Gulf real estate projects worth $143bn

The value of GCC real estate projects announced in the last year has jumped 59% to $143bn according to research released yesterday.

In the previous 12 months (2005-06) the total value of new commercial and residential real estate projects announced was $90billion, according to the report by international law firm Trowers & Hamlin.

Real estate mega projects in the Gulf region are largely driven by a desire to diversify the region’s economies away from oil by creating regional financial services and tourism hubs, the report said.

However there is also a need to provide additional housing to deal with the region's unique demographics.

With 70% of the population under 30, the demand for residential property in Saudi Arabia is driving some of the region’s biggest projects. These include Emaar Properties’ $11bn Jeddah Hills development which is expected to deliver nearly 20,000 new homes.

The real estate sector continues to attract huge investment as rents and capital values defy sceptics with their strong growth, the report said.

Projects currently underway include the leisure, retail and cultural centre Dubailand, which plans to have 55 hotels and will cover 3 billion square feet, making it twice the size of all the Disneyland’s and Disney Worlds combined.

The construction boom is creating its own problems however, including well advertised shortages of steel and sand.

Nigel Trustcott, parter at Trowers & Hamlins said in a statement “There is now a shortage of capacity amongst engineering firms, skilled contractors and subcontractors. That means that they are able to negotiate some contracts where far too much of the risk is left with the developer.”

“In some cases the contractors are forcing the developer to pay for their professional indemnity insurance. There are cases where a subcontractor has stopped work on one development so they can start on a bigger, more prestigious project,” he continued.

“This is creating the kind of contractual environment where corners get cut, projects overrun and the potential for legal disputes escalates. However, the underdevelopment of the commercial courts system in the region means that litigation is a very unattractive route to go down.”

In Dubai, the newly-announced Escrow Law is likely to present problems for developers who normally release staged payments from purchasers to pay contractors.

The new law requires developers to keep purchaser's deposits in escrow accounts rather than allowing them, without some form of independent certification permitting release of funds, to pay this money early to contractors as the project progresses. This could lead to contractors refusing to continue work until the payments they were promised, but are now tied up in escrow accounts, are made to them.

The law firm is promoting the concept of ‘project partnering,’ a contractual framework used to create long-term, non adversarial relationships between clients and suppliers. The company says it is a key solution to the construction industry’s tendency for cost overruns, poor delivery and spiral of litigation.

Truscott said “Court proceedings in the region are not always that straightforward, and even when a judgment is finally obtained further steps will need to be taken to enforce it. Partnering ensures that such disputes do not occur in the first place and where they do they can be resolved through arbitration.”

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