Grandiose visions of splendor have dissipated for Dubai’s developers after a sobering couple of years spent rethinking their payment schemes and trying to re-galvanize investor confidence. Now they are left with an array of unfinished projects, many of which are currently dormant.
“Not many projects have been restarted except the Nakheel ones,” says Charles Neil, chief executive officer of Landmark Advisory, a division of Landmark Properties. “Most of the ones that are stalled will remain stalled.”
Neil adds that it was the combination of the financial crisis and many developers’ lack of experience that led to the huge swaths of unfinished projects scattered throughout the emirate. Certain areas like Business Bay and Dubai Marina have a concentration of unfinished work, though some slow and cautious crane activity recently restarted. In June 2010, Proleads, a construction consultant, said $5 billion worth of Dubai projects were stalled, some of which had never physically started construction. More recent data published in The National suggests that more than a fifth of Dubai’s projects are postponed or have been cancelled completely.
According to Fadi Moussalli, regional director at Jones Lang LaSalle in Dubai: “Some projects went beyond the point of no return; depending on the project’s financing [or re-financing], how much was sold and how much of the down payment has been paid in cash, a developer may reach a conclusion that it would be less costly to re-launch building [work] rather than do nothing because of the liabilities on that building.”
Dubai World’s property arm, Nakheel, repaid $930 million to creditors as early as September of last year, announcing a mighty revival of construction on eight of their stalled projects (see chart). Though priority was given to Al Furjan and Jumeirah Park villas, Nakheel, in a November 12 announcement, only mentioned reactivating the first phases of construction. That means Arabtec, the construction company assigned to Al Furjan, is back on payroll but will complete only 800 units out of the 4,000 originally planned by the first quarter of 2012, after it had halted work in January 2010.
Pauling Middle East and Al Huda Contracting Company will both go back to stacking up villas in Jumeirah Park, but Al Huda will only deliver 289 out of the 2,764 villas originally planned by the fourth quarter of 2011. In response to investor frustration over Nakheel’s delivery delays, Chairman Ali Rashed Lootah said in February that about half of the company’s liabilities to buyers were swapped for these and other units to be completed in the next two years.
Landmark Advisory’s Neil believes most developers have opted to downsize their projects: “For people who put down payments on five villas, their deposits will all go towards one villa; that’s how they consolidate.”
The cost of stalled projects
A project’s revival will be driven by its uniqueness, its location and “the possibility of securing an anchor tenant, if that’s relevant” said Mark Fraser, partner at Dubai law firm Taylor Wessing, who believes that “it’s not just Nakheel that will be resuscitating projects.” Areas other than Business Bay, Dubai Marina (where Abyaar and Omniyat are trying to restart projects) and Jumeirah are seeing re-construction, such as the tourism mega-project in Dubailand, City of Arabia, which is being developed by Dubai Properties.
The biggest issue for developers is reeling in their contractors. “If you renegotiate with the appointed contractor, there are certain running costs in addition to remobilization costs for the stalled projects,” said Rizwan Shaikhani, managing director of Shaikhani Contracting. “If you appoint a new contractor, he’s got big liability concerns because he has no idea how it was built by the other contractor and has to go through complicated legal formalities and project details to ensure nothing has been overlooked.”
Any delays pose structural concerns, as exposed projects are subject to Dubai’s harsh environment. When slabs under the foundation are exposed to high temperatures for years it can cause a defect, posing a legal headache for the old and new contractor as well as safety concerns for the owner and future residents. The United Arab Emirates’ civil code does not specifically address who is at fault in such a situation, but, as Fraser asserts, “Given the potential liabilities that a contractor can face under the UAE civil code, he is going to implement exhaustive surveys to manage such risks.”
For example, exposure to salt and humidity in porous concrete can alter its composition after a year or two, depending on its quality, according to Tanmay Biswas, an engineer at Meinhardt Dubai who spoke at a June 2010 conference in Dubai about the risks of re-constructing stalled projects. Exposed pumps, electrical cablings, rebar and steel also need to be protected from the elements, but owners and consultants often spar over who should pay the maintenance fees when a project has been stalled, according to Biswas.
Anyone in business knows that time is money. But for Dubai’s half-built structures, time is more costly than elsewhere because the climate weighs heavily on the cost of re-starting construction. According to Taylor Wessing’s Fraser, when Thailand was finally bouncing back from the 1997 Asian financial crisis some five years ago, half-built developments that had been stalled for six or seven years were resuscitated. Contractors weren’t particularly concerned about degraded materials because of Thailand’s wet tropical climate.
“[Dubai] is obviously different because of salt and heat issues, but you could still resuscitate a building 3-5 years after, if a reputable survey company, either local or international, has carried out a comprehensive examination of the building,” said Fraser.
Given the oversupply across all sectors in Dubai and the resulting negotiating power of the tenant shopping around for the best deals, one of the prickliest thorns for developers is not reconstruction but rather trying to fill the units after they are finished.
In 2011, Dubai’s total housing stock will see an increase of 25,000 new units, bringing the total number to around 335,000, according to Jones Lang LaSalle’s fourth quarter 2010 report released in January, adding that the value of transactions dropped 65 percent in the year leading up to the third quarter of 2010. Reports issued last month say properties such as Jumeirah Lakes Towers are still empty, as is half of Dubai Marina, where 36 crane sites are actively humming along.
Jones Lang LaSalle’s Moussalli said, “It’s very tough to fill a building with over 100 units when tenants are dictating [the market].”
Landmark Advisory’s Neil adds to the gloomy mix: “I think the investors don’t have a lot of confidence that these projects will be completed on schedule. For example, we [Landmark Properties] get some of these houses on the secondary market.
Buyers are not interested because there’s plenty of choice to buy something ready and functioning and because you have no idea when they will be completed.” There are also problems such as a lack of utilities connections and infrastructure in zones like Business Bay, meaning that even if homes are complete, they are still not immediately livable.
Next target… malls
Developers seem to be turning to Dubai’s greatest pastime, shopping, to grease the cash-flow wheel since it became rusty in the dry financial climate of the last two years. Emaar, the other Dubai-based construction giant often described as Nakheel’s rival, pulled in 24 percent of its 2010 revenue from its retail and hospitality sector, according to its 2010 earnings statement released on February 10. In 2009 it was about nine percent of revenue.
Perhaps that’s why Nakheel is set to expand its Dragon Mart and Ibn Battuta malls in Dubai as soon as the eight priorities it listed in September are brought to fruition, as a serious cash inflow would be more of a priority than finishing work on other stalled projects.