Dubai: Building recovery

Dubai’s construction sector is still dealing with the fallout of the global recession. Some segments are experiencing gathering momentum while others may have to look beyond 2011 before demand picks up and confidence returns.

An oversupply of residential and commercial properties has resulted in the sector redressing the speed with which it built pre-crisis, after many private and state-backed developers found themselves overstretched when the market dried up, leaving them with large-scale projects in the early stage of development alongside high levels of debt.

With sales slow and new projects still rolling off the production line, prices in Dubai’s residential market continue to fall. In the last quarter of 2010 the segment saw a 5.1% drop for villas and 2.4% for apartments over the previous three months, according to a report issued in early January by property agents Cluttons.

This takes the drop in market values to around 60% since their peak in mid-2008, with buyers and rental customers seeking space in completed and well-established residential developments, the report said.

The situation is much the same in the office and retail segments, where despite the high level of oversupply, a number off additional projects are nearing completion. This has pushed prices down and is serving as a disincentive for new developments.

According to Khaldoun Rashid Tabari, the CEO of construction firm Drake and Scull International, it will be some time before Dubai’s building sector completes its rebound from the economic downturn.

“The construction industry in Dubai is currently undergoing a challenging phase due to the latest economic downturn,” Tabari said in an interview with Gulf News on January 7. “Until supply meets the demand and banks’ ability to lend improves, there remains pressure on the construction industry and recovery will take more time than originally anticipated.”

However, while Tabari said the recession had resulted in depreciation of assets and created a climate of uncertainty across the region, there had been some positives for the industry. In particular, the wave of mergers and acquisitions and improvements in corporate governance and transparency will serve to strengthen the sector, he said.

While the weakened state of the property market has taken the heat out of the residential and commercial construction segments, there has been far less of a chill in infrastructure.

The state is continuing to invest in infrastructure projects, a policy actively backed by Dubai’s ruler, Sheikh Mohammed bin Rashid Al Maktoum. This strategy is part of the government’s drive to counter the recent economic slowdown and to build for the future, according to Nabil Al Yousuf, former director-general of the emirate’s Executive Office, one of the official bodies charged with formulating development plans.

“Dubai continued to invest in infrastructure, the metro, roads, more capacity to the airport,” Al Yousuf told the English-language daily The National in early January. “We worked on what made Dubai in the past – and what continues to make Dubai – the most attractive place to do business.”

While there has been a scaling back of some projects, or more often a rescheduling of delivery dates, there have been few outright cancellations of infrastructure developments. That said, there could be a reduction in the pace with which new schemes are unveiled in the short to medium term as the government reassesses the emirate’s immediate needs and its ability to fund them.

One upside to the easing of the rate of project delivery has been that contractors can take advantage of lower materials prices, which have fallen thanks to the weaker demand across Dubai and the region. Figures released by the Statistics Centre Abu Dhabi showed a region-wide drop in the cost of many building materials. The price of cement, timber and steel all fell in recent months, with the cost of some key supplies decreasing by as much as 2.3% in November 2010 compared to the previous month. According to the agency, this is due to a number of factors, including an increase in domestic stockpiles of materials coupled with the relatively limited activity in the construction market.

Though official projections are that Dubai’s economy will expand by 3-3.5% this year, this may take a bit longer to translate into broader growth in the property market, as it may have to wait until the tide of recovery peaks and the oversupply of residential and commercial units is absorbed.

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