In May 2002, Sheikh Mohammed bin Rashid al-Maktoum, then crown prince of Dubai and now its ruler, issued a decree allowing foreigners to own freehold properties in the emirate. This acted as a catalyst for development in the UAE and the rest of the region. The value of projects awarded from 2002 to 2003 in the UAE increased by more than 960 per cent, from just above $400m in 2002 to $5bn in 2003, according to regional projects tracker MEED Projects.

The immediate forecast for the UAE shows a marginal decrease of 1.3 per cent in the Tender Price Index during 2012

The sudden demand for properties and the race that ensued between newly created, state-backed developers keen to capitalise on this market sent construction costs rocketing. The MEED Cost Indices (MCI) Tender Price Index shows the cost of construction rose by 90 per cent from 2001 to its peak in early 2009.

Project boom

During this same period, oil prices were rising steadily, breaking through the $100 a barrel mark in March 2008 from only $26 in 2001, according to the World Bank. This generated substantial revenues for the government. National accounts show that UAE net income rose from $27bn in 2001 to $78bn in 2008, resulting in account surpluses that peaked at $22bn in 2008 and enabled huge investment in state-of-the-art infrastructure. Projects became larger and more elaborate, with developers tapping into a seemingly endless supply of credit from investors.

But on 15 September 2008, US bank Lehman Brothers filed for bankruptcy, marking the start of a global financial crisis. At first, investors believed Dubai and the UAE would be insulated against the credit crunch, but within months signs began to emerge that this would not be the case. On 24 October 2008, MEED revealed that developer Nakheel had instructed contractors to stop work on its Palm Deira project. Throughout 2009 a domino effect followed as banks stopped lending, projects halted and real estate transactions dried up.

Abu Dhabi, which had planned its real estate growth more conservatively, pushed on with major projects commissioned by state-backed developers Aldar, Mubadala Development Company and the Tourism Development and Investment Company. However, by 2010 it became apparent that Abu Dhabi too was delaying both infrastructure and real estate schemes. Contract awards expected throughout 2010 were not made and by 2011 many major projects that had been under way had ground to a halt. The entire UAE construction market was now suffering the effects of a global liquidity crunch. The MCI index shows that following a peak in early 2009, tender prices were back down to 2006 levels by 2011.

MCI’s Building Block Index tracks costs for 36 key items underlying the tender price, including materials, labour, plant and fuel. It indicates the price movements for major items such as concrete for foundations, reinforcement steel, formwork, slabs and soffits. Since tender prices consider not only the material costs but also the price of placing and transporting materials, the index has tracked commodity items using this compounded rate as used in tender information.

It is clear all of these materials have witnessed extreme volatility during the past decade, with the most extreme changes appearing between 2007 and 2009. This corresponded to global economic turmoil and changing dynamics in import and export markets. For example, the world’s largest steel-producing country, China, saw demand from core markets such as Europe fall away. As a result of this and increasing steel production rates in other countries, the global reinforcement bar (rebar) price plummeted from its peak of $1,135 a tonne in August 2008 to $422 a tonne in April 2009.

Material price trends

The UAE’s reliance on steel imports saw the same price trends emerge with rebar prices mirroring the global cost collapse. This was further exacerbated by mass stockpiling in 2007 and early 2008, which created a surplus just as the price dropped. As producers reduced output in response to the new market conditions, the global price swung back up to $607 a tonne by May 2010, almost 44 per cent higher than its low 13 months earlier. Prices in the UAE also began to recover.

The cost of cement and placed concrete rose rapidly early in the construction boom as demand grew, but regulation in the UAE contained the pace at which prices were allowed to increase. At the same time, a number of cement plants were constructed and commissioned throughout the UAE. This diversified production away from the traditional cement centre of Ras al-Khaimah and, by the end of 2011, the UAE’s total production capacity was 16 million tonnes a year (t/y), equivalent to about 40 million t/y of concrete. As capacity continued to increase, demand fell drastically in 2009, with prices reacting accordingly.

It became clear from tender information that the commodities themselves had a greater impact on rates than the labour costs involved in placing them. The reliance on readily available, low-cost workers from India and Pakistan kept prices low. However, greater movements were observed in the rates charged for professionals such as engineers and project managers.

Looking at the installed cost of structural steel, rebar and concrete, it is safe to say that market competition has resulted not only in a reduction of the average unit cost (with the exception of rebar, which saw a slight increase as a result of rising global steel prices), but also in a reduction in the spread.

By analysing the key influencing factors that drove the tender price index from 2001-11, MCI spots trends and predicts how these factors are likely to change in the coming five years. It then uses these variables to show how the index may move and attempts to give greater certainty to developers, contractors and consultants who are planning and delivering projects.

Looking at the predicted cash flow across the MEED database, it is clear that for current demand in the UAE to hold, projects now under construction and in the bidding, design and study phases need to proceed as planned. If this does not happen, demand will drop, resulting in a downward pressure on costs.

The picture for Qatar is significantly different. Although cash flow from projects under construction is reducing, projects in the bidding phase will contribute to a stable demand for resources. Doha is preparing to fast-track a series of projects to allow the country to bid for the 2020 Olympic Games. This will result in the schedules of projects currently in the design and study phases being brought forward.

Saudi Arabia is by far the largest market in the Middle East. MCI predicts the country will see unprecedented growth over the next few years. The forecast cash flow will remain flat as projects under construction are completed and those in the bidding phase replace them as drivers of demand.

The immediate forecast for the UAE shows a marginal decrease of 1.3 per cent in the Tender Price Index (TPI) in 2012. This is predominately driven by the continuing global economic turmoil and shortage of liquidity that will negatively affect demand in the real estate sector. In turn, this will keep demand for resources, and therefore construction costs, down.

Index growth

From 2013, there should be a moderate recovery in the UAE market with project awards and construction costs potentially starting to increase slightly. There are also likely to be knock-on effects from the increasing investment activity in the neighbouring countries of Saudi Arabia and Qatar. Increased resource demand in local markets should see construction costs rise marginally in the UAE. As a result, the UAE TPI index is expected to climb 3 per cent during 2013. Thereafter, it should show only slight growth, averaging 1.6 per cent a year from 2014 to 2017, as infrastructure spending remains steady and resource supply continues to outstrip demand.

In Qatar, the TPI index is expected to rise 3.5 per cent in 2013 in anticipation of an impending construction boom, marginally higher than the UAE. Average index growth will exceed 5 per cent a year as a result of significant infrastructure investment driven by the government as it prepares for the 2020 Olympic bid and 2022 World Cup.

Project development lifecycle schedules range from 36 to 60 months, and the index suggest that investors and developers with projects in the planning stages would benefit from low construction costs if they can move ahead with schemes in the coming 12 months.