UAE's construction sector still hurting from 30% spike in material, shipment costs from December 2020

Dubai: The sudden increase in material and shipment costs since end-2000 remain the biggest challenge for the UAE construction sector, according to the head of Middle East operations at China’s biggest contractor.

Construction material costs, depending on the category, have risen by 10-30 per cent in these four or five months, adding to the worries of contractors and developers alike. So far, the full weight of the cost increases have not been passed on to project clients – but that too could change.

But it’s not just external factors that should worry industry players, according to Yu Tao, President and CEO at China State Construction Engineering Corp. (CSCEC), Middle East. To secure a project, “some contractors are tendering even with the price lower than their costs,” he said. “It further worsens the industry competition since profit margins for contractors are negatively impacted.”

This need to secure work at any cost – even if means taking a loss if the project faces time and cost overruns – comes even as new construction work has dropped. “Due to the current macro-economic environment and the pandemic, clients/owners/developers are launching limited active tenders and projects,” said Tao.

“It is unknown how much lasting damage has been done as it has slowed economic activity. In construction market, most of the players are facing challenges under these circumstances. Price competitiveness remains a key differentiator at the bid assessment stage.

“At the downturn, we focussed on our own operations rather than aggressively compete for marketshare or replace other companies. We are maintaining progress for the projects on hand and delivering for the clients.”

Reliant on real estate

Government-created project activity has picked up since the second-half of last year, related to industrial, utilities, oil and gas, renewable energy and even manufacturing. Many of these would have been planned earlier but actually getting launched now.

Real estate development – one of the biggest contributors to the construction sector – continues to lag in terms of new project awards. Tao is hoping this situation gets rectified in the coming weeks.

“UAE real estate has shown strong signs of bouncing back from the pandemic impact,” he said. “Hopefully, in the near future, it will attract more local and foreign investment and demand, leading to the recovery for construction. CSCEC will be trying to explore in real estate to see if there chances that we could contribute more to the region.”

Tao is definitely keeping those options. In the recent past, some of the biggest Chinese construction companies have taken up projects in the UAE and Gulf - as well as extend project financing support through Chinese financial institutions.

Take on direct share

From project financing support to taking a direct equity exposure with a local real estate partner could be a small step. There had been speculation that some Chinese contractors was already taking such steps.

“Direct equity participation is highly dependent on the characteristics of the client and the project itself,” he said. “We will be carefully evaluating the details if we decide on this approach.”

For now, his company certainly has a busy portfolio. A residential project its involved in is the Downtown Views II in Dubai. Featuring three residential towers and 1,509 apartments, “this is the largest single project awarded by Emaar Group after Burj Khalifa,” he added.

“CSCEC has more than 40 on-going projects in the UAE and Gulf markets - some are ahead of schedule,” the official said. “Package A for Stage 2 of Etihad Rail is a national infrastructure project and on completion, it will link the principal centres of trade, industry, manufacturing, production and logistics with all the major import and export points of the UAE.”