The price is right: An outline of expenses for construction in the emirate

Global and local oversupply of many key building materials has helped keep construction costs relatively stable in recent years, with Dubai’s streamlined logistics infrastructure helping to ensure the emirate does not fall foul of some of the transportation bottlenecks experienced elsewhere in the Gulf. Ahmad Thani Al Matrooshi, managing director of Emaar Properties, told OBG, “Dubai’s economy is growing, the population is rising and core economic sectors, such as retail, hospitality, tourism and aviation are recording robust growth. This energises demand for property from both international and regional investors.” The situation has been good for contractors, developers and future residents. However, the sector is not without its challenges. Pressure on margins has emerged for construction materials firms.

Cementing Costs

The UAE has a large domestic cement industry, with 12 integrated cement plants, eight cement grinding plants and 17 cement producing companies, a dozen of which are in Dubai. Cement grinding capacity in the emirate is approximately 4.4m tonnes per year, about a third of the capacity in Ras Al Khaimah, the UAE’s principle cement grinding centre. Most of this capacity is also UAE-owned, with Dubai-based companies such as Jebel Ali Cement, National Cement Company and the Binani Cement Company, all local players based in Dubai.

The cost of cement is currently capped at Dh16 ($4.40) for a 50-kg bag of Portland cement, controlling the impact of market price fluctuations, with the average price around Dh12.50 ($3.40) in the first half of 2015. Since April 1, 2015 all cement used in new construction in the emirate has to be “green” – meeting certain environmental criteria – due to a new rule introduced by Dubai Municipality. This does not seem to have adversely affected costs, however; a construction cost benchmarking report by commercial real estate company Colliers International cited just a 1% hike in cement prices year-on-year between the second quarters of 2014 and 2015. For aggregates and sand, however, the same report showed a 3.5% hike, reflecting heightened demand for quality as the Gulf building expansion continues.

Steely Prices

On average, cement accounts for 3-7% of total construction costs, while steel rebar, the other major materials input, accounts for around 10-15%. The UAE has its own steel industry, too, with Emirates Steel based in Abu Dhabi, while Dubai produces aluminium at Dubai Aluminium, in Jebel Ali. Steel prices have, however, taken a major plunge during the year. According to Colliers, this dropped some 14% between the second quarter of 2014 and the second quarter of 2015, reflecting global conditions as growth slows and China, in particular, offloads cheap steel onto the world market.

Labour Rates

With land for projects often granted by the government, the main individual cost in construction remains labour, with an average share of about 30%. According to the Dubai Statistics Centre (DSC), labour costs rose by 1.2% between the first quarter of 2014 and the first quarter of 2015, while the DSC’s construction costs index indicated that they had risen some 3.38% between 2012 and the end of the first half of 2015. At the same time, expenditure on raising the standards of workers’ accommodation is increasing, particularly as the roll out of mega-projects boosts the demand for labour.

Other necessary costs, such as materials, showed smaller hikes between the second quarter of 2014 and the second quarter of 2015, with blockwork up 1.5%, tiles and marble up 2.1%, and glass up 2.5%. Averaging all this out, construction costs overall had only varied -0.5% to +1% over the period in question.

For contractors, then, prices are currently less of a concern than they have been in the past – although oversupply may be more of a worry for materials producers trying to sell on a difficult market, with many watching the global commodities trade in 2016.