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Fri 22 Feb 2008 04:00 AM

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Saving Dubai from oversupply?

Construction costs are rising, developers are over-optimistic on time frames, and many Dubai projects are behind schedule.

As a consultant working in the field of hotel development, it is easy to feel overwhelmed by the hell-for-leather development race going on in such Gulf markets as Doha and especially Dubai.

With all our methods for estimating the market supportability of new projects, it sometimes seems inconceivable that Dubai could soon be filling up more than 100,000 hotel rooms and apartments per year (some say by 2011), or even that there should be sufficient demand by then to support one single planned hotel of 6,500 rooms (no prizes for knowing which that is).

How can we give our clients a professional recommendation to go ahead and invest in such a project, when in reality there are so many question marks about the future?

In that context, it is actually reassuring to see that a significant number of the hotel projects that were supposed to have opened last year in Dubai appear to have been delayed, and others planned to be under construction by now have even failed to start on site.

I won't name names, but there were some big projects, expected to open in 2007, which may not even see the light of day until 2009. Why is this happening, I wonder, and what will be the impact of the delays?

A quite plausible reason was given by a Saudi company, Rakaa Properties, which was recently reported as stating that 40% or AED 587.7 billion (US $160 billion) of the current AED 1.5 trillion (US $400 billion) worth of real estate projects in Dubai have been "temporarily suspended" due to defaults in payment resulting from the rapidly increasing prices of core building materials. The company refers to a 10% increase in cement prices and a 30% hike in steel in the last few months alone.

For developers, such figures translate into monthly reductions in the potential return on investment for hotel projects. One can't help speculating that in some cases, delays also result simply from ‘cold feet', or else from some speedy footwork in terms of repositioning their projects mid-development to make them stack up - perhaps through reducing the quality of finishing, or through adding other components to produce additional revenues lines.

Another related explanation for the apparent delays seems to be developers' over-optimistic announcements regarding fast-track building programmes, made for PR purposes.

It sounds great to say that you can build a five-star hotel in 18 months flat (the benchmark being the One&Only Royal Mirage, phase one, which reportedly was built in just 14 months from bare sand beach to fully fitted hotel), but with so many contractors on site in Dubai at the same time, suppliers are simply struggling to cope with the volumes of materials required; deliveries are routinely late and so are the projects.

By the same token, true fast-track building programmes require a whip-cracking, dictator-like project management approach that only a few companies can actually achieve. Even something as relatively straightforward as the fitting out or the pre-opening preparations for a hotel can be fraught with snags, if there is not a sufficient level of coordination between the operator, the owner and key construction team members.

Another cause for project delays seems to be the fact that some master developers are virtually making up the rules as they go along in terms of determining hotel planning and related regulations in some of the major master-planned communities, introducing unnecessary bureaucratic bottlenecks.

Partly, this is because such developers are literally being tasked with undertaking the functions of urban planning (such as deciding zoning, setbacks and FAR parameters) and infrastructure provision (from roads and car parks to district cooling and desalination plants) normally carried out by the municipal authorities, who are quite happy to pass up such responsibilities in the case of the new mega projects. It's a big ask, and no wonder it takes their eye off the ball sometimes - when it comes to approving designs for hotels, for example.

Another cause of concern for developers may be the dawning realisation that operating conditions over the next few years may be less buoyant than they are now, which is another factor likely to reduce profit margins. Most hoteliers would admit privately, if not in public, that at least an ‘adjustment' of market conditions is likely in Dubai in the next few years, even if it is only temporary.

Ironically and at the same time logically, the delays we are already seeing in Dubai are actually postponing the day when such a market adjustment occurs. I myself have had to move back my predictions about the expected downturn from 2008 to 2009 as a result of the delays, just as the Egyptian investment bank EFG Hermes has done in relation to Dubai's residential property markets.

The logic is, of course, that the longer we can prolong the current conditions of undersupply and overpricing, the better. Quite possibly, the delays are not a phenomenon of 2007 alone (or 2006, when the same applied to a lesser extent), but an indication of a general slowing of the rate of completions of new hotels, with that precise result. And that might mean the market will grow in line with demand, and there may never be a downturn.

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