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Dubai construction costs all set to rise

DUBAI — The slowdown in rising construction costs in Dubai, which saw the largest increases in 2004, is likely to be temporary. Contractors in the emirate are anticipating a renewed surge in prices in the second half of the year.

“The rapid growth in construction activity in places like Dubai and Doha has stretched the capacity of the local market. The first-ever survey of construction materials and labour costs across the Middle East has revealed that shortages in key resources, including cement, steel and aggregate, is driving up the cost of construction in most markets,” said Ayman Razek, General Manager of MEED Projects.

In Qatar, which experienced a 16 per cent boom in construction activity in 2004, prices have been rising across the board since December, with some costs climbing as much as 35 per cent. Prices elsewhere in the region also grew in the first half of the year, although less dramatically. The booming construction sector in Qatar has added to the regional cost hike. The survey was carried out for Meed by Davis Langdon, a UK cost consultant.

Dubai had experienced a massive increase in construction costs from May 2004 due to an extraordinary increase in cement prices. In July last year Oman had virtually banned the export of cement. Last May the cement prices had climbed to as high as Dh24 per 50 kg bag from Dh13 in the beginning of the month. Following a settlement between the UAE Contractors' Association and the local cement manufacturers, the prices were brought under control. Subsequently the cement prices were brought down in the range of Dh14-17/50-kg per bag.

The increasing costs are expected shave off a big portion of the margins while the overall property margins are reportedly declining on account of large supply of new projects in the market.

The booming construction sector has resulted in big earnings growth of regional cement companies. Last year the cement companies had outperformed the benchmark Shuaa Capital GCC Index (SC GCC Index). A regional shortage in cement supplies has ensured a sustained increase in domestically produced cement prices in the GCC. Top-line figures for the sector grew 28 per cent in 2003 and have acheived a compounded annual growth rate of 17 per cent over the past four years.

The current cement supply-demand dynamics in the region is also working in favour of the regional cement sector. The price of cement in the UAE hit new highs in the middle of this year amid soaring demand from the domestic construction sector.

UAE, being a hub for cement re-exports to regional destinations, the local cement prices have been subject to sharp fluctuations. Large civil contractors have attempted to cover their raw material pricing risks by adding clauses in their contracts that effectively cover the fluctuation in cement prices within a 5-10 per cent band. By and large, smaller contractors have been forced to absorb the rise in cement prices as tenders are signed at fixed prices. Occasionally, local cement producers have felt the same pinch of price volatility by signing long-term supply contracts with large-scale development projects, which had locked in a sale price which currently represents a large discount to prevailing market rates.