Pressure on contractors means some of the glamorous new mega-projects announced may fall well behind schedule
Look at computer models for the Venice-like Arabian Canal proposed for central Dubai, or the plans for the world's biggest shopping mall, and it seems as if the collapse of the UAE's real estate market six years ago never happened.
Citibank estimated earlier this year that there were already two thirds of a trillion dollars worth of construction projects underway in the UAE. That was before Dubai ruler Sheikh Mohammed bin Rashid Al Maktoum unveiled models of the Mall of the World, a glassed-in city complete with an air-conditioned Times Square and Oxford Street and Earth's biggest indoor theme park.
But beneath the soaring cranes and the glass and steel domes, all is not well for builders, who have found massive amounts of work but profit margins squeezed and developers slow to pay bills. And that means some of the glamorous new mega-projects may fall well behind schedule.
The UAE is recovering strongly from the 2008-2009 financial crisis which battered its real estate market. Local governments and state-linked firms have announced a slew of huge housing and infrastructure projects in the last 18 months.
But as some developers in Dubai and Abu Dhabi hold back payments, builders are now scrambling to obtain loans and digging into cash reserves for money to tackle the projects.
At the same time, the construction boom is drawing new contractors and sub-contractors to bid for business in the hope of winning quick profits. This is pushing down margins.
Such difficulties illustrate the perils of the Gulf's construction market. Foreign builders flock to the region to get a share of its oil wealth, but sometimes face unstable market conditions and erratic payment schedules.
"The biggest challenge contractors face is that the margins are still going down. It's getting more competitive, and a tough market to survive," said Philippe Dessouy, managing director at Belgian construction firm BESIX.
One regional industry expert, who did not want to be identified because of the sensitivity of his comments, said profits at UAE construction companies would be weak this year despite the massive volume of business.
"The contracting business is going through a rough phase. Payments are coming in late, which is impacting builders, and they are now faced with liquidity issues. This would of course have an impact on the projects," he added.
The challenges for construction firms can be seen at companies such as Arabtec, Dubai's largest contractor and builder of the world's tallest tower.
Its backlog of projects has almost doubled to about AED26 billion ($7.1 billion) in about two years. The amount of money owed to it by clients jumped to AED9.1 billion in the first half of 2014 from AED6.6 billion a year earlier.
At the same time, the company's cash balance shrank to AED1.1 billion in June from AED2.7 billion in the third quarter of 2013. Analysts said this was mainly because of high working capital requirements; Arabtec declined to comment.
"If Arabtec wants to continue at the current rate of project executions for the next two to three quarters, then we expect a cash outflow (incremental working capital) of AED500 million each quarter," said Allen Sandeep, director for research at brokerage Naeem Holding.
"That just means that the company might run out of cash and it has to either raise funds or slow down on executions."
Arabtec has also had to grapple with management changes such as the sudden resignation of its chief executive Hasan Ismaik in June. The departure of top managers and staff will result in "significant project delays", analysts at HSBC said in June.
The company has insisted all its construction projects are on track. But it has acted to reduce its commitments, pulling out of plans to launch its own real estate company and scaling back its strategy to bid for oil and gas projects in the region.
Similarly, Dubai's Drake & Scull had outstanding receivables of AED5.3 billion in the first half of this year, more than double its first-half revenue of AED2.35 billion. Its backlog grew to AED14.3 billion from AED7.4 billion a year earlier. The company declined to comment.
Such pressures may lead to delays in a range of projects around the UAE, possibly including high-profile items such as the much-anticipated Louvre Museum in Abu Dhabi, which is being built by Arabtec and other companies.
At present just 55 percent of construction work on the Louvre, which includes one of the world's biggest domes, has been completed, although work is scheduled to finish next year.
"To get to the finish line, a lot of hard work needs to be done. It is a challenge but we are working to meet the deadline," said Jassim al Hammadi, head of infrastructure at Tourism Development & Investment Co, the Abu Dhabi state-owned firm which is developing the project.
An industry source who is monitoring the project's progress said it would be very difficult to complete construction next year, given the scale of the task and pressures on resources.
A boom over the past two years has driven Dubai's residential real estate prices back close to the bubble levels seen before its market collapsed in 2008. Prime rents in Dubai are now only 10 percent lower than their peak in 2008, according to a report by property company Knight Frank.
With about a 30 percent jump, Dubai rents and house prices are estimated to have recorded the highest growth rate in the world in the first half of the year, after an increase of about 25 percent in 2013. The market may at last have peaked, with increases finally slowing in the last few months.
Residents, most of whom are expatriates from Asia and Europe, complain about the surging cost of living, and wonder whether the boom is sustainable for a city that prides itself on attracting talent with a promise of the good life.
Jahanzeb Mashhadei, an assistant manager at Panasonic Corp's Middle East arm, was priced out of his luxury high-rise in central Dubai and now commutes two hours to work from a modest apartment bordering the neighbouring emirate of Sharjah. It is still dark when his son gets on the school bus.
"We kept pushing our boundaries and eventually the market just pushed us out of Dubai. We just weren't able to afford something," he said.
Despite the boom, developers are still mindful of the crash six years ago, which makes them cautious with payments to building contractors. Industry executives say some property developers are slow to disburse cash, proceeding in stages instead of making big up-front payments to construction firms.
Local governments, especially oil-rich Abu Dhabi, do not lack for money. But bureaucratic and logistical obstacles can delay payments to construction firms.
Falling global oil prices could become another worry if prolonged. Despite a plunge to four year lows in recent months, Abu Dhabi is still believed to be running a budget surplus and there is no sign of state-backed projects being cancelled. But industry executives believe that if Brent crude stayed near $80 for a year or two, spending on projects could slow.
For builders seeking financing, the UAE's bond market is underdeveloped. Instead, construction firms rely mainly on banks. UAE construction loans soared 40.1 percent from a year earlier last December to 181 billion dirhams, central bank data shows; that far outpaced 8.8 percent growth in total bank loans.
Drake & Scull, for example, took out two loans in the first six months of this year, one of $20 million from international banks and one of 125 million dirhams from local banks.
For some companies, however, bank lending may not be enough to top up operating funds; an Abu Dhabi-based banker said banks were still conservative in the wake of the 2008-2009 crash.
"Banks are surely lending, but they are lending cautiously based on set criteria such as security, the borrower's funds, cash flow, project sustainability etc.," he said.
Meanwhile, the stiff competition in the construction sector is putting pressure on profit margins, which means retained earnings cannot fund the big projects.
Arabtec reported a year-on-year rise of just 11 percent in second-quarter net profit, despite a 51 percent leap in revenue. Drake & Scull posted a 41 percent drop in quarterly profit.
"Despite growth in the volume of work, there's been a 3 to 4 percentage point drop in margins over the past two-three years, which is impacting contractors," said Sandeep at Naeem.For all the latest real estate news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
It is good to see the developers in the UAE are back to their old tricks of withholding payments and driving companies into financial stress. Taking a contract here without substantial upfront payments or bonds paid is akin to financial suicide. Purchasers should be aware of having projects which are built with multiple low grade construction companies with no handover. Shabby quality will affect resale!
"the construction boom is drawing new contractors and sub-contractors to bid for business in the hope of winning quick profits" says it all. We are headed for more disastrous times!
The fact that there is such turmoil in one of Dubai's major sectors proves one thing...the UAE is NOT recovering strongly from the 2008/09 financial crisis. If it were, there would be no such issues...some maybe...but overall, none to speak of.
Taking the above article into consideration and the knock on effect to their employees...and job security...then the next sector to suffer is banking and credit card/personal loan and car loans. You can see where I am going with this....
Fact is, there has NEVER been a recovery...unless you regard a recovery as being one based on Debt and piling on more Debt and spending beyond the means of what a market can yield.
This goes for corporate Dubai and Expat Dubai. The writing has been on the wall for some time and articles on this very site when looked at again as a collective and not in isolation, build a bigger picture for all to see.
The West has NOT had a recovery either. They have more debt now than before 2008...go figure!
Its obvious a dip is coming. But this is a great opportunity for us Dubai residents to buy some units at low prices. The best thing to do now, is hoard all your money, dont overpay for rents, dont invest in real estate for atleast 2 years. When the bubble pops, take out your money and buy.