Dubai contractors left licking their wounds

18 November 2010

Dubai is no longer a source of new contract awards for construction companies, but it is still an important base for those looking for opportunities further afield

Key fact

Construction projects worth $356bn have been put on hold in Dubai since 2008 and $27bn-worth cancelled

Source: MEED Projects

An international contractor jokes: “Dubai! Where’s that?” The sarcasm may at first seem ridiculous, given the position Dubai has held for the past decade as the world’s most exciting construction market. But it reflects how dramatically his order book has changed over the past three years. In 2007, more than 80 per cent of his turnover from the Middle East came from Dubai. Today, the emirate accounts for none, and he does not expect that to change any time soon.

The international contractor’s experience is not unique. His competitors have endured a similar decline in activity. Since late 2008, all the major players have lost or completed more work than they have won. The good times of 2004-08 have been erased from the company accounts, as most are owed millions of dollars.

Market crash

The scale of the collapse of the Dubai construction market has been spectacular. According to regional projects tracker MEED Projects, $356bn of projects have been put on hold in the emirate since 2008 and another $27bn of schemes have been cancelled. Added together, this is nearly three times the value of all the contracts awarded between 2004 and 2008.

“There is nothing in the pipeline. Firms that were designing skyscrapers are now working on villas”

Middle East regional contractor

When the crash came, private real-estate projects were the most vulnerable. The private sector depended on property sales to fund development and it was the first to be affected by the economic crisis. High-profile real-estate projects, such as the $790m Trump International Tower and Hotel, were scrapped within months of the collapse in property prices. Many more projects have quietly slowed down. In some cases work effectively stopped, as developers could only afford to make minimum payments to contractors. One contractor was told in early 2009 to reduce monthly spending on a project to AED1m ($272,000) from AED30m, meaning the project would be completed in 60 years, rather than two.

By late 2009, the contagion had spread to the public sector. Government infrastructure projects began to stall due to a lack of cash flow at agencies such as the Roads & Transport Authority (RTA) and Dubai Electricity & Water Authority.

In October 2009, the RTA began asking contractors to propose funding solutions for the Dubai Metro and Al-Sufouh Tram schemes. Earlier this year, a deal was struck with Japanese investors and banks for the metro, but the French/Belgian consortium building the tram stopped work on the project in June.

For contractors, projects that are put on hold or cancelled have a major impact on order backlogs. They frequently mean payment problems too; if a client can no longer afford to continue developing a scheme then it is likely it cannot pay its contractors either. In early 2009, the larger construction companies in Dubai claimed they were owed up to $100m by Dubai clients - most of them government-related.

State-owned property developer Nakheel was one of the worst offenders and this year it has had to restructure $25bn of debt. Although most of the restructuring involved dealing with financial institutions, the developer has also had to offer a payment plan for its trade creditors, which includes construction companies.

In early October, the first signs that contractors were starting to be paid slowly began to emerge. Nakheel said it had paid $926m to trade creditors to cover unpaid bills and further payments would be made through a five-year sukuk issue of about $3bn. The sukuk is due to be in place by early 2011.

Contractors ‘bullied’

“We have signed up for the sukuk and we are waiting for it to be finalised,” says a Dubai-based contractor. “We feel bullied because in the end we didn’t have much choice. We just hope that we do eventually get paid. The process has not been very transparent, so it has been difficult for us to tell what is going on.”

Despite concerns about transparency, Nakheel’s debt problems have been dealt with more openly than the debts facing other clients in Dubai. Contractors say they are still owed large amounts of money from government and government-related entities, such as Dubai Holding and the RTA, as well as from hundreds of other smaller private real-estate developers that are now effectively bankrupt.

“We are owed money by everyone we were working for,” says a regional contractor. “We are still trying to find a solution, but it is difficult because they say they have no money.”

Until now, contractors have managed to survive by passing on their debts and not paying their suppliers. “Of course we have not being paying subcontractors and suppliers,” a general manager at another Dubai-based contractor says openly. “We haven’t been paid, so how can we pay someone else?”

Firms at the end of the supply chain are left to wrestle with the problem. “All I do now is chase cash,” says the general manager of an equipment supplier in Dubai. “Three months ago, contractors would meet you. They would tell you they cannot pay you, but at least there was dialogue. Today, it is impossible to even get a meeting with some companies. We feel like the door is now shut.”

There are few signs that the suppliers’ predicament is going to change. Contractors have lost money or are waiting for payment on projects they have already worked on, so the only way new cash will enter the supply chain is if contractors take on new projects.

Local market

The problem is that the value of contract awards in Dubai has plummeted; clients can no longer afford to build existing projects, let alone new ones. In 2008, some $33.9bn of contracts were awarded in Dubai. In 2010, there has been just $6.1bn-worth of contract awards.

Tellingly, none of the awards this year are worth more than $500m and all were won by local, rather than international companies.

“There has been little interest in the Dubai market in 2010,” says the international contractor. “There have been very few tenders and the jobs that have been awarded are small. We have to accept it’s a local market right now.”

Contractors expect Dubai to remain a local market for years to come. The public sector has little new work left to do. Dubai’s infrastructure is now nearly completed. It has almost finished the first two lines of the metro. The road network has been massively overhauled and new road projects will now involve minor adjustments and upgrades, rather than the large-scale interchange projects that were built over the past five years.

With a depressed public sector, the big hope is real estate, but, as with government projects, cash flow is a problem. Nakheel and Emaar Properties may have restarted work on projects at Al-Furjan, International City and Downtown that have already been sold, but no new projects will be launched until there is a resurgence in property sales. “We don’t expect any major tenders,” says the regional contractor. “This year there has been nothing and, if you speak to consultants, there is nothing in the pipeline. Firms that were designing skyscrapers three years ago are now working on villas.”

The prognosis for the real-estate sector is not good. Prices remain depressed at 40-50 per cent of 2008 levels. In late October, the region’s most renowned investor, Prince al-Waleed bin-Talal said Dubai’s property prices would continue to fall. He said it would take several years for the market to hit the bottom and start a recovery as the market is oversupplied and new stock continues to be delivered.

With limited options in Dubai, contractors have been forced to look to other markets for work and, after two years of frantic business development, major Dubai-based companies have found success away from home.

“It is important to remember that, during the boom, contractors working in Dubai built up a lot of resources and gained experience on big projects,” says a regional consultant. “That gives them the ability and experience to bid on projects in other markets.”

Just 180 kilometres away, Abu Dhabi has been the most popular destination. It has tendered major projects worth billions of dollars during the past two years and Dubai-based companies have successfully found work in the capital.

For example, Khansaheb Civil Engineering has won work with the Tourism Development & Investment Corporation on Saadiyat Island. Al-Futtaim Carillion has picked up a new headquarters for Abu Dhabi Investment Council, along with work on New York University and UAE University for Mubadala Development Company. Further afield, Al-Naboodah Contracting has won work on the New Doha International airport project in Qatar and Arabtec Construction, through its local affiliate, has won a contract to build 5,000 villas in the Eastern Province of Saudi Arabia.

Regional base

Despite the focus on other markets, Dubai will remain an important part of the region’s construction industry. Dubai-based companies will maintain a presence in the emirate and, just as they did before the real-estate boom, bid on whatever work is available.

Dubai will also continue as the regional headquarters for many international firms. The emirate’s transport links to the region and the rest of the world mean that, for many international companies, it is still the best place to base offsite functions, such as tendering, accounting and administration.

“There’s no talk of us closing down our Dubai office,” says the international contractor. “It’s still our base of operations for the Middle East and it will continue to be.”

Dubai can be an uncomfortable place to live for contractors. Many would prefer to forget the half-finished buildings and other reminders of unpaid bills and what might have been. Ultimately, it is something they will have to get used to. They may be working on projects elsewhere, but they will continue to have a presence in the emirate.

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