Cherry picking of contracts is allowing contractors in the UAE to easily pass on increased costs to developers and is even leading to an increase in their margins, according to EFG Hermes.
“This momentum is not expected to slow over the coming year. With the expectation of further cost inflation, we believe that the likelihood of pending property supply being delayed is even greater than before,” the Cairo-based investment bank said in a flash note.
With demand for property being buoyant, developers in turn are easily able to pass on higher costs to new off-plan buyers. However, construction cost inflation will persist throughout the year due to higher building material and labour costs.
“The persistence of these labour shortages, strong demand, and the mandatory adoption of green building codes, health and life insurance are likely to raise construction costs in the UAE even further in 2008.”
Construction costs in the Gulf have risen by around 30 per cent in the past 12 months and new firms are entering regional markets, making the sector even more competitive. Rising costs remain the key issue for contractors this year, but, unlike in previous years, it is the rising price and dwindling supply of manpower, not materials, that is causing concern, according to Middle East Economic Digest.
Contractors are profiting but the escalation in a cost of raw materials and labour has squeezed their margins, Imad Al Jamal, vice-president, higher technical consultative committee, UAE Contractors Association told Emirates Business.
Meanwhile, the UAE interbank rates (EIBOR) have fallen from 4.94 per cent in November 2007 to 2.78 per cent to date. Mortgage rates, which are usually three month EIBOR plus 300 basis points, have fallen approximately 216 basis points, from 7.94 per cent to 5.78 per cent over the same period.
“This is helping to stimulate demand for property. Taking both cost and demand pressures together, we believe that both off-plan and secondary market prices will rise significantly higher in 2008 than our previous expectation of five to 10 per cent.”
Arabtec Holding and Orascom Construction Industries’ enjoy strong positions in the Dubai market.
“We expect both companies to continue to benefit positively from current industry dynamics and they will experience strong revenue growth and margin improvements for at least the next 24 months.”
The bank expects a positive impact on developers with unsold Dubai real estate exposure.
UAE construction costs to rise