Contract awards see strong pick-up in Dubai

06 February 2013

With property prices increasing and demand for housing on the rise, developers are once again awarding contracts in Dubai. But fears of a new real estate boom and bust remain

On 5 March, contractors will submit bids for the first phase of the extension of Dubai Creek, running from Business Bay, under Sheikh Zayed road, past Safa Park and on into the Gulf some 3 kilometres away.

The contract, valued at AED1.5bn-2.5bn ($408m-681m), is the largest that Dubai’s Roads & Transport Authority (RTA) has tendered since 2008 and is the latest sign that Dubai has returned as a market offering good opportunities for contractors.

According to regional projects tracker MEED Projects, the emirate made $9.7bn of construction and infrastructure awards in 2012, more than double the $4.8bn awarded during 2011.

The improved market performance has been welcomed by construction firms that have been forced to scale back their operations in Dubai. “We have been tendering for quite a lot of work in Dubai since mid-2012,” says a local contractor. “Some of the projects are quite big, and we haven’t seen many of them for quite a long time now, so it’s a welcome change.”

Transport sector

Transport projects have been leading the recovery. In early 2012, the local Alec was awarded the construction management contract for concourse 4 at Dubai International airport. Since then, there have been awards for the superstructure; mechanical, electrical and plumbing works and the monorail connecting the concourse to the existing Terminal 1.

Construction contracts have also been awarded at Jebel Ali port. In February last year, the local DP World awarded Greece’s Archirodon Construction an estimated AED150m deal to build the expansion of Terminal 2. In September, it signed an estimated AED700m contract with a joint venture of Japan’s TOA and France’s Soletanche Bachy to build Terminal 3.

While these schemes have had an impact, Dubai has only two airports and one major port, meaning their ability to inject confidence into the construction industry is limited. The sector that has traditionally had the most influence on the market is real estate. Prices for good quality property in central locations began to rise last year, and as demand grew, developers were able to launch new projects and sell units off plan.

The clients I deal with only proceed with projects once they are sure the funding is secure

International consultant

With local developers Nakheel and Emaar properties selling enough units on launch to cover costs, construction contracts have been awarded promptly. One of the first was the AED194m deal awarded to the local Dubai Civil Engineering to build Palma Residences on the Palm Jumeirah. At the end of 2012, Emaar awarded Canada’s Brookfield Multiplex the contract to build The Address The BLVD hotel and residential development near Dubai Mall for an undisclosed sum.

Other smaller developers have also begun to award deals and as confidence spreads to independent developers, the opportunities for contractors will grow. Consultants working in Dubai say clients are planning new projects and have begun to engage architects. “We have many private clients interested in building projects again,” says a consultant at a local architecture firm. “They started with small buildings, but there are big projects coming up.”

Property consultants expect 2013 to be another good year, but not as good as 2012. “With a lack of available good-quality residential products in many popular community locations, 2013 is likely to see further growth in sales and leasing rates in primary areas,” says Matthew Green, head of research and consultancy UAE, at CBRE Middle East. “However, with uncertainty prevailing over implementation and enforcement of proposed regulations, an inherent risk remains in the market that some investors may find off-putting. ”

Continued real estate growth should create more opportunities for contractors, although many are concerned Dubai may repeat the mistakes it made in the past. Before 2008, the emirate’s construction sector struggled to keep pace with a real estate market that saw property prices nearly double in less than a year. If these market dynamics return, in the short term, construction firms will have to deal with cost inflation, and in the long term, face the prospect of another market collapse.

Cautious approach

So far, the signs are that some lessons from the 2009 crash have been learnt, with developers adopting a far more cautious approach to new projects. “The clients I deal with only proceed with projects once they are sure the funding is secure,” says an international consultant. “It’s not like before when projects started without funding and due diligence.”

Lenders have also adopted a more cautious approach. On 30 December 2012, the UAE central bank proposed limiting the value of mortgages at 50 per cent for expatriates and 70 per cent for nationals. Even if the Emirates Banks Association’s watered-down legislation (75 per cent of the value of a property for expatriates and 80 per cent for nationals) is adopted, speculation will be more controlled than in the past.

Provided the real estate market maintains the momentum it built during 2012, and the speculation that led to its downfall in 2008 is curbed, there should be good prospects for construction companies in Dubai in 2013 and beyond.

Key fact

At $9.7bn, the value of construction awards made in Dubai in 2012 was more than double the 2011 figure

Source: MEED Projects

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