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War casts shadow over UAE construction boom

6 April 2026

 

The UAE’s construction sector entered the year in a position of strength. According to regional projects tracker MEED Projects, contract awards reached $59bn in 2025, a record that surpassed the $53bn awarded in 2024.

With market conditions expected to remain buoyant, 2026 was forecast to be another strong year. However, the Iran conflict that began on 28 February is set to change that narrative.

In the short term, the construction sector proved resilient during the first weeks of the conflict. With the exception of a few sites in high-risk zones, construction activity across the UAE has largely continued uninterrupted.

Cost pressures

Despite continued activity on the ground, the industry is bracing for cost escalation. Brent crude prices have risen well above the $100-a-barrel mark. For the construction sector, the impact was felt most acutely on 1 April, when the UAE adjusted its domestic fuel prices.

Diesel surged to AED4.69 a litre, up sharply from AED2.72 in March. This nearly 72% increase has immediate and far-reaching implications for project overheads, affecting heavy machinery operations, site power generation, and the transport of bulk materials such as sand, steel and cement.

For projects signed under fixed-price contracts during the lower-inflation environment of 2024 and 2025, these increases pose a significant threat to contractor margins and potentially to overall project viability.

Supply disruption

These inflationary pressures are compounded by logistical challenges stemming from instability in the Strait of Hormuz. As a critical artery for regional imports, any disruption has ripple effects across the construction supply chain – particularly for long-lead items such as specialised façade systems, high-end finishing materials and key MEP components.

While the UAE has leveraged overland routes to mitigate some of these bottlenecks, the shift is unlikely to be cost-neutral or time-neutral.

Insurance gaps

Legal and contractual frameworks governing projects are now under increased scrutiny. A key concern is the limitation of standard insurance policies. Many contractor all-risk and logistics policies exclude coverage for losses arising from active conflict, creating a significant gap for goods in transit.

As freight is rerouted to alternative ports and transported over longer distances by road, insurers are becoming increasingly reluctant to provide cover for these extended journeys.

Contractors are being advised to adopt a more disciplined approach. To recover costs linked to these disruptions, the industry is being urged to move away from the broad claims that have historically characterised regional disputes.

Employers are unlikely to accept claims that do not clearly distinguish conflict-related impacts from pre-existing project delays. Instead, contractors must precisely document separate heads of claim, including supply chain cost increases, on-site stoppages, and new health and safety requirements.

Market outlook

In the longer term, the sector is in a wait-and-see phase. The market’s trajectory will depend heavily on the government’s ability to manage public finances following a period of significant, unforeseen expenditure.

The cost of defence, combined with reduced tourism revenue, lower oil exports and weaker consumer spending, has created a complex and as yet undetermined fiscal challenge.

Although construction is likely to be used as a tool for economic stimulus once the conflict subsides, the availability of capital for major new projects remains unknown. Government spending priorities will likely shift towards resilience, including accelerated infrastructure development on the UAE’s east coast.

Fujairah and the Sharjah enclave of Khor Fakkan – both located outside the Strait of Hormuz – are expected to play an increasingly central role in strategic infrastructure planning. Over the next decade, investment may focus on strengthening the logistics and industrial capacity of these ports to better shield the federation from future geopolitical shocks.

For the private real estate sector, the outlook depends on whether the attacks that began on 28 February have permanently altered the UAE’s reputation as a secure, low-tax safe haven. While the conflict is testing investor confidence, the country’s operational resilience may still compare favourably with challenges in other global markets.

If the risks are viewed as manageable, investment could rebound quickly. However, prolonged uncertainty would result in a slower recovery. By early April, warning signs had already emerged, with some developers facing cashflow pressures due to slowing sales.

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Colin Foreman

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