Prices of construction materials were falling around the region as 2009 drew to a close and the negative economic climate continued to subdue demand for real estate.
The latest costs statistics from UK-based construction consultant Davis Langdon show prices for cement in the region now stand at pre-2005 levels. But there are signs that prices may be bottoming out in the UAE.
Since the start of 2010, the average price of reinforcement steel bar (rebar) appears to have stabilised in the UAE, rising to $545 a tonne in February from $538 a tonne in October 2009. Ready-mix concrete prices have also strengthened in the emirates, climbing to $94 a tonne in February from $91.5 a tonne in October. The cost of aggregates, meanwhile, has remained static at $15.5 a tonne over the past five months and the rate of decrease in cement prices has slowed, falling just 2.8 per cent between October 2009 and February 2010 to settle at $3.7 a bag, after dropping from $6.8 to $4.1 between December 2008 and June 2009.
As the first market in the region to feel the impact of the global financial crisis that unfolded in the final quarter of 2008, the price of construction materials decreased faster in the UAE than elsewhere.
Prices for cement in the region now stand at pre-2005 levels
Some of the earliest projects to be put on hold were megaprojects in Dubai. In October 2008, MEED reported that dredging work on the Palm Deira offshore island project, being developed by state-owned property firm Nakheel, had halted. Launched in late 2004, the Palm Deira project was the largest of the three palm island archipelagos planned for Dubai.
In November 2008, construction activity was also halted on Nakheel’s Dubai Waterfront project to create a new city of 1.5 million people and Dubai’s $54bn Bawadi entertainment zone was also shelved.
Other GCC countries believed they would escape unscathed from the effects of the economic crisis and positive sentiment buoyed materials prices in those markets for a few months longer. Although materials costs in the UAE have started to firm since the start of this year, cement and ready-mix concrete in the rest of the Gulf have continued to undergo a price correction.
Saudi Arabia has seen some of the sharpest declines in the price of construction materials. The cost of a 50kg bag of cement bought in the kingdom was stable between December 2008 and June 2009 when it was $6.4 a bag, but the price has fallen by more than 50 per cent to reach $3.1 a bag in February.
The price of rebar in the UAE plummeted in the latter half of 2008, dropping some 64 per cent between July and December. During the same period, rebar prices fell by 53 per cent in Saudi Arabia and by 42 per cent in Bahrain, but remained static in Qatar. Since December 2009 rebar prices have dropped by more than 25 per cent in Saudi Arabia, by 45 per cent in Bahrain, and by 43 per cent in Qatar. However, in the UAE the average price of rebar in February 2010 was 36 per cent higher than it was in December 2009.
Labour costs have also decreased over the past 18 months. Salaries for project managers in the Middle East increased steeply between mid-2006 and mid-2008 as the construction market boomed – the monthly remuneration for an expatriate project manager in the UAE jumped from $11,000 to reach $21,000 in July 2008.
But labour costs have eased in most markets since early 2009, with the exception of Qatar, whose economy outperformed the rest of the region last year, with an estimated rise in gross domestic product of 9 per cent.
The average cost of employing an expatriate project manager in Doha remains $15,070 a month, as it was in July 2008. By contrast, expatriate project managers working in the UAE have seen their monthly salaries fall by 29 per cent since July 2008 to $15,000 in February this year. Nonetheless salaries are still significantly higher than they were in mid-2005, when a UAE-based project manager earned about $7,500 a month.
Lebanon has not been exosed to tge extreme price swings experienced in Gulf states
Lebanon has not been exposed to the extreme price swings in materials costs and labour experienced in the Gulf states as the growth of its construction sector has been more measured.
Construction projects in the country have centred on the much-needed redevelopment of the Beirut Central District – the commercial centre of the Lebanese capital – by the local firm Solidere, as well as government infrastructure projects. Prices of aggregate and cement in particular have not seen significant movement since their increases in 2003-2006.
The exception has been the cost of ready-mix concrete, which has fallen 29 per cent since June 2009. Average ready-mix concrete prices in Lebanon in February this year stood at $60 a tonne. However, rebar prices have been firming there since March 2009, rising 15 per cent in the period to February 2010 to $630 a tonne.
Labour costs in Lebanon have also remained stable over the past three years, despite the regional boom in construction and the subsequent widespread collapse of the real estate market. According to Davis Langdon, local and expatriate project managers working in Lebanon today take home the same monthly salary as they did in December 2006. A local project manager earns an average of $4,500 a month, while an expatriate project manager has a monthly income of about $8,000.
Lower project costs
Although suppliers of construction materials will have seen profits decline in 2009 as a result of the price falls, the drop in materials and labour costs are welcome news for the rest of the industry, which has struggled with spiralling project costs in recent years.
Average project costs have also stabilised in the UAE. The cost of building 1 square metre of gross leasable area on a five-star hotel project fell by 8.38 per cent between March-June 2009 to between $3,000 and $4,100 and has remained unchanged since then. In Qatar, the average cost of the same project fell by about 5 per cent since October 2009 to $2,250-3,300 a square metre.
Lower materials prices and project costs will not be sufficient to bring about a revival in the region’s construction industry.
A pick-up in demand for property and an improvement in the banking and finance sector is also needed. But companies still pushing ahead with developments and governments launching new infrastructure projects can expect to make significant cost savings this year.