largest Greenfield IWPPs in the UAE. The USD25bln UAE rail system, including the Blue, Gold and Purple metro lines and the Jumeirah tram in Dubai were approved for construction, due to be operational by 2030, and Dubai's Roads and Transport Authority (RTA) will fast-track a AED5bln expansion of the Dubai Metro's Red Line to connect to the Dubai World Central in light of the successful Expo bid. A new rail law is expected within the next year to give the green light for the whole network's development.

Risks Moderating

We had been noting for some time that one of the largest threats to the improved climate in the UAE was the so called fiscal cliff, or the maturing of the huge amount of debt. Had the debt not been tackled, the resulting shock to the banking sector, tightening of liquidity and loss of confidence could have shattered the construction industry's renewed activity. Dubai had approximately USD30.1bln due in 2014, amounting to over one-fifth of the emirate's GDP. However, the effect of this is lessening as Dubai's debt restructuring process is progressing fairly smoothly, a situation we expect to continue. In January 2014, Dubai Holding's financial arm, Dubai Group, had reached an agreement with lenders regarding the debt restructuring of almost USD10.0bln.