The honeymoon is over. As construction prices soar and labour shortages wreak havoc on schedules, the property industry is facing increasing challenges to deliver on time. And with some companies unable to keep up, the industry is set for a series of consolidations and high-profile failures in the years to come, according to analysts and industry professionals. The forest of small-scale development groups within larger companies will be trimmed back, they say, and some of the best-known names in the business will have to shift their priorities from "marketing" to "delivery". Only the strongest will survive.
A senior official at Emaar said that the bigger players would be able to weather the storm differently. "We all want to stay on schedule but there are a lot of moving parts that have to come together. Larger companies have more options." The demise last week of National Properties - a development arm of National Bonds Corporation - is cited as what may be the first of many consolidations of smaller, struggling property companies within more established ones. National Bonds was set up in 2006 as a Sharia-compliant savings scheme for Emirati nationals. The company went on to create the property development group to provide "distinctive homes and lifestyle options" for the "multinational community", according to press releases at the time.
The group launched two projects: Skycourts, a 2,300-apartment building in Dubailand, and Flamingo Creek, a collection of 244 villas and townhouses at the Lagoons in Dubai. Though both sold out, before last week's developments, it had yet to deliver a single unit. Then, just last week, the parent company said it had shifted its development operations to Deyaar Development - one of the largest developers in Dubai. Adel Lootah, the former chief exec of National Properties, had stepped down from his post two months previously.
Mohammed Qasim al Ali, the chief executive of National Bonds, said that the agreement "represents an alignment of resources and core competencies between two of the UAE's leading institutions". National Properties will now be a shell company that will own any properties or investments held by National Bonds but it will no longer be a developer itself. The consolidation is "part of a much broader trend which we characterise as a flight to quality", said Blair Hagkull, the managing director of the regional office of Jones Lang Lasalle.
"We anticipate in the remainder of this year, and the next few years, a greater emphasis on delivery," Mr Hagkull said. "People are looking for certainty with respect to completion, and it's the market leaders that are going to be able to deliver". He said "flight to quality" also meant the downfall of companies that had become overextended and unable to meet their construction deadlines. "There will be winners and losers across the many markets," Mr Hagkull said. "This market is becoming much more mature. A focus on quality and delivery will emerge as key points of differentiation."
Damac Properties, for instance, has recently reversed its advertising strategy to emphasise a commitment to finishing the buildings it has started. The change started after an incident in April when it sought to cancel its Palm Springs project on Palm Jebel Ali and pay back buyers with interest. Investors caused an uproar and eventually, after discusstions with the Real Estate Regulatory Authority, Damac said it would build the project after all.
Now the company's advertising around Abu Dhabi and Dubai says that Damac will deliver 2,300 apartments by the year's end and another 7,100 next year and in 2010. It is a marked contrast to previous advertising campaigns that were famous for over-the-top giveaways, such as upmarket cars for purchasers and the free use of a yacht. Hussain Sajwani, the chairman and founder of Damac Holdings, said in a press release in May that "the property boom in the region, especially Dubai, has far exceeded the region's capabilities to develop these projects on time".
"The region has been facing a steep challenge on delivery of projects due to a shortage of quality contractors and the rising cost of construction material," he said. "At Damac, we are determined to ensure that we go all the way to get our customers their homes as quickly as possible." Even if a company began having problems in the market and could no longer afford to build its projects, it is likely the Dubai government would step in and take over the buildings, said Christopher Davidson, a professor at Durham University and the author of Dubai: The Vulnerability of Success.
"Real estate ties the whole economy together in Dubai," he said. "I can't help but think that the ruling family's various investment vehicles or companies would step in and make sure things are finished. You'll never find a ghost town in Dubai." The costs of building in the Gulf region increased by about 30 per cent last year and another 50 per cent in the first six months of this year, a senior developer said earlier this month. A tonne of steel reinforcement bar (rebar) now costs about Dh5,693 (US$1,550), a rise of 35 per cent since May. Inflation in the UAE is the second-highest in the GCC, hitting 11.1 per cent last year.
A spokesman at an Abu Dhabi contractor put it bluntly: "Three years ago a gallon of petrol was around Dh4.20 and now it's almost four times this. But the cost of steel and cement hurts us a lot - more than transportation costs. It is an unusual and quite extreme situation at the moment, but then all companies are fighting the same battle, so we are equal." Perhaps the greatest challenge, though, is an increasingly acute shortage of labour - both skilled and unskilled. It is estimated that there are about 700,000 construction workers in the UAE but many more are needed to complete the projects that have been announced. Wahid Attalla, a member of the board of Rakeen, a property developer backed by the Ras al Khaimah Government, said earlier this month that the northern emirate alone would need another 200,000 workers to complete the projects planned there.
And with economic conditions improving in the countries where construction workers hail from, there is likely to be a wider exodus back to their homelands, according to a research report from Al Mal Capital last week. "Labour shortages and rising labour costs have consumed the construction sector in recent months, squeezing margins of the smaller contractors," the report said. A worker can earn about 3,000 to 5,000 rupees in the Gulf, while jobs in India are offering in the 10,000 Indian rupee range, the report said. India's Construction Industry Development Council (CIDC), reported recently that wages would rise by 35 to 40 per cent in the coming year because of a 1.5m shortfall in workers there. While recruitment companies in India say that they are having trouble filling their quotas of UAE working visas for new labouring staff, an increasing number of Indians are returning home with in-demand technical skills that they have learnt in the UAE.
While the playing field may be level for developers here, some companies are better equipped to make it through successfully. Larger developers like Aldar and Emaar are able to buy futures on materials, set up joint ventures with suppliers and contractors and build better quality housing for construction workers. Emaar recently partnered with a construction division of Samsung, the Korean engineering giant, and has an agreement with Arabtec that guarantees its ability to meet deadlines. Aldar has joint ventures with Laing O'Rourke and the concrete supplier Readymix. And Nakheel, which is building on 50 per cent of Dubai's land bank, has contractor agreements with Samsung, Dutco Balfour Beatty and Wade Adams.
"We formulate deals with contractors that give us better protection from cost escalation," said Chris O'Donnell, Nakheel's chief executive. "We've spent a lot of time formalising 'locked-in' agreements for building materials such as steel. If you 'lock-in' with contractors early enough the price escalation risk can be removed." Still, the consensus among property experts and analysts is that delivery is the UAE's greatest challenge.
And it is something that gives William Browder, the head of the US$1.8bn (Dh6.6bn) Hermitage Global Fund which has $600m invested in the UAE, a reason to worry. "There are such ambitious plans and there is still a lot of skill needed to get it done," he said. "My biggest concern is about the timetable." * With reporting by Angela Giuffrida @Email:firstname.lastname@example.org