Construction Week Newsletter 17th July 2004

Even though the ballistic impact of volatile prices of steel and cement products may have softened somewhat, the repercussions are still being felt. And, these are not restricted to just the real-estate developers or the contractors, who, of course have to pick up the initial bill. Property buyers are being affected too.

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By  Eudore Chand Published  July 17, 2004

Editorial Leader|~||~||~|

Buyer takes all – even the cost of escalation

Even though the ballistic impact of volatile prices of steel and cement products may have softened somewhat, the repercussions are still being felt. And, these are not restricted to just the real-estate developers or the contractors, who, of course have to pick up the initial bill. Property buyers are being affected too. Over the past year or so, the global construction sector has been overheating, fuelled in the main by the hunger of the world’s most populated nation to snap up whatever the factories and furnaces could churn out. From the world’s largest exporter of steel and its products, China, one of the world’s largest geographical countries, turned into one of the earth’s largest consumer of steel products. Along with demand from other parts of the world, steel undersupply soon meant dizzying prices, which sent a chill through developers and contractors. Added to the global steel problem was a local phenomenon: a huge hike in cement prices. To cash in on the high demand in the UAE (cement demand was in fact outstripping the country’s ability to supply the market) cement and related products producers increased prices so that at one time, a 50 kg bag of cement was being quoted at as high as Dhs25. The UAE Contractors Association was able to get prices down to an average of Dhs17 after much persuasion and the advent of imports. The vast majority of contracts in the UAE are fixed price contracts; most clients here will not agree on anything else, and what is more, clients generally manage to force contractors to stick to the price the project was tendered at, irrespective of the escalation in the cost of raw materials. Sentiment and understanding fell by the wayside: “If you have promised it at this price, you have to do it at this price. It is your problem, not mine,” was the often quoted line. But not all developers were insulated from the price rises. Any project that was caught between concept and tendering often suffered price rises of between 15 to 50%, and many of these projects run to millions of dirhams. Some developers who were unable to organise financing and reasonable returns on their investments have had to shelve their dream projects. Developers have admitted that they have tried to spread the full cost escalation of a project on to buyers. Some who have been not so successful, have at least, managed to pass on part of the cost rise. There have been no reports of any project that has reduced offer prices to buyers. Nevertheless, Dubai seems to be able to soak up all the increases. Any property coming to market is snapped up at unbelievable premiums: prices that property would normally fetch if they were located in London or New York. Prices that justify such a rate of return for investors that they are encouraged to build more and more, despite rising building costs. Money is pouring in. The sector is so boyant it is encouraging non-property firms to move in. It is even attracting overseas developers. In a situation like this, it is inevitable there will be whispers of a ‘bubble’. But, the fact remains that the amount of equity or actual money that is being invested in the real estate sector is huge compared with the debt that is being issued either to developers, contractors or buyers. As long as this ratio is heavily in favour of equity, the bubble will continue to be sustained. But you do have to ask yourself if London and New York prices can be sustained in Dubai.||**||

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