Contractors working in Dubai say margins need to improve before they can start investing in projects.
There is pressure on contractors with pricing, the margins are not there, said Khaldoun Rashid Tabari, vice-chairman and CEO of Drake & Scull International speaking at the Arabian Hotel Investment Conference (AHIC) in Dubai on 5 May. Work is coming, but margins are not there yet. When the margins come, then you can consider whether you want to invest.
Construction companies and their owners could be a more significant source of funding for projects in Dubai as the emirate builds new infrastructure and hotels to support the its hosting of the World Expo in 2020. Margins in Dubai for construction companies are typically running at 1-3 per cent as competition and limited project opportunities in recent years mean most firms order books are far from full.
Five years after the global financial crisis hit Dubai and the following debt crisis, funding projects is still an issue for developers, as many that are planning to build new developments. So far, a variety of sources have been tapped, including securing investment by bringing in new business partners, as well as export credit guarantees from foreign governments.
Earlier this year, the owners of the Dubai Pearl project have announced the sale of AED6.8bn-worth ($1.9bn) of property in the long-delayed development. The purchase, by Hong Kong-based Chow Tai Fook Endowment Industry Investment Development Group (CTFE), includes high-end residences, serviced apartments and two five-star hotels. The transaction represents the largest bulk asset sale for the development, which is wholly owned by Pearl Dubai.
Funding from China is also being used for a new hotel project on the Palm Jumeirah, Chinas Industrial and Commercial Bank of China (ICBC) has provided an AED737.6m project financing to support the construction of a new Dubai hotel, the Viceroy Dubai Palm Jumeirah. It is the first time ICBC has provided a project finance facility for a hotel project in the Middle East.
Skai Holdings, a Dubai-based property investment company, is developing the AED3.75bn hospitality project. The property firm is forming a special purpose vehicle with the main contractor on the hotel project, China State Construction Engineering Corporation (CSCEC).
UK funding has also been tapped. In February, Al-Futtaim Carillion won a $181.1m deal from Abu Dhabis Aabar Properties to build a five-star Hard Rock Hotel in Abu Dhabi with UK funding support. In 2013, it secured work on The Avenues for Dubai-based developer Meraas, again with financial assistance from London.
The guarantee that supports Carillions recent deals comes with certain standard terms and conditions that all UK Export Finance deals must adhere to. The contract must feature 20 per cent minimum of UK content, consisting of goods or services sourced from the country. The guarantee will also cover a maximum of 85 per cent of the value of the loan being extended to the Dubai-based buyer.
Dubais Roads & Transport Authority (RTA) is also using a variety of funding options.
In October 2013 last year, it award Turkeys Mapa Gunal a contract that involves building a 16-lane bridge that will take traffic on Sheikh Zayed Road across the proposed Dubai Water Canal project, which involves extending Dubai creek from the Business Bay area to the Gulf. The contractor, with the support of banks, is providing a seven-year credit facility for the work.
Contractors bidding for the second phase of the infrastructure works have provided similar financing deals in the proposals that were submitted in late March.