Good debt, bad debt

A radio advert for mortgages caught my ear on the drive to work, the fact there was any advert at all was surprising.
Good debt, bad debt
By Stuart Matthews
Sat 02 May 2009 04:00 AM

A radio advert for mortgages caught my ear on the drive to work. Not because the offer was particularly attractive – it wasn’t – rather, the fact there was any advert at all was surprising. Is it a sign of a thaw in the months-long financial freeze that has gripped the local property industry?

Advertising is a long way from handing over actual money – though it is a proven way for companies to come out of a recession with a larger portion of consumer mind share. No doubt too, the already tiresome lending processes have only become further mired in complexity. However, if money is being spent on encouraging consumers to buy a home, and not just for mind share, then we can call it a positive step.

Outstanding debts are awaiting payment across the industry and there are plenty of instances where contractors simply need the money to survive.

It’s not the only one. Gentle noises are being made by Tamweel and Amlak, which between them accounted for the majority of the Dubai mortgage market, about lending again. Add to this the trickle of stimulus liquidity entering the market from other sources and there may be enough to induce some commercial activity.

In the long run, this will be good for contractors. But it will be a long run. Money from mortgage lenders will have to go through several sets of hands before it gets anywhere near a contractor. Outstanding debts are awaiting payment across the industry and there are plenty of instances where contractors simply need the money to survive. This is a challenge that faces all links in the construction supply chain.

Several contractors have mentioned the importance of securing payment in recent interviews. This isn’t just a question of getting the money in, but a detailed process of checking the fine points, to make sure retention money owed is paid when it’s due. The same goes for progress payments too. This keeps the cash flow moving and debt predictable. Predictable debt can be managed, either by the contractor, possibly its bank, or in some cases by understanding and patient master developers.

It is in the industry’s long-term best interest to take a sensible, not desperate, approach to manage debt effectively, if it is to emerge from the recession. However, until then, cash remains king.Stuart Matthews is the senior group editor of ITP Business’ construction and industry titles.

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