Nakheel’s plans to start work on new projects next year could stall as contractors in Dubai say they would only be prepared to work again for the government-owned developer if it provides payment guarantees.

Construction companies in Dubai are now expecting Nakheel to tender new projects after the developer said in late October that it is planning to expand its Dragon Mart and Ibn Battuta shopping malls, and build five other new shopping centres.

The projects are still in the design stage and Nakheel could start approaching contractors for the projects in 2011.

Contractors are cautious about working for Nakheel again. Many of Dubai’s construction companies were working for the developer during the property crash in late 2008. Since then Nakheel has put projects on hold and not paid its contractors for work already completed. Contractors are now waiting to finalise repayment plans as part of a debt restructuring deal under way at the developer.

It all depends on the payment guarantees. We would want a letter of credit from the banks, or upfront payments

Source at international contractor

By early October, the firm said it had paid $926m to trade creditors to cover unpaid bills, and further payments would be made through a five-year sukuk issued to creditors of around $3bn. The sukuk is due to be in place by early 2011.

“At the moment I don’t think we would want to participate [in a new Nakheel project], we are still finalising outstanding issues from previous projects,” says an Asian contractor. “Once the sukuk is finalised, we may consider it.”

Other contractors say they would be prepared to work for the developer again if there are guarantees in place to make sure they get paid. “It all depends on the payment guarantees,” says an international contractor. “We would want a letter of credit from the banks, or upfront payments.”

Another source at an international contractor says it would have several demands. “We would not work for them unless they were prepared to pay a large advanced payment and could offer state-backed payment guarantees,” says the source.

Local contractors without as many options for work in other markets, would also want payment guarantees, but accept there may not be many other new projects to work on in Dubai in the coming years. A payment guarantee may also not avoid new debt problems emerging. This year there has been just $6.1bn of construction contract awards in Dubai, down from $33.9bn in 2008.

“We would need a few guarantees, although they are worthless,” says a local contractor. “We probably would work for them again in desperation.”

Contractors that did not work for Nakheel before the property crash are still not prepared to work for the developer. “It is a total no-go for us. Even back in the good days we discounted them as a potential client,” says a regional contractor.

“For us their business model never made any sense and the fact they’re not listed removes the element of proper governance.”

The contractors’ sentiment echoes the concerns raised in the financial sector. Many banks are reluctant to put more cash into real estate anywhere in the region, let alone Dubai. Any future loans are also expected to have to be secured against cash flows, or feature some kind of guarantee. In October Nakheel repaid a $1.2bn debt, secured by the revenue from property sales. It could prove to be a model for future fundraising by Nakheel in the future, and could also be used to assure contractors that they will be paid.

When asked if Nakheel will be offering payment guarantees for future contracts, its spokeswoman said: “Our transactions with our partners the contractors are of a confidential nature.”

With multi-billion projects such as the Palm islands, Nakheel was the region’s largest construction client before the property crash. According to regional projects tracker MEED Projects, it awarded $8.3bn of construction contracts in 2008. Most of these schemes, such as the $790m Trump International Hotel & Tower are now on hold.

Nakheel has recently restarted work on residential schemes that have delivery commitments to customers. In mid-October, the developer said construction work has restarted on its Al-Furjan residential development next to Jebel Ali Village, together with the Phase 15 of the Emirati Cluster at International City (MEED 23:9:10).