Fuel prices, the skyrocketing cost of materials and shortage of skilled labour are eroding financial returns.
Inflation surge hammers construction industry
ABU DHABI // Contractors who enjoyed lucrative returns as recently as last year are now being swamped by rising costs that have left many struggling to eke out a profit. Record fuel prices, the skyrocketing cost of building materials and shortages of skilled labour are rapidly eroding financial returns. Al Mazaya Holding, a Kuwaiti property developer, has found that inflation in the GCC led skilled and unskilled labourers to leave the country, resulting in a labour shortage.
The costs of building in the Gulf region increased at an estimated rate of 30 per cent last year alone and a further 50 per cent in the first half of this year, said Salwa Malhas, the executive vice president of Al Mazaya Holding, a Dubai-based developer. A tonne of steel reinforcement bar (rebar) costs about Dh5,693 (US$1,550), up from Dh4,224 in May, mesteel.com reports. In May, the wholesale price of cement was capped by the UAE Ministry of Economy at Dh340 per tonne, up from the previous cap of Dh295 a tonne.
Inflation in the Emirates last year hit 11.1 per cent, second only to Qatar, as the cost of living in the GCC continued to soar. A hike in petrol prices has also meant higher transportation costs for contractors. Some of the largest contractors have been able to sustain their profitability. Arabtec, which is the UAE's biggest construction firm by market value and the only one that is publicly listed, posted a net income increase to Dh231.4 million in the three months to March 31, compared to Dh60.1 million in the same period a year before, while revenue more than doubled to Dh1.9 billion.
Even contractors that have seen profits fall are doing relatively well. "It has been very difficult to source materials, and we have to look to new markets," said a spokesman for an Abu Dhabi-based contractor. "But still, contractors should not be upset if they are earning an 11 or 12 per cent profit margin rather than 15 per cent, as it's still the best region for contractors to earn money." Still, many contractors were going through an unaccustomed squeeze, the spokesman added. Until now, contractors in the region had been "living in paradise", as a building boom stoked demand for their services, he said.
"Three years ago, a gallon of petrol was around Dh4.20, now it's almost four times this," the spokesman said. "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." The hunt for skilled labour has put pressure on contractors to raise salaries. The dearth in skilled labour was compounded last September when an estimated 300,000 illegal construction workers left the country after taking advantage of a three-month amnesty, which gave them the choice to either formalise their status or return home.
Inflationary pressures in the region have also led construction workers elsewhere to stay at home or look for work in countries outside the Gulf region. The overall situation has left developers grappling to find contractors with a large enough workforce to complete projects on time and to the right specification. "We are working out timetables to avoid delays in the delivery of our projects," said Ms Malhas. "Delays in project delivery are not caused by a lack of reliable contractors, but by the inability of those contractors to find skilled labourers, and by the rising cost of building materials. Building material prices have increased by 50 per cent on average, and even more so in the case of certain materials."
Ms Malhas said that the company was expanding into markets where costs had not climbed as much. Working in several markets also helped reduce the risk of being hurt by localised price spikes in materials or labour. "We are implementing strategies for horizontal expansion, such as the establishment of Mazaya Qatar and Mazaya KSA, as well as investing heavily in Oman, Bahrain and other countries." John D'Lima, the general manager of UAE operations at Bahwan Engineering, said the cost of hiring and accommodating workers has been more pronounced since the beginning of this year. "Two years ago, I paid Dh700 for a room for one month, whereas last month I paid Dh5,500," he said. "We used to have three workers in one room but now we have six - the workers aren't happy about this, but it's what we had to do to cover the costs."