Builders are unhappy but say it is better than getting nothing.
Contractors become owners as developers hand over properties instead of cash
Construction companies in Dubai are starting to accept completed homes instead of cash for payment from developers as they continue to struggle to collect on debts. Contractors, subcontractors and service providers were badly hit towards the end of 2008 as about 249 projects were cancelled or put on hold, while developers found it hard to get funding.
Little has changed, contractors say, forcing them to take over properties. The use of property for payment was raised in the industry at the beginning of the economic downturn, but such transactions have just started to take place. "It's only emerging now because developers aren't willing to pay," said a senior member of staff at Al Rostamani Pegel, an engineering and construction company, who wished to remain anonymous.
"We've waited for the market to improve and are now considering taking over a number of properties. It's certainly not ideal, but it's better than having nothing or getting into litigation. "But at least you can rent the property out and slowly recover the money." Mohammed Sultan Thani, the assistant director general of the Dubai Land Department, told The National in May that some developers had struck agreements with contractors to give them flats or partial ownership of a building instead of cash.
"Contractors are accepting it," he said. But in an industry that requires cash to keep going, the option is a last resort for contractors, said Brian Evans, the vice president of projects for the Middle East at Aecom, a construction consultancy based in the US. The contractors are taking on properties as prices are falling and sales lag. Further declines are forecast as new developments are completed and hundreds of repossessed homes flood the market.
"If you're a businessman, you're staring at a choice here: you can wait X number of years to get paid or you can take hold of a fixed asset, which you may be able to sell and at least get some money," said Mr Evans. "From a developer's perspective, he's stuck with all this property and has no cash flow, and so you trade off." Imad al Jamal, the vice chairman of the higher technical committee for the UAE Contractors Association, said: "Contractors need cash, not buildings ? but it's very hard."
Still, the option should help reduce the number legal disputes between contractors and developers. Litigation has surged since the onset of the financial crisis, stemming mainly from the inability of developers to pay their bills. The Dubai International Arbitration Centre has said it handled 206 property and construction cases last year compared with 100 in 2008. While Nakheel, the company responsible for a large proportion of Dubai's property development, has started to pay its contractors, problems persist elsewhere.
"There are backlog challenges and other customers that need to pay," said Saud Masud, the head of property research at UBS in Dubai. firstname.lastname@example.org