Abu Dhabi's real estate boom hits Dubai developers

It is an obvious truth that in a small country like the Emirates there are finite resources in terms of construction contractors and building materials. You can use innovative joint venture arrangements and special bulk import deals to stretch resources further, but there are always limits.

In this context then it is clear that Abu Dhabi's huge new construction order book is likely to divert resources that would otherwise have been put to work in Dubai. If nothing else Abu Dhabi is a richer city, producing $230m worth of oil every day, and can always afford to pay more for goods and services than neighbouring Dubai.

In the relatively free market of the construction industry this is a matter of bidding contract prices higher, and paying more to secure building materials.

Cost pressures

Not all of Dubai's massive real estate projects fall under government or quasi government control. The Real Estate Regulatory Authority expects to have some 500 real estate companies registered shortly, and many of these concerns are private sector groups fully exposed to market forces.

As Abu Dhabi gears up its real estate boom, and anybody visiting the UAE capital can be under no illusion that this is happening now, then it would be very surprising if the competition for resources did not increase and some casualties emerge.

Not every company can be a winner, and some marginal developments in Dubai are going to find that the cost of construction becomes too high to proceed. These companies will have to scale back their projects and may abandon them altogether.

RERA chief executive officer Marwan Bin Galita told the Dubai Property Group breakfast last month that only around 60 per cent of projects announced for Dubai were actually going ahead, and that he had no idea what had happened to the rest of them.

Project economics

The answer surely is that the economics of real estate in Dubai have changed since many of these projects were first promoted. The problem is not demand for real estate as soaring rents show that completed projects are still in short supply.

It is the cost side of the equation that has changed for Dubai developers. If you find that contractors want 50 per cent more than you have estimated, or that the cost of cement is up by 30 per cent, then the profit margin on a development project can be too small to make it worthwhile.

And the biggest upward pressure on construction and building materials prices in the Emirates is definitely the massive building program in Abu Dhabi which did not exist a few years ago.

See also:
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