Dubai launched its most expensive project to date on 12 April. The AED200bn ($54bn) Mohammed bin Rashid Garden City is twice the cost of the AED100bn Bawadi project that was launched in 2006, which at the time dwarfed all existing projects including the three Palm islands, Business Bay and Dubai Marina.

Covering an area of 88 square kilometres, Garden City is undoubtedly a massive undertaking, but it also demonstrates how projects are having a top-down effect on the construction industry, causing prices to spiral out of control.

Almost every year, Dubai launches at least one major masterplanned project. In 2003, it was The World and Dubailand, while 2004 was a bumper year with Business Bay, Dubai Waterfront and the Palm Deira. The following year was quieter, but in 2006 it was back with Bawadi, and in 2007 with Meydan Racecourse City and a relaunched Arabian Canal. This year, it has already launched the Khor City cultural development and Mohammed bin Rashid Garden City.

Outstripping supply

With billions of dollars worth of construction work piled onto the project mountain each year, demand will always outstrip supply, and in extreme cases create shortages. Although cement grinding capacity across the federation is expected to grow by 51 per cent this year to 35.4 million tonnes a year (t/y), followed by 14 per cent growth in 2009 to 40.5 million t/y, shortages continue.

In early March, cement shortages occurred when plants in the northern emirates shut down for maintenance. “Some contractors have suffered with this,” says one Dubai-based contractor. “I have heard of people only receiving 40 per cent of the deliveries they have ordered.”

The government is trying to help. In mid-March, it exempted cement and rebar (reinforcement steel bars) from import duty until further notice across the federation. Although contractors do not expect the measure to soften prices, most agree it will help prevent shortages by inc-reasing the volume of materials in the market.

While the lifting of import taxes has given the market some optimism for the future, the ban on cement exports by the Egyptian gov-ernment has dampened this mood as analysts predict the price of bulk and bagged cement will continue to rise from their current levels of AED450-470 a tonne and AED600 a tonne respectively.

The price of rebar is also expected to increase. Although rebar prices are determined by the international market, they are now up to AED3,750 a tonne, and are expected to cross the AED4,000 a tonne mark in the coming weeks. As a result, contractors expecting further increases are pricing using rates of more than AED4,000 a tonne.

Basic raw materials, together with equipment prices, specialist materials, labour and staff wages, fuel and transportation rates, are causing construction costs to rise every month. Unlike previous years, when cost increases were still perceived as temporary, clients, consultants and contractors are resigned to the fact that rising costs are here to stay.

“There is always the odd client who says costs will come down, but generally everyone now accepts that building cost inflation is running somewhere between 1.25 per cent and 1.5 per cent a month,” says one UK-based cost consultant operating in the region.

In some sectors, inflation is having a dramatic impact on prices. Construction costs for office and residential buildings are AED6,000-6,500 a square metre, a 50 per cent increase on 18 months ago. Villa construction costs have increased even more. A tender for a villa package in 2005 was priced at AED3,400 a sq m; today villas are priced at AED6,200-AED7,000 a sq m - roughly double the construction costs of three years ago. Hotels are also approaching AED7,000 a sq m. “We received a tender for a five-star hotel, and although that was a little on the high side, it was priced at AED7,500 a sq m,” says the cost consultant.

Dubai is not the only culprit. Cost inflation has taken hold in other emirates and across the region. Costs across the federation are now close to being uniform. Since 2005, Abu Dhabi has begun to create its own project bank with schemes such as the AED47bn Al-Raha Beach, AED100bn Reem Island, AED146bn Yas island, and the AED100bn Saadiyat island.

The northern emirates are playing a similar game. They plan to more than double their populations with projects such as Nujoom islands, Salam City, Emirates City, Ajman Marina, the $13.6bn Al-Zorah, Marjan island, and Mina al-Arab.

Prices in Abu Dhabi are comparable with Dubai, with prices for large, mixed-use schemes coming in at more than AED6,000 a sq m. In the northern emirates, where construction costs are typically lower than in Dubai, prices are also creeping up, but remain lower the further north you travel. “I have recently completed two tender reports: one for a project in Abu Dhabi, the other for a scheme in Sharjah, and both were using similar prices,” says the cost consultant.

Although the UAE is the most active market in the region, the cost constraints in Qatar are even more severe and towers are typically priced in the QR5,500-7,500 a sq m range for shell and core, while more complex projects such as hotels can reach QR10,000 a sq m.

“Qatar’s construction industry experiences similar supply chain problems to those in the UAE,” says Nigel Couper, Qatar branch resident manager for UK construction consultant Northcroft Middle East. “In comparison, Qatar has a less extensive manufacturing base and less locally available raw constituents of basic building materials such as cement and aggregate, which comes from the northern emirates.

“It is therefore more reliant on imports of labour, equipment and materials, and is exposed to the associated cost escalation and difficulties in securing suitable supplies. Qatar used to be a net exporter of reinforcing steel; today the government has reduced the import duties on steel to help meet its local demand.”

Like the UAE, Qatar has experienced cement shortages over the past year and, as an importer of cement, was affected by the shutdowns in the northern emirates in March. The state has also endured shortages of washed sand, and costs across the board have risen at a rate of about 2 per cent a month.

“Last year, we were predicting about 2 per cent a month increases in tender prices,” says Couper. “We are looking at a similar level this year.”

For raw materials, the government is trying to help by signing agreements with countries such as India and Pakistan, which have spare capacity, while at the same time encouraging local producers to increase their capacity.

Qatar National Cement Company plans to boost its cement production by commissioning two mills within three months. Located at Umm Bab, the mills will have a combined capacity of 5,500 tonnes a day (t/d) of cement.

Import reliance

For aggregate, Qatar is almost completely reliant on imports, and plans to expand the gabbro import facility at Mesaieed are advancing, while bids from two contracting groups are being evaluated by the client, Qatar Petroleum.

But despite these advances, local logistical issues remain. Increasing fuel prices and transport restrictions on Doha’s road network mean that transportation costs have effectively doubled. The authorities are now enforcing a longstanding law that limits the weight of trucks to 45 tonnes. In the past, this was overlooked and suppliers loaded trucks up to 55 tonnes.

Rising costs are also having an impact in Saudi Arabia, where the volume of planned projects has grown exponentially over the past 18 months.

The kingdom has access to more natural resources and has more production capacity than the rest of the Gulf, particularly for cement, where the market is expecting a period of oversupply as producers wait for projects to begin construction.

Nevertheless, the volume of work under way is beginning to have an effect on prices, and clients have found that when they issue tenders, cost data quickly becomes out of date. “The budgets used do not consider the significant increases in almost every cost component, not to forget the eroded purchase power of the dollar and therefore the Saudi riyal,” says one contractor in the Eastern Province.

The result is that projects are put on hold as budgets are revisited. Contractors are left hoping that clients will incorporate expected cost increases in tenders so that cost forecasts are more realistic in the future.

Key fact:

The largest cost increase in the past 12 months was for diesel, which soared by up to 86 per cent.