Are construction costs the Achilles heel of the Abu Dhabi boom?

Original Article

Every great construction boom has the flaw that proved its ultimate downfall. This summer a huge real estate boom is continuing to rage in the oil-rich emirate of Abu Dhabi, with house prices doubling over the past year. It is easy to argue that off-plan speculation is getting out of hand, and that prices could correct on a market overshoot. But a more fundamental problem exists in the form of construction cost inflation.

It is relatively easy to find a construction project to promote in the UAE these days.

Dubai alone has more than 1,260 registered projects under development.

It is relatively easy to secure financial support from eager off-plan investors, particularly for high-profile companies with an element of government ownership.

But actually delivering projects has become a nightmare.

Project delays of two years are typical in Dubai but this is just an average. Drive past the huge Bavaria Business Suites towers either side of the Sheikh Zayed Road and the sign once promising delivery in August 2006 has now been removed.

The problem of project delays has gotten worse as the boom has progressed in the UAE. And competition for scarce resources from the slew of mega projects now mobilizing in Abu Dhabi promises to make delays longer and not shorter.

Negotiations trump tenders
Capacity constraints are producing very high construction price inflation for both labour and materials.

No local project goes out to tender these days, everything is done by negotiation and the highest bidder gets their project completed nearer to schedule than the penny-pinchers.

Indeed, market muscle is all important in this overheated and frenetic construction market. And this is becoming a big consideration for off-plan buyers in Abu Dhabi.

Having watched the waiting times for the delivery of projects get longer and longer in Dubai, the fear is that Abu Dhabi is starting building later in the day and that completion times will get even further behind.

If off-plan buyers have to wait then their money is tied up, not earning rental income. Worse, it becomes a drain on income if it is borrowed.

Probably the best tip for any buyer in Abu Dhabi this summer is to do your due diligence on the contractor that your developer is employing.

In fact, the first step is to make sure that they have one, late appointment of contractors being another prime cause of delay.

Checking the construction process
The best guarantee to construction timetables is to be able to see with your own eyes that construction has actually started.

For once contractors get building these days they are generally keen to get on with the job so that they can move on to another as quickly as possible.

Otherwise, be very careful about the contracts you are signing. What happens if your developer decides not to go ahead? Do you get a full refund plus interest? Or is there some compensation such as a buy-back of the unit purchased at the market price?

Already in Dubai there have been several cases of projects abandoned for inadequate refunds because developers simply find them uneconomic due to rising construction costs. Perhaps Abu Dhabi buyers will learn from this unfortunate experience.