More firms look to quit projects as costs soar

Tuesday, 15 April 2008 11:50 AM

Skyrocketing construction costs are forcing Dubai real estate developers to buy back properties from investors as projects become financially impossible to complete.

A number of developers have said soaring labour and raw material costs mean projects launched several years ago are no longer economically viable, UAE daily Emirates Business 24/7 reported on Tuesday.

Developers that sold units in off-plan projects two years ago are now finding the revenue is not enough to cover the cost of construction, the newspaper said.

Developers told the paper it did not make business sense to build something for 1,000 dirhams ($272) per square foot after it was sold for 600 dirhams per square foot.

The problem has so far been limited to the smaller, more inexperienced developers, according to the paper.

The report comes after Dubai-based Damac Properties last month cancelled a 25-storey beachfront development on the Palm Jebel Ali.

Damac had said the cancellation of the Palm Springs project five years after launch was due to "redevelopment of the plots".

The decision sparking outrage from investors who threatened legal action after the developer offered compensation well below current market value.

Damac has since told investors said it will go ahead with the project, according to a statement on an investor group website.

The developer also changed its mind about the cancellation of its Haz Tower in Business Bay last week, after investors complained about its plans to pull the project.

The Real Estate Regulatory Agency (Rera) has said the problem has so far been limited to Damac.

"We have not received any other complaint from investors about developers buying back properties. But if we do, we will definitely investigate the issue,” Marwan bin Ghelaita, CEO of Rera, told Emirates Business.

Many analysts are talking about a looming crisis in the construction industry has the cost of raw materials, particularly cement and steel, continues to climb.

Construction costs rose at about twice the rate of inflation in 2007, up around 20% according to research from international consultancy EC Harris. The price of steel reinforcement rose by 46% and structural steel gained 38%, while cement prices ended the year 30% higher.

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Please post responsibly. Commenter Rules

Posted by: Bonovox Thursday, 17 April 2008 8:43 AM[UAE]

What is happening in the construction industry is a crime. They pay a pittance to the worker who toils in the sun and gets the luxury of sharing a small room with ten other people. The flat/villa on the other hand gets traded by greedy people who make millions without shedding a drop of sweat.

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Posted by: Eswar Wednesday, 16 April 2008 12:19 PM[UAE] - UAE

Not only finishes but for the workmanship and cheap materials is already prevailing in the market. However, the absence of skilled and professional manpower and the increase in costs, raises ambiguities over the completion that may spiral the property prices. Most of the firms are already threatening in the name of Force majeure to terminate. It is preferable to have amendments uniformly to address the rising costs or to have partnership contracts rather than regular lump sum contracts. Let Project management combine the core reality of team work from Contractor, Engineer and the Client.

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Posted by: RAJ SHEKHAR Wednesday, 16 April 2008 9:39 AM[UAE] - UAE

I am unable to understand how the firms could do that. People invest their hard earned money on trust and, of course to earn a profit. Who, in this world, is not earning a profit. Builder calculate all the aspects, by their finance division, and they also consider for the price escalation in the future upto the project completion. So , it is their sheer greed to earn more & more profit from the project as they tend to retreat. I am in the construction field and I know how much is the profit margin for a single project. Rates are charged in dollars that also on international rate basis which escalates the overall price of a building prices while they pay the workers in local currency. There should be stingent control from RERA to protect the buyers from such retreat of builders. It has now become a monarchy system!!!

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Posted by: Lee Tuesday, 15 April 2008 4:59 PM[UAE] - UAE

Hopefully Damac's attempts to cancel projects is just a "bump in the road" in the Dubai Real Estate story. But, if a few more private developers attempt to cancel projects then Dubai will probably see money shift to Abu Dhabi real estate or elsewhere. Some of the developers were in a hurry to launch projects to start collecting money from customers. Well, now it's time to give customers the flats & villas they bought, even if it means the developers lose money. I think the problem could be the quality of the finished product. Who is to say Damac or other developers will spend money for quality finishings. Buyers in projects where there are not options for finishings (counter tops, flooring, wall tiles, etc.) should not be surprised if the finishings are the cheapest in the market.

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