The former group chief financial officer of Arabtec has said contractors in the region are finding their already tight margins squeezed even further by developers driving the growth of the UAE’s affordable housing sector.
Iyad Abdulrahim, who left the firm in May 2015 and previously held senior posts at Depa and at Dubai Properties Group, said both public and private sector organisations in the region are facing liquidity challenges.
Mr Abdulrahim, who now provides restructuring and advisory services to companies, said while post-financial crisis rules introduced by Dubai’s Real Estate Regulatory Authority mean fewer projects grind to a halt because proper funding mechanisms are in place, a lack of cash in the market means developers are having to tailor schemes to provide more affordable homes, as that is where demand lies.
This has led to a change in developers’ own priorities, he argued, so that cost control becomes the primary target, rather than ensuring projects are completed on time.
“In the past, it was the completion date that was the top priority because there was demand available and they wanted to catch it as quickly as possible,” said Mr Abdulrahim.
The drive for more affordable homes means a potentially more adversarial relationship between developers and contractors, he said.
“Developers are now moving towards applying all possible cost control measures, including delay penalties and very precise management of valuations and claims from the contractor,” he said. “In one way or another, there is not much room for construction companies where they can compensate [for] a delay in works, or any glitches.”
David Clifton, the regional business development director with the cost consultancy Faithful + Gould, said contractors would prefer to work on high-end property schemes where margins are typically higher, but the lack of other work in the current market means that they are not in a position to be choosy.
“You will focus on where you think you can make margin. However, the downturn in work means that you will look at work that you would not have done previously,” Mr Clifton said.
He cited as one example the UK-based contractor Kier, which recently announced that it had secured £60 million (Dh288.2m) worth of contracts for the affordable housing developer Nshama. It is delivering an £11m infrastructure contract at the Dubai developer Nshama’s Town Square development in the city and has been named the preferred bidder for another £49m accommodation project for the developer, which will be delivered under the UK Export Finance initiative.
“I wouldn’t historically have said that Kier would be interested in working with Nshama because their premiums are too high,” said Mr Clifton.
Mr Abdulrahim said contractors were cutting their own costs to service projects, but were often doing so in the wrong manner simply by reducing headcount rather than taking process-driven decisions.