After rising in 2016, non-payments are expected to increase further in the coming six months, while business closures are also increasing further.
- The decrease in oil prices since the end of 2014 has had a negative impact on construction activities in the UAE. The government, as the largest sponsor of construction activities (especially infrastructure), suffered a deterioration of its fiscal position due to decreasing oil revenues.
- Commercial and residential construction are facing headwinds due to reduced demand and a cooling down of the real estate market. In 2016 delivery of residential units in Dubai decreased to approximately 10,000 units compared to the 40,000 units originally planned.
- Decreasing demand, payment delays and strong competition have led to an erosion of businesses´ profitability - both in terms of reduced margins as well as increased provisions towards bad debts.
- Construction businesses are largely dependent on banks to fund their working capital requirements. However, banks have become very restrictive on lending due to the low demand situation and the fact that many construction businesses are already highly geared.
- Payments to suppliers and subcontractors are usually made when receivables are collected from end clients, who currently tend to delay payments. This has a knock-on effect on the trade cycle, with many smaller players struggling to meet their payment commitments. After rising in 2016, non-payments are expected to increase further in the coming six months. Business closures are also on the rise since 2016.
- Due to the currently challenging business environment, we have decreased our risk appetite in all construction subsectors. We are especially cautious on large buyers with sizeable exposure to government projects, buyers operating in the infrastructure segment, and businesses operating in oil field support services.