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Sun 8 Feb 2009 04:00 AM

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Rebuilding the dream

Despite UAE’s struggling market, a new report shows the construction industry is sturdier than its detractors think.

While the year ahead will be challenging for the UAE’s struggling construction market, a new report shows the industry is sturdier than its detractors think.

Once a mainstay of the national economy, the UAE's beleaguered construction industry faces an uncertain future. The market, staggering under a catastrophic real estate crash, is facing a make-or-break year with a new report showing that the fate of more than half of the country's 1,289 projects, worth $582bn, hangs in the balance.

The findings by Dubai-based market research firm Proleads reveal that of a $1.3 trillion-strong industry, only $698bn is still in operation on active projects - the rest is in limbo, dependent on the imminent recovery of the Emirates' troubled property market.

The small jobs, the less than $10m jobs, will continue. It’s the big developments that are harder hit because they’re inherently more risky.

Anchored in a decade-long, debt-fuelled building spree, the construction industry's very foundations are under pressure. The collapse of the Gulf's overheated property markets has sent its biggest clients, developers and contractors, into freefall, with landmark projects suspended, job cuts rife and liquidity all but gone.

Some 180 projects in the real estate sector are on hold, the report shows, while projected cash flow - the marker of an industry's health - is set to drop 43 percent in the first quarter of 2009.

While real estate comprises a massive 74 percent of the UAE's construction portfolio, it is far from the only sector affected. Leisure and entertainment projects, the newest breed of hotels and hot spots dotting the country, have fallen as fast as tourist figures.

More than 25 developments are now on hold, a three fold increase on December's figures, with a predicted 40 percent decline in cash flow expected in the first quarter.

The report makes for grim reading. But while the year ahead will undeniably be difficult for the construction industry, there are also glimmers of hope, says Emil Rademeyer, director at Proleads.

The UAE's existing pool of work is unlikely to disappear, leaving a raft of future opportunities for contractors robust enough to wait out the storm and capitalise on the market's undoubted potential.

"There are delayed opportunities, in terms of the suspended contracts. The money involved - and it is billions and billions of dollars - is still there," he says. "We are still in a better position than the rest of the world, and the evidence is there that the market will turn."

Although overshadowed by the dramatic suspensions of iconic projects such as Nakheel's $900m Trump International Hotel and Tower, many smaller scale developments are still on track, Rademeyer adds.

"The small jobs, the less than $10m jobs, will continue. It's the big developments that are harder hit because they're inherently more risky."

The question is whether these low budget projects will be enough to fill contractors' order books. The cancellation by state-owned Meydan Group of its $1.3bn contract with Arabtec Construction and Malaysia's WCT Engineering to build the Nad Al Sheba racecourse, seemed a tipping point for industry sentiment, sparking fears that no projects would go ahead.

The flurry of suspensions that followed, however, including that of Sunland Group's $654m Atrium residential project in Dubai, is less a sign of a collapsing market and more a practical business strategy, argues analyst Ismail Sadek.

The severity of the downturn has shown that all bets are off, so companies are halting construction to conserve cash, Sadek, of Egyptian bank Beltone Financial, says.

"The whole industry has entered a phase of ‘wait and see'. Events have deteriorated the economy so severely that both the government and companies are holding for a rebound in the market."

But suspension is not synonymous with cancellation. The Proleads report shows only 1.5 percent of construction projects halted during 2008 and Jan 2009 went on to be cancelled. Of those that were written off, only a fraction - 0.9 percent - were shut without being placed on hold first.

So while the industry may not be growing, it is not necessarily shrinking either. Cash flow has declined but budgets have remained, meaning "the industry as a whole in mid-January 2009 is in the same financial position as it was in October 2008", the report says.

"If there is development on the ground, that project will resume at some point. What we have is a dormant market," says Rademeyer. This could change in the latter half of the year, however, as fewer new projects emerge to bolster the industry.In recent weeks, state-funded infrastructure schemes have emerged as a potential lifeline for private contractors scrabbling to diversify from real estate, but there is no cast iron guarantee the sector will survive the downturn unscathed.

"One of our criteria of operating with certain clients used to be that the project must be government related," says one Dubai contractor. "Now even those clients are suspending projects left, right and centre, so where is it safe now?"

Some 19 infrastructure projects worth $11.6bn have been placed on hold across the UAE, according to the report, making it the least affected sector within the construction industry.

The government can’t bail out everything. With oil prices where they are, it is getting harder and harder for them to intervene.

Anecdotal evidence, however, suggests that even government-backed developers have seen a spike in late payment disputes with contractors that could threaten the sector's security.

Mark Blanksby, a partner with law firm Clyde & Co, told Arabian Business in January that he had seen a 60 to 80 percent increase in inquiries over the previous two months relating to disputes over the termination and suspension of contracts, and reduced work scope on construction projects.

"There are major concerns over major delays in payment," confirms the Dubai-based contractor. "That needs to be sorted out to restore confidence to the market."

Despite the negatives, there are some perks to the slowdown. Construction costs in the UAE have dived an estimated 30 percent, providing welcome relief from the 1.5 percent monthly price hikes seen last summer, and laying the groundwork for the government to press ahead with its public works plans. Dubai alone has ringfenced $3.3bn for elaborate infrastructure schemes.

"It's a cheap time to build a project, it will cost a third less than a year ago," says Rademeyer at Proleads. "The minute the markets pick up again, so will commodities. Now is the time to dust off any infrastructure plans because the industry needs it."

The first signs of recovery are tentatively forecast for the latter half of 2010, but much hinges on the willingness of the UAE government to shore up crumbling projects and restore confidence to the market.

Banks have already received a substantial chunk of a $32.6bn state-funded rescue plan, an attempt to thaw the frozen lending markets, but the bailout has had almost no impact on the Emirates' real estate and construction sectors.

Meanwhile, the financial crash has dragged oil prices down with it, subduing hopes of renewed federal intervention.

"The government can't bail out everything. With oil prices where they are, it is getting harder and harder for them to intervene," says Sadek at Beltone Financial.

"We need both factors: strategic intervention through effective channels, and a boost in the government's revenue stream, which is mainly oil wealth."

The report forecasts a return to 2007 cash flow levels by the end of the year; a sign, it notes, of a "resilient industry" in times of economic turmoil. It is still likely a number of companies will fold before the market recovers, Rademeyer predicts, but a more realistic construction industry will emerge from the rubble, with a solid base of capital to cling to.

"It's an opportunity to correct the imbalances we've seen. The numbers are daunting, but we should focus on the glass being half full. There is still close to $700bn worth of projects on the table, and not many countries in the world can say that," he cautions, with a hint of optimism.

Market set for merger frenzy

The radical shake-up of the UAE's construction industry is predicted to give rise to a flurry of merger activity. Market conditions are expected to spawn a slew of unions among small and medium-sized contracting firms.

As the industry shifts back to a more traditional tender model, rather than the direct negotiations favoured by clients in recent years, firms will be seeking to balance out their order books as more contractors jostle for less work.

"The market will become too small for so many companies to compete at a high risk level. Mergers are a quick way to boost the balance sheets of two companies," Sadek says.

Not all large firms will be insulated from the downturn, Rademeyer warns. He expects a "handful" of mergers at the bigger end of the market. "Some of the bigger contractors will be consumed on the value of their order books. That's something we'll see over the next 12 to 18 months."

Qatar has been the first Gulf state to champion mergers as a path to increased economic stability.

The government has ordered four merger deals in recent months across a range of sectors, including a headline-grabbing merger between Barwa Real Estate and Qatar Real Estate Investment Co.

The two firms have a combined market capitalisation worth $2.5bn.

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paul 10 years ago

"The Proleads report shows only 1.5 percent of construction projects halted during 2008 and Jan 2009 went on to be cancelled." Sure, but how many of those projects that were suspended have been restarted? If they are still suspended then that means no activity. Developers are not going to pay staff to sit by the pool when a project is suspended - they are going to fire people if the suspension lasts more than a few weeks. Just because they hold open the chance of restarting work does not mean it is actually going to happen. It is just an administrative issue. What is the difference between a suspended project with no resumption, and a cancelled one? In practical terms, none. "Of those that were written off, only a fraction - 0.9 percent - were shut without being placed on hold first." So what? This is a meaningless statistic. It could be zero percent projects cancelled because everything is suspended. How is this supposed to be good news? The big issue is how many suspended projects will ever get built. My expectation is very few. How about you get some useful figures... like of all the suspended projects, what % were cancelled, what % resumed and what % are still suspended? I know you guys are being leant on to come up with happy news, but articles like this are not fooling anyone by quoting percentages for completely irrelevant things.