Dubai: Developers in Dubai carrying significant debt on their books will have to immediately start negotiating with lenders for possible repayment options.
If they don’t, they carry the heavy risk of defaults and will “struggle to maintain liquidity if their working capital management is not sound,” KPMG says in a new update on the UAE property market.
“Balance sheets with significant exposure to financing and payment commitments in the short-term will be especially vulnerable. There may be a potential mismatch between cashflows and outstanding commitments, due to the current economic environment.”
Some have already decided maintaining their cash is the best way forward, dropping plans to issue dividend payments this year. Others could soon follow this path.
But “Developers will need to carefully manage shareholders’ expectations and cashflow for the remainder of the year,” the report adds.
Many in the property market are concerned about what the second-half will have in store. So far, large-scale defaults on payments by property buyers on their scheduled installments have not happened, sources say.
But if property prices drop in the coming weeks, these buyers will try and renegotiate with developers, especially those who have only put up a token down payment.
No offplan frenzy, thankfully
Developers have already realized that preserving cash is the only way forward… and complete existing projects. It is unlikely anyone of them will launch new offplan projects, until some semblance of demand patterns emerge.
But everyone is hurting
“While construction has continued, the pace has slowed due to various COVID-19-related safety measures,” KPMG notes. “The pandemic has posed various challenges not only to developers, but also to contractors as cash flows and margins were already strained.
“Any potential project delays will further impact contractors’ execution cost, in addition to supply chain disruption, enhanced safety costs and reduced productivity.
“Developers will need to carefully manage obligations, as there is an expectation that contractors will now have to enter price renegotiations. However, it is unlikely that many will agree, due to low margins and existing commitments to sub-contractors.
“Some contractors are also of the view that delays in contractual completion of projects may result in claims and litigations, if not settled amicably.
“In the current market environment, it would not benefit either party to begin protracted negotiation of claims and counterclaims.”
Easier said than done
But tensions are rife in developer-contractor relationships, and recent weeks have seen some flare-ups. Market sources say that delays on project completions would be a major cause of new rifts and potentially setting off legal disputes.
Avoid at all cost
KPMG reckons that in the “developers’ best interest that contractors survive the current crisis. Without financially-sound contractors, successful project execution would become difficult.
“As far as liquidity is concerned, different financing structures, which could ease the burden for both developers and contractors, may warrant exploring.
“These could include factoring and bills discounting with assistance from banks, as organizations seek longer payment terms from their service providers.”
• Developers may also need to re-consider strategies. “While offering attractive payment terms with single-digit down payments may increase sales in the short term, such an approach could lead to heighted risk of default.”