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Delay, cost hike hit construction industry in UAE

DUBAI — A steep increase in the cost of materials and outsourced labour is putting further pressure on construction companies that are struggling to meet completion deadlines due to a severe shortfall in skilled and semi-skilled workforce.

While the average price of building materials has shot up by 20 per cent in the past 12 months, the exodus of around 300,000 illegal labourers from the country during the three-month amnesty that ended in September has driven up the cost of outsourced workers by more than 30 per cent.

"For those construction companies which have not factored these steep cost increases in their lump sum contracts, it would be an uphill task to stay out of red and complete their projects on schedule," building industry analysts said.

"Some of the major projects are already several months behind schedule. The present shortage of labour would delay it further by another six to eight months," a top executive of a leading property developer said.

"There is an acute shortage of skilled workers in all categories in the wake of the recent repatriation of tens of thousands of illegal workers. The hourly wages of workers including electricians, plumbers and steel-fixers have gone up from Dh9-10 to Dh12-13 in the past two months," an industry source pointed out. A similar increase in wages is evident in the case of carpenters and masons, they said.

According to the latest figures from EC Harris, materials continue to drive cost inflation in the Middle East, with prices up 20 per cent on average over the last 12 months.

"Steel beams and cement rose 45 per cent and 33 per cent respectively over the year, although the market is awaiting the effects of a cap on cement prices implemented in July," ECH’s latest Construction Cost Bulletin said. A cost index created by EC Harris indicated that overall costs of materials and labour rose by an average 1.5 per cent each month in the 12 months to March 2007.

The report said dollar weakness continued to have a major impact on the commercial success of construction projects in the UAE. As the dollar weakens, imports cost more, primarily with companies buying products from countries such as China, India or the European Union.

"The reliance of the UAE construction market on imported supplies from nondollar-pegged currencies has resulted in an average currency uplift of approximately five per cent for the year to date," the report said. The dollar fell to an all-time low of 1.4283 to the euro on October 1 as investors dumped dollar-denominated assets in favour of high-yielding currencies.

However, ECH noted that continuing high demand has led to a steady increase in tender price returns, which have risen 15.5 per cent in the 12 months to July accompanied by a rise in contractors’ margins which are due to hit 15 per cent.

"Labour supply remains a problem, exacerbated in rising costs of living in the UAE and the impact of the weak dollar which, the firm said, has begun to deter people from relocating to the area. However, the falling dollar has led to increased pressure on developers to get projects to market quickly through lengthening payback periods alongside higher land and construction costs. This has led to an increase in early contractor involvement as developers attempt to bring contractors on board quicker and improve efficiencies on schemes."

In a recent study, EFG-Hermes, a regional investment bank, said Dubai's booming real estate market was starting to cool but project delays are likely to push an expected price correction back until 2009. The supply of new apartments and villas has been delayed by materials and labour shortages, failing to meet the demand of about 50,000 housing units a year from the steady flow of migrant workers arriving.