For several years, investors have concentrated on building high-rise towers and luxury waterfront properties in their quest to derive the richest returns in the real estate sector, but contractors working in the emirate know that bigger profits lie elsewhere.

“The best real estate investment at the moment is labour camps,” says one Dubai-based contractor. “Demand is strong, availability is low, and landlords can really take advantage of the situation.”

The spike in demand for accommodation has forced costs up by about 50 per cent over the past year. “The standard monthly rate for a room for four to six men is AED4,500 [$1,226]),” says another Dubai-based contractor. “Just one year ago, it was AED3,000 [a month].”

The issue is a serious one for contractors as it drives up labour rates and eats into profit margins. On average, up to 25 per cent of labour costs are for accommodation, another 25 per cent is for add-ons such as transport, food and flights home, with the remaining 50 per cent going on wages. Over the past year, all these costs have increased dramatically.

Workforce expansion

The spike in accommodation rates is a result of the huge influx of labour into the emirate. As the number of projects under way has increased, contractors’ labour forces have doubled in three years, and the biggest firms, such as Arabtec Construction, now employ more than 40,000 men, a figure that is expected to reach 50,000 by the end of 2008.

Arabtec’s experience is not unique. Other companies such as local firms Al-Habtoor Engineering Enterprises, Alec, Al-Naboodah Contracting, Dubai Civil Engineering, Al-Shafar General Contracting, Lebanon’s Arabian Construction Company (ACC) and the local/UK Dutco Balfour Beatty have all experienced similar growth as they take on more and bigger projects. “It is obvious why there is a problem,” says the contractor. “The numbers are so huge the market has struggled to keep up.”

Traditionally, labour in Dubai has been housed in three main areas – Al-Quoz, Sonapur, close to the Sharjah border, and Jebel Ali – but contractors now claim these areas are full. “Jebel Ali has been full since 2004,” says the Dubai-based contractor. “I can remember the last plots being sold off.”

Abu Dhabi is facing similar problems to Dubai as it starts construction on more than $150bn worth of real estate projects planned for the emirate. “We have seen accommodation rates go through the roof over the past two years,” says one Abu Dhabi-based contractor. “Several years ago, we paid AED100-150 a month for a single labourer’s accommodation. Today we are looking at rates of about AED500.”

For contractors working in Dubai and Abu Dhabi, there are two basic options: to rent or to buy. In the past, renting was an attractive option as it did not require as much up-front investment, and the rent could be passed on to the client. Today, more contractors are looking to build their own facilities so they are no longer at the mercy of landlords and, more importantly, to guarantee that they have enough camps.

“There is not enough accommodation so we are trying everything,” says the Abu Dhabi-based contractor. “We are renting and building our own accommodation. Building your own makes sense. Even if you don’t need all of it, you can always rent it out so someone else.”

Moving out

But as with all real estate decisions, location is critical. Dubai and Abu Dhabi are developing fast, and as the emirates focus on high-end residential projects, labour camps are being forced further out of town. Camps are starting to move out of Al-Quoz to make way for redevelopment and the construction of residential areas – the area is currently a mix of residential, labour camps and light industrial facilities. Similarly, the temporary camps in Jebel Ali established by real estate developers such as Nakheel and the Dubai Metro project will make way for large-scale residential developments, such as Nakheel’s Al-Furjan.

Most of the sites available to build camps are now a long way out of town. In Abu Dhabi, the Mafraq area is available, and in Dubai, options such as Al-Faja on the Al-Ain Truck road have been proposed, but these options pose logistical problems for contractors. “The land available is not very attractive,” says the Dubai-based contractor. “Most of it is out of town, and we cannot expect our men to stay on a bus for three hours to get to work. It is inhumane and inefficient.”

For contractors working in Dubai, another option is the northern emirates, but this is only viable for projects at the right end of town. “We use camps in Ajman for projects in Deira and on Sheikh Zayed road, and its takes about 45 minutes to get to and from work,” says the Dubai-based contractor. “We cannot use those camps for jobs in Jebel Ali or Dubai Marina because the journey time would double.”

To help solve the problem, contractors are calling on the government to provide them with land close to development areas where they can build camps to house their men. “We all want to improve the labour situation in the emirates,” says another Dubai contractor. “If we can build new camps close to the projects we are working on, our labour will have good facilities and won’t spend half their days on buses to and from work.”

Although the government has yet to move on the issue, government-controlled private developers such as Abu Dhabi-based Aldar Properties have, by offering contractors land to build camps on or near to their projects. “Aldar has done well at managing this issue,” says the Abu Dhabi-based contractor. “It has given land for contractors to build camp facilities for something like 50,000 men on Yas island, and for its central market redevelopment camps have been established in the nearby Mina area.”

Developers are forcing contractors that use their land to provide more facilities and recreational areas than the basic municipal regulations provide for, but for contractors it means increased costs. “Zonecorp has a string of regulations that you have to abide by if you want to build a camp on its land,” says the Abu Dhabi-based contractor. “If you buy a 100,000-square-metre plot, you have to provide dedicated recreational areas and other amenities, which makes your costs go up.”

Additional costs

Accommodation costs are only part of the problem. Food costs, transportation and other add-ons have all increased over the past 12 months. Transportation costs have soared on the back of rising bus prices and rental charges, together with diesel prices that continue to creep up. Diesel prices alone are said to have increased the cost of operating buses by 70 per cent as prices have risen steadily to $4 a gallon over the past year because of an increase in global crude prices.

Food prices are another problem. Prices for staple items such as rice increased significantly as transportation costs and domestic demand in rice-growing countries such as India and Thailand took hold in 2007.

India has even banned rice exports to ensure there is enough local supply. “The price of rice has doubled,” says the Abu Dhabi-based contractor. “You might think that is not that important, but if you are feeding 20,000 men a day it is a lot of money.”

The rise in add-on costs is in addition to the 20 per cent increase in wages that contractors were forced to give their labourers late last year. The rise followed a series of strikes at major local contractors including Arabtec. Although several issues were raised by workers during these strikes, the main concern was the declining value of the dirham against the US dollar and the home currencies of workers, as it greatly reduced the amount of money they could send home.

After repeated calls for the government to impose a minimum wage, a group of contractors within the UAE Contractors’ Association deci_ded to deal with the issue by agreeing to increase workers’ wages to compensate for rising living costs and currency depreciation. Although there was a degree of altruism with the increase in wages, the end result is that the additional cost, together with increases in accom_modation, transport and food costs, will be passed on to clients in tender prices for new projects.