After five years of soaring materials prices, the cost of construction in the Gulf is set to fall as a result of the global economic slowdown, which has led to $1.9 trillion worth of construction projects being suspended across the region, and in turn lowered demand for materials such as steel, cement and aggregate.
Signs of the slowdown emerged in late October 2008 when the first major project delays in Dubai were announced. Local developer Nakheel stopped work on the Palm Deira island project, and in the following weeks, the domino effect of the slowdown became evident as it spread throughout the region. By December 2008, construction projects from Dubai to Jeddah were being delayed or cancelled.
The number of projects being cancelled is largely due to the slump in demand for new real estate developments. But many of the delays have also been caused by clients seeking to cut costs. By delaying projects, clients hope to negotiate, or renegotiate, significant savings on construction contracts as materials prices fall.
“It is still early days, but we have already seen a 10-15 per cent drop in prices,” says one Abu Dhabi-based contractor.
“We are advising clients that costs will come down this year,” agrees a Dubai-based quantity surveyor. “I expect material prices will continue to fall, and in six months, when contractors are hungry for work, they will be forced to cut their margins.”
Most contractors currently price their work with a profit margin of about 15 per cent. But as the market becomes more competitive, companies are expected to be forced to reduce their profit levels to secure work.
“I expect margins will drop down to 10-12 per cent from 15 per cent within a few months,” says the Abu Dhabi-based contractor.
Reduced profit margins will have an impact on overall construction costs, but the biggest saving for clients will come from the fall in materials prices. Over the past six months, the price of steel – the most widely used metal in the construction industry – has collapsed, according to figures from UK-based construction consultant Davis Langdon.
In the summer of 2008, the price of steel reinforcement bars (rebar) reached a peak of more than $1,600 a tonne. Today it is $500-600 a tonne in the UAE and about $650 a tonne in Qatar and Bahrain, where there are still logistical bottlenecks at the ports.
The price of structural steel is also falling, but the drop has not been uniform across the region. Prices have dropped the most in the UAE, to $800 a tonne from $1,500-1,800 a tonne in July 2008, whereas prices in Qatar have remained stable at about $2,500 a tonne.
Other metals have also fallen in price as global demand contracts. Aluminium is now $1,400 a tonne, down from $3,125 a tonne in July 2008. Similarly, copper now costs about $1,900 a tonne, down from about $5,800 a tonne at its peak.
Although these two metals are not used in the same volumes as steel, the impact of their price falls on overall construction costs is still significant. Aluminium is commonly used for facades and curtain walling, and copper is used in wiring and duct work by mechanical, electrical and plumbing (MEP) contractors.
“We expect falling aluminium and copper to have a big impact, especially copper as that is a big part of the MEP costs,” says the Dubai-based quantity surveyor. “Prices are now at the level they were during the middle of last year. I do not expect them to fall much further. The market would really have to die for that to happen.”
Fuel is another important commodity that is falling in price. Diesel prices in Dubai and the northern emirates have been cut by 7.5 per cent to AED12.35 a litre.
Equipment costs are also expected to fall. After five years of strong activity, the region has built up an extensive fleet of equipment, and as the volume of work available shrinks, it is inevitable that some machines will be underused and available for sale or hire at discount prices.
“We ordered four tower cranes for a project that has now been put on hold,” says one Dubai-based contractor. “The kit is now sitting in our yard. We do not have a project to use it on, and no one wants to buy it. We are stuck with it.”
Hire firms are also expected to drop their rates. At one equipment outlet in Dubai’s industrial area, there used to be just three or four pieces of equipment available to hire. By mid-November 2008, equipment was lined up in a row several hundred metres long, and by early December, there were two rows of machines lying idle.
In previous years, contractors have had to cope with a steady increase in labour costs. In late 2007, contractors in the UAE agreed to increase pay by up to 20 per cent following a string of disputes at leading companies, including the local Arabtec Construction and the local/Belgian Bel Hasa Six Construct.
However, personnel costs could also fall as projects are shelved.
At the end of 2008, Dubai-based Al-Shafar General Contracting was forced to lay off about 1,000 workers and staff after its projects were put on hold. Other contracting companies have followed Al-Shafar’s lead in making job cuts, and more are expected throughout the year.
Over the past five years, another key driver of salary inflation has been the soaring cost of accommodation, which has forced employees to demand ever higher levels of pay. But with the property market now struggling, rents and living costs are expected to retreat to more manageable levels this year.
“Contractors are starting to look at their staffing levels,” says the Dubai-based quantity surveyor. “And if rents stay the same or fall, I doubt anyone will be getting a pay rise [in 2009].”
Other costs are more difficult to predict. There are fears among contractors over the future cost and availability of bid bonds, which contractors lodge with clients as a financial pledge to meet the terms of a contract, such as the completion date.
In January, Dubai-based developer Meydan cancelled its contract with the joint venture of the local Arabtec Construction and Malaysia’s WCT to build its AED4.6bn grandstand project at Dubai’s Nad al-Sheba racecourse and tried to cash in the firms’ performance bid bond.
The move sent shockwaves through the sector, raising fears among contractors that they could face a string of potentially costly disputes with contractors over project delays, and that the banks would adopt a more cautious approach towards their exposure to real estate and construction contractors.
Dubai-based contractors say banks are starting to refuse to issue bid bonds, and expect that performance bonds will be increasingly difficult to secure. “We cannot get bid bonds anymore,” says the Dubai-based contractor. “Most contractors will tell you the same.”
Managing the change in costs is not going to be easy for contractors. The danger for general contractors is that they may get stuck between clients that expect lower costs and subcontractors and suppliers that still have full order books and are unwilling to drop their prices.
“Subcontractors are going to be busy for the next 12 months fitting out structures that we have just finished,” says the Dubai-based contractor. “So they will still be pricing high for jobs that start in 2009, and to win work we will have to give the client the price he expects.”
Major Gulf project delays since late December 2008
21 December: Anara tower
The local Tameer Holding becomes the latest developer in Dubai to shelve a major project by putting the 125-storey tower scheme on hold. The building was to have been used as Tameer’s headquarters, and the developer had intended to use the development’s design as a blueprint to build tower developments in all major cities in the Gulf.
21 December: Dubai Properties projects
The local developer suspends work on three of its projects in Dubai. Work is temporarily stopped on the AED550m ($149m) contract to build 12 five-story residential buildings on the AED55bn Mudon development in Dubailand. The Zaha Hadid-designed Signature Towers at Business Bay is also no longer going ahead, according to bidders.
11 January: Dubai Towers Jeddah
The SR2bn ($534m) project is put on hold while the developer, Sama Dubai, continues to rein in its development plans. One source close to the project tells MEED it is on hold indefinitely. Another source, the project’s architect, UK-based RMJM, is told by the client to cease work on the scheme. The development was set to cover 500,000 square metres and was scheduled for completion by 2011.
11 January: One Zabeel and Meydan racecourse grandstand
Contractors who were working on the One Zabeel project and Meydan grandstand have their contracts terminated, signalling that the Dubai government has adopted a new strategy of delaying construction projects that are already under way. The estimated AED3bn One Zabeel project was launched by the Investment Corporation of Dubai in June 2008. Construction work on the project, which would include offices, residences, retail outlets as well as a five-star hotel, had already started. However, the contract for the enabling works with the local Dutch Foundations is understood to have been cancelled.
11 January: Dubai Health Care City towers
Construction is halted on two mixed-use towers after the client, Tatweer, instructs the contractor to stop work. The local Al-Basti & Muktha was awarded the AED850m contract to build the towers in 2007. The structural work had been mostly completed.
19 January: Dubai Exhibition City project
Construction is suspended on the $450m scheme. The joint venture of South Korea’s Samsung Corporation and Turkey’s Baytur was awarded the construction contract in January 2008. About 30 per cent of the work had been completed.
20 January: Al-Salam Resort
Work is stopped on Sama Dubai’s Bahrain project. The $550m contract to build the hotel resort and conference centre had been awarded to the South African/local joint venture of Murray & Roberts Contractors (Middle East) and Nass Contracting, and work was progressing on site. South Africa’s DSA is the architect. UK-based WSP is the consultant.
All dates refer to when the story was first reported in MEED or on MEED.com.