The perfect storm

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DELAY: Millions of dollars worth of UAE real estate projects are under threat due to the rising costs.

This will have a bigger impact on the smaller contractors, who won't be as sophisticated as the larger companies when it comes to hedging against material price increases and negotiating contracts," he says.

Jamaji of Roshan Construction says that many real estate developers could face financial difficulties as a result of the most recent price increases.

"Some developers will be faced with the choice of either putting more money into their projects, or going bust," he says.

Jamaji believes the solution may be for the government to nationalise the cement factories to ensure that the local construction industry receives a regular supply.

The price volatility and material shortages are also dissuading construction companies to bid for new contracts because they are unsure whether they will be able to resource the projects should they win them, according to Jamaji.

The cement crisis could deepen as the industry enters the second quarter because four factories in the emirates of Ras Al Khaimah and Fujairah have ceased production due to the "breakdown of machinery and equipment", according to a research note from HC Securities Brokerage.

Many major construction projects in the UAE are governed by fixed-price contracts where contractors have limited protection against rising material prices. Others include so-called ‘price escalation clauses' which allow construction companies to pass on material price increases to their clients.

"Rapid increases in the cost of materials could put some contractors at risk, especially those who are locked in with fixed price contracts with less understanding developers, and this could definitely fast-forward consolidation in the industry as some firms are taken over or risk going out of business," says Cherry.

Jamaji says that contractors who have been stung by significant material price rises are seeking to enforce ‘force majeure' clauses within their contracts, more usually associated with events such as wars or strikes.

The cost crisis in the construction industry comes as Gulf states, including the UAE look to find ways of curbing inflation which is threatening to derail economic growth.

Rampant price increases have led the UAE Ministry of Economy to introduce controls on a range of items while also removing import duties. Other GCC states have also introduced price caps to reign in record inflation as their currencies linked to a weakening dollar have made imports more expensive.

Real estate costs have been the biggest driver of inflation in the UAE as the price of homes and apartments have soared since Dubai allowed foreigners to own homes in 2002, sparking a six-year real estate boom.

Apartment rents have almost doubled in Dubai over the last three years according to real estate consultancy Asteco, while premium office space has more than tripled over the same period.

The International Monetary Fund has warned that the UAE must slow government spending if it wants to reduce inflation.

"Its challenge now is to address the housing constraint that is pushing up inflation while sustaining growth and ensuring macroeconomic and financial stability," said the report published in December.

As landmark projects such as the Burj Dubai near completion, the UAE's world-famous construction sector may be entering its most turbulent period in recent years.

Cement shortages are combining with rising costs across other key building materials at a time when developers may not be able to absorb them. For the real estate industry, it could represent a perfect storm.

RELATED LINK: Builders lament price of cement

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