The good, the bad and the ugly of Dubai's projects inertia

17 January 2017

Emirate typically delivers about 35 per cent of the residential units that it plans to complete each year

It is an eye-catching statistic: Dubai typically delivers about 35 per cent of the residential units that it plans to complete each year.

The statistic, which was revealed by US property consultant JLL in a briefing on UAE property market, was presented as a good thing if you want property prices to start rising again. With a market that has now endured a 15 per cent drop in sales prices from its 2014 peak, the statistic means that the prospect of the market being flooded with new supply - and further downward pressure on prices - was less likely that the number of planned completions for 2017 suggests.

For the construction industry the statistic is a less encouraging. Dubai has a talent for launching new projects. The big government-controlled developers lead the way, but others follow, and even in a market that is downbeat like the one today, ambitious launches are still a regular occurrence. The problem is that this statistic shows that the market should be careful not to be dazzled by the hype - in most case these projects will not be delivered on time, or worse, not at all.

This project inertia is supported by data that was recently analysed by MEED on construction project completion times in Dubai. On average, projects that are valued at over $100m, take over 4 years to complete, which far exceeds the scheduled completion time that most contracts are given when they are first signed.

Delays are bad because they normally indicate that a project has failed to result in a positive outcome for all those involved. The developer may have to pay for the additional time and wait longer to generate revenue from its new asset, while the contractor may incur additional costs that may not be fully compensated for as a result of the extension of time.

Bad is not the worst case scenario. Delays get really ugly when projects are put on hold, and many legacy projects from the 2003-08 real estate boom remain in an extended limbo period with investors and developers locked in litigation as they attempt to exit the project in a satisfactory manner.

Delayed projects can also be ugly for those tasked with delivery. Delays mean claims are more likely from contractors working on a project heightening the likelihood of dispute, which if the process drags on for an extended period of time, is not beneficial to any party involved.

In order to avoid these pitfalls investors and contractors have become increasingly cautious with the companies that they invest in or work for. This has strengthened the position of the government controlled developers, which are generally perceived by the market place to have a better track record when it comes to delivery.

The strategy is not a new one. In 2008 as the global financial crisis began to take its toll on markets in North America and Europe contractors, especially international ones, began to concentrate their business development efforts on Dubai government-controlled entities as they were perceived to be less risky.

In late 2008 and 2009 that assumption proved to be a misguided one. The hope is that this time around Dubai will deliver when it matters.

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