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UAE construction costs set to soar by 20%
Construction costs in the UAE will rise by at least 20% this year after surging in 2006, according to the chief executive of Abu Dhabi developer Aldar Properties.
Abu Dhabi, the largest of seven emirates in the UAE, is investing windfall oil revenues in developing tourism and infrastructure. These projects and others across the Gulf and Asia are driving demand for everything from cranes to cement.
Construction costs, including the cost of cement, steel and other building materials, rose 25-30% in 2006, Aldar Chief Executive Ronald Barrott told Reuters on Monday on the sidelines of a presentation to investors for a bond sale.
"We expect construction costs will go up 20% plus this year again in the UAE," Barrott said.
"They're still moving quickly because demand simply outweighs supply. Contractors are taking advantage of that."
The pace of construction and rising costs are squeezing profits, Barrott said, echoing concerns raised by developers in Dubai, including High Rise Real Estate which said in September their margins were under pressure.
Abu Dhabi, which has more than 90% of the UAE's oil reserves, is trying to wean its economy off energy exports and emulate the success of neighbouring Dubai, the Gulf's commercial hub.
Dubai's kicked off rapid growth in real estate prices in 2002 by allowing foreigners to invest in property.
Abu Dhabi is poised for similar growth after a 2005 law allowing foreigners to buy properties under 99-year leases, triggering a flurry of new projects by Aldar and rival Sorouh Real Estate, Barrott said.
"There is pent-up demand from the expatriate market to acquire these properties," Barrott said. "It will take five years before the supply crunch eases."
Aldar plans to invest $50 billion in Abu Dhabi real estate projects in the next five to 10 years. One of its projects is a $40 billion island of the coast of Abu Dhabi that will host a leisure complex including a Ferrari theme park.
Although Aldar has got most of its 30 million square metre land bank free from the government, the company spends about AED 7bn ($1.91bn) to develop 1 million square metre for residential use, said Chief Financial Officer Shafqat Ali Malik.
Aldar is trying to contain costs by forming joint ventures with suppliers and building companies, including construction group Laing O'Rourke, Malik said.
Residential properties account for half of all Aldar's projects.
Aldar expects a return of 15 to 20% on residential sales, while rentals properties, both homes and offices, will yield between 8 and 12 percent a year, Malik said.
The company also expects to sell about a third of its land as bare plots.
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