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Construction costs in Dubai have remained stable over the past year despite a drop in the prices of building materials and oil.
Currently, the cost of construction varies between Dh250 and Dh400 per square foot for medium-range projects, rising up to Dh450-Dh600 per square foot for high-end luxury projects, with no fluctuations seen over the year.
Rising costs of manpower, worker accommodation and utilities have offset the gains from the price drop seen in a few building materials. While material expenses remain a key element, industry heads point out that the overall value of the project could still vary based on the location, type of construction, design and architectural features. Some are of the view that the property sector in an emerging market such as the UAE is not very sensitive to construction costs.
Going forward, not much is expected to change. Even with the UAE gearing up for the World Expo 2020 and work on many new and ongoing projects gaining momentum, construction expenses are expected to remain stable over the next 12 months.
Prices of cement and steel — the two main components for construction — have remained low, with the latter dropping by almost 14.5 per cent compared to previous year. Syed Saifullah, Deputy Sales Manager of National Cement, says although cement prices have seen a slight drop globally, the price structure in the UAE has not been affected; prices are hovering below the government imposed cap of Dh16 a bag due to oversupply.
''At present, we are selling the 50kg bag of Ordinary Portland Cement at Dh12.50,'' says Saifullah. ''The prices have not changed in the past year. The UAE market is suffering from overcapacity, and the demand is quite low.''
The government capped the price at Dh17 per 50kg bag to control spiraling rates during the construction boom in 2007. The following year, UAE cement producers signed an agreement with the Ministry of Economy to reduce the cap to Dh16 a bag.
''Despite the much-higher government cap, we've not been able to increase the prices because of the market conditions,'' he adds.
As Saifullah points out cement costs constitute just 3-7 per cent of overall construction expenses. While cement prices have remained relatively stable, steel prices have seen a drop of around 14.5 per cent. According to Danube, a company involved in the sale of building materials that has recently entered property development, rebar (reinforcing steel) was priced at about Dh1,880 per metric tonne (pmt) last month versus Dh2,202 pmt in March last year.
''The typical cost percentage of steel rebar in a project ranges from 10-15 per cent of the total project construction costs,'' says Bharat Bhatia, CEO of Conares, a steel trading and manufacturing firm. ''A fall in the steel prices will not heavily affect the construction cost of a particular project as the percentage is minimal compared to the other factors.''
Rizwan Sajan, Chairman of Danube Group, says that there has been no major change in construction costs over the past year.
''Currently, the cost varies between Dh300 and Dh400 per square foot for medium-sized economical construction,'' he says, adding that it might escalate to Dh450-Dh600 for high-end business projects.
Commenting on building material prices, he says, ''They have mostly remained stable. We have not seen major movements since February last year. If there was some movement, it was a small percentage and limited to certain materials. Overall, there's been no major deviation in construction costs from the first quarter of 2014.''
Providing a rough indicator to present costs, Rob Edgecombe, Director of Rider Levett Bucknall, a property and construction company with 120 offices across the world, says, ''The cost of constructing an apartment will range from Dh4,500 to Dh6,500 per square metre, while that of villas is from Dh3,000 to Dh4,250 per square metre, and it has remained pretty much the same over the past 12 months.'' This works out to about Dh400-Dh600 per square foot for apartments and Dh270-Dh390 per square foot for villas.
Pointing out various factors that can affect construction costs in Dubai, he says, ''The number of new projects in the pipeline, capacity of main contractors to carry out the work and material suppliers to supply contracts, global and regional economic conditions, regional strife zones and supply of labour all have an impact.'' Abdul Kadir Faizal, CEO of property management firm ERE Homes, echoes the sentiment. He says that the basic cost, while determined by material prices, would change based on factors such as location, developer and the quality of the project.
Faizal thinks that compared with the international market, Dubai's construction costs are lower. ''This makes it highly feasible for projects to carry on even through cyclical changes in the market.''
A realistic average, he says, is between Dh250 and Dh350 per square foot for medium-range construction.
Bhatia, however, notes that the UAE is still an emerging market and therefore the property sector is not sensitive to the factors affecting construction costs.
''Although master project developers are very keen on controlling their overall developmental costs, the property sector in this market is not heavily affected or influenced by the construction costs,'' says Bhatia. ''One can confidently say that projects currently being implemented in the country are constructed much below their selling prices.''
Sajan, on the other hand, says that property prices, especially in Dubai, are sensitive to construction costs, which according to him, includes prices of building materials, manpower, transportation and logistics. ''Every developer has to intensely study the market movement of these costs,'' he says.
Philippe Dessoy, General Manager Middle East, Sixco, subsidiary of the international Belgian construction giant Besix Group, is also of the opinion that construction costs have not changed in the past year despite the drop in many building material prices over the period. He emphasises that despite the fall in material prices, an increase in other costs has balanced overall construction costs. ''As always, when prices, such as that of oil, steel and imported materials from Europe, for example, go down, others [such as] housing for construction companies' staff and workers go up,'' says Dessoy.
However, it is not just the materials that determine the cost of construction. As most industry chiefs point out, it varies as per the location and type of architecture.
''It is the finish that involves a higher percentage of the total costs,'' says Saifullah. ''The super structure itself is not very expensive to build. So the cost of building materials do not have a major impact on the construction costs. However, with green compliant materials being in demand, their usage can alter the prices in a big way.''
Sajan explains that from a developer's perspective the price of land is a big cost component in addition to the finish, interiors and exteriors. He says, ''The cost variance due to location is largely linked to land costs. The build permission on the land can also have some impact. If you were to calculate on a pro-rata basis, there is a clear difference in costs for constructing a villa as opposed to a low-rise building.
''The overall cost will certainly be higher in locations such as Dubai Marina and Shaikh Zayed Road, as these are high-density areas. The cost of land itself is going to be phenomenally higher.
''[However] costs will be relatively lower in communities such as Jumeirah Village and Dubai Sports City. If you're considering a locality such as Dubai Silicon Oasis, the land lease rate has to be taken into consideration as it is a leasehold community.''
Dessoy, however, disagrees with this observation. ''While there is not much difference in the actual construction costs in different locations, the difference arises from the quality, finish and architecture of the building. But selling prices offered by developers will vary greatly with location,'' he argues.
The construction industry has many dynamics, says Sajan. ''Contractors rely heavily on economical labour supply, generally from South Asian countries; this can be affected due to bans on certain nationalities.''
So a developer has to factor in all those elements while determining the pricing of the property — be it an apartment or villa.
What's in store
Meanwhile, most industry heads feel that construction costs will continue to remain stable over the next 12 months.
''In general, construction costs have remained almost the same over the past year despite the massive amount of work under way,'' says Edgecombe. ''We predict that the oil price will assist in lowering prices this year, but the overcapacity of the market will push prices up. They will therefore remain pretty steady again this year.''
As for building material prices, Sajan says, ''We do not foresee price escalation. For cement, the UAE is no longer dependent on imports. The country has become a net cement exporter due to overcapacity. The price of rebar will also continue to remain more or less stable.'' As Faizal points out, the construction sector will remain robust this year with many ongoing projects. ''I see the sector continuing to grow over the next few years, especially with the upcoming Expo 2020, as developments need to be put in place for the significant inflow of visitors during the period.''
Apart from a recovering housing market, which is partly bolstered by an increasing population, Sajan argues that growth in the UAE is expected to be boosted by large-scale infrastructure projects. ''Such projects are expected to be concentrated mainly in Dubai and Abu Dhabi,'' he adds.
Quoting a study by the Dubai Chamber of Commerce and Industry, Sajan says that the UAE's construction industry is expected to contribute 11.1 per cent of the country's GDP this year and 11.5 per cent of GDP by 2021. ''This compares to 10.6 per cent in 2008 and 10.3 per cent in 2011.''
Bhatia says prices could improve this year as the construction sector expands.
''We believe construction activities will grow by about 25 per cent compared to last year,'' he says. ''We feel that prices of the commodities are already at the bottom or nearing support levels, hence we don't see any further major drop.
''Furthermore, as more economies enter their construction season, we are expecting demand to move up further, hoping that it will push prices up a bit.''
Here's an overview of materials used in construction
Source: Libini Joy, Special to Property Weekly