With Dubai’s property market falling in value Bernadette Redfern asks if the bubble has burst for the emirate’s construction sector.
The attitude of many engineers working in Dubai has quickly gone from bullish to bearish as plummeting real estate prices begin to have a knock on effect on consultancy and contracting work.
Several consultants have told NCE that their clients, most of them major government backed developers, have put projects on hold. But the overwhelming response from those working in the sector is that the market cool down is not such a bad thing. Soaring materials and property prices had contributed to rampant inflation that was stretching the bottom line of every firm in the region and many believed that the increasingly ambitious range of mega projects being launched was too much for a population of less than 1.5M.
“It is the residential sector that has been hit the hardest. Developers rely on sales to purchasers to fund schemes and with banks tightening their lending criteria, project viability is affected,” explains Waterman Emirates managing director Greg Morgan.
Real estate is the main driver of the Dubai construction sector, with everything from offshore islands to the Burj Dubai created to provide more property for the growing United Arab Emirates (UAE) population. The property boom began in earnest when the government passed a law in 2002 enabling foreign investors to buy property. Since then the only way for property prices has been up. Until now.
A report released by the HSBC bank this month says that October was the start of the property price downturn. The steepest fall recorded was 49% at downtown Burj Dubai, the area hosting the world’s tallest building. Apartments being sold at $8,600 (£5,654) per square metre in September were down to $4,400 (£2,893) per square metre in October.
The drop coincides with developer Nakheel announcing plans for a building to surpass the Burj, the 1.2km Tall Tower at Nakheel Harbour at the start of the same month. At the same time, global financial constraints and fears that property had become overpriced have pushed banks into reducing the volume and value of mortgages on offer. From lending up to 90% of a property value some banks are now only offering 50%.
In addition they are becoming more selective about who they will lend to. NCE’s sister magazine MEED revealed that the UAE’s biggest bank, Emirates NBD, was withdrawing mortgages and retail banking services offered to expatriates working for real estate firms. “Since international finance dried up banks are taking a more cautious approach to financing,” says one Dubai banker. “It is a good move, better than giving loans to everyone.”
To mitigate falling demand, developers have begun putting projects on hold and cutting jobs. Dubai developer Damac said it was losing 200 staff, and Emaar also confirmed it was reviewing its staffing levels. Nakheel meanwhile has pulled back on major projects such as Palm Deira and the Promenade, as it waits to see how the market behaves.
“The issue now is how long will the global downturn set back growth strategies?” says Nakheel group managing director for retail Graham Dreverman. “It looks like six months to a year. We have got to be sensible about it. That is why all of our projects are masterplanned so that we can deliver them in parts depending on the market. It is the only way to do it and we use very good masterplanners,” he says.
Among these masterplanners are many UK consultants who confirm that work is slowing down and that they will have to adjust their own recruitment plans accordingly. “We will pull back slightly on recruitment but there will be no lay offs,” says Mott MacDonald divisional director for buildings Steve Rayner. “We cover a lot of sectors and regions so we can focus on other areas such as oil and gas. We planned to have an additional 500 staff in the building division by 2012. Now it might be more like 350.”
Many developers are now sitting tight while they wait to see how the market unfolds, and many are waiting to see how far commodity prices will fall in order to get better deals from contractors. Project tenders are increasingly being delayed and contractors report that invitations to bid for work are drying up.
The tendency in the region has been for Dubai to lead the way and for other emirates and Gulf states to follow. But so far there are no signs that anywhere else is suffering from the same issues. “We are not expecting the same thing in Abu Dhabi,” says Morgan. “There is still a substantial amount of business in the region. Going forward we expect to see conditions become more difficult in Dubai, but there will still be good opportunities elsewhere.”