As building costs pile up, will property buyers in UAE have to start paying more?

Dubai: Will property values in the UAE be the next to feel the weight of inflationary costs?

Building material prices have been on the rise again since June, and if this continues through to the year-end, will put further pressure on project costs. If that happens, developers will have no option other than to tag on the higher cost of construction onto their selling price.

For property buyers – especially end-users – any further addition to the property price can be quite a burden. Already, they have to factor in higher mortgage rates (after 11 rate hikes brought on by the US Federal Reserve) and then there is already the run up property values in Dubai since 2021, which has seen projects in some locations asking for even 25-35 per cent more than what they would have in 2020.

"The problem this time is not with a lack of new projects - in fact, each month is seeing new contracts being awarded," said the general manager at a leading construction firm. "There is not much of an issue with payments - that's coming, but with some delays.

"What's proving to be a worry is the run up in project costs, and this inflationary pressure is starting to come again at a most inconvenient time."

Developer sources say that adding the higher project costs will only be done at a last resort. “Right now, we are OK because we had placed bulk orders for steel and other building materials well before prices started to firm up from June,” said one developer. “That means, we have not placed a mark-up on or selling price – so far.”

Sudden rise

It was all looking good for UAE developers and construction firms at the start of 2023. Building material prices had dropped considerably from mid-2022 onwards. On some commodities, that change came about even earlier.

So, even as higher inflation became a source of discomfort for businesses across sectors, it wasn’t that much of an issue for developers, at least on the project side of things.

Then, June happened. Steel, concrete and cement prices all made gains, catching many developers completely by surprise.

At Azizi Developments, “We procure construction materials ourselves, sourcing them directly from suppliers and leveraging economies of scale,” said Tizian Raab, spokesperson of the Dubai-based developer looking to launch a new project later this week.

“Since October 2022, we’ve seen steel prices surge 7.5 per cent. Building materials, commodity and even manpower prices have all been on a pronounced upward trajectory due to the demand and supply equation shifting, with construction booming in the UAE and beyond.

“But with accurate forecasting and planning, rising costs can be mitigated, such as through the closing of direct bulk deals with secured rates in advance of project development.”

Cushion buyers

If developers can do that repeatedly, then the risk of having to pass on higher costs to the property buyer is mitigated. While offplan property sales continues to boom in Dubai driven by investors, the market is seeing end-users go back to being cautious. Mortgage negotiations are taking longer, and even with lenders offering 5-year fixed rates from the outset, buyers are wary about costs.

According to a developer source, “There are only so many price increases that end-users can absorb. Building costs had shot up significantly in 2021 – but that was because of the Covid impact on global supply chains and shipping costs. At the time, property values were still recovering from a 5-year slump, and buyers were OK with paying more.

“This time, we need to be extra careful about passing on costs.”