Developers renegotiate contracts as construction costs fall in Dubai

Construction costs per square foot in Dubai are falling once again and developers are taking advantage of the situation and renegotiating contracts. The costs have dropped by around 70.83 per cent from a high of Dh1,200 per square foot (core and shell residential) in August 2008.

"The market at this time is slow and sales are non-existent. But we are taking advantage of this time by hiring new contractors. Construction costs are lower and more manpower is available. We are focusing on construction and consolidation," said Danial Schön, Vice-President of Schön Properties.

"On Dubai Lagoon, we have signed up with two contractors and are renegotiating with them," said Matt Cronje, Chief Development Officer at Schön.

"We are looking at construction prices ranging between Dh280 to Dh300 per sqft in general. When we signed the contract the costs went up with the high steel and concrete prices. We had an agreement that if it fluctuates positively or negatively, then we will look at the contract prices. At the moment, we have contractors only on two projects – Dubai Lagoon and Schön Business Park.

"In the next week or two, we will conclude negotiations. Prices have come down by 30 to 40 per cent compared to what we got last year. It is not just steel and concrete prices that have dropped. There is a worldwide glut in construction materials and the costs of labour and supervision have also fallen due to the recent redundancies and terminations. Again, a year ago, contractors demanded whatever profits they wanted and now profits are coming down to world-related figures. So now contractors' profits have come down from 15 to 20 per cent to between eight and 12 per cent. It is more in line with reality. Super profits are not to be made anymore – not by the developers and not by the contractors. Overall, the construction industry is much more healthy now."

"The prices could go down even lower," said Schön.

According to brokers, the selling prices at Dubai Lagoon stand at Dh818 per sqft for studio (512 sqft), Dh840 per sqft for one-bedroom (766 per sqft), Dh818 for two-bedroom (1,163 per sqft) and Dh939 for three-bedroom flats (1,692 per sqft). Last week, Emirates Business had quoted various industry sources, including Imad Al Jamal of the UAE Contractors' Association, saying different areas in Dubai have different construction cost structures.

"The construction cost per sqft comes down to between Dh500 and Dh700 on Sheikh Zayed Road while it reduces further in other parts of the city," said Al Jamal last week.

Yesterday Al Jamal agreed that the figures are falling further. They have gone down to between Dh400 and Dh600 per sqft with some areas going as low as Dh350. This is against the peak in August 2008, when it went as high as Dh1,200 per sqft for very high-end projects.

Added Garrie Renucci, partner, Gardiner & Theobald: "At the peak, the construction price for high-end residential stood at Dh900 per sqft in August. In February 2009, it has come down further to range between Dh500 and Dh600."

In December, Yahya Jan, Vice-President and Design Director, Norr Group Consultants International told Emirates Business that depending on building types, construction of residential towers (including parking) could be roughly Dh600 to Dh650 per sqft at the high end.

According to another source from a contracting firm, in August core and shell prices stood at Dh700 per sqft and commercial stood at Dh550 per sq feet. "With high-end finishes, today residential has come down to Dh350 per sqft," he said on condition of anonymity.

Meanwhile, Schön said its project at Dubai Lagoon ran into delays due to changes in the road design by the Roads and Transport Authority. "This delayed the whole approval phase with Dubai Municipality. The main reason is that we had to wait for a whole zone to complete and hence decided to make the zones smaller with 500-600 units for a earlier handover."

The earlier date of completion has moved from 2007.

"We are now looking at the second quarter of 2011," said Cronje. "This was not the only reason. We made mistakes as well."

Said Schön: "A total of 492 apartments will be completed and Zone 1 will be ready for handover by end-2009. The next phase is set for the end of 2010 after which, we will hand over a zone every three to four months. We are linked to the Dewa grid and by mid-2009 will have access to all utilities."

The developer is looking at a 17-month construction period from September 2008 for Schön Business Park. "We are on track for that project," said Cronje. "We are also renegotiating those prices. If you tender, you will get variance but if you negotiate, you will get even lower costs between Dh280 and Dh300."

He added that the height of the tower and the type of apartments also add to costs along with façade costs.

The developer is not looking at construction-linked payment plans. "We have received the Rera regulation, but this is not yet law. We are trying to reach all 4,000 investors and to accommodate their requests," said Schön. "We are not looking at construction-based payment plans. But on a case-by-case basis, we will accommodate people if they have paid 45 per cent in a certain zone and construction has not started."