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27
May
2011
Challenges ahead in construction industry UAE

Whatever the real estate market looks like but the reality is simple that whatever you have sold till 2008 you have to make it anyways. The new developments are additive to brisk construction industry scenarios in the United Arab Emirates.

 

When we see the construction landscape of United Arab Emirates we see a lot of potential whereby the projects launched in Dubai has to go ahead and emerging projects in Abu Dhabi require massive construction activity to reach the vision of Capital Emirate.

 

According to the study of Ventures Middle East; Abu Dhabi alone carry construction projects of US$ 562.8 billion. Construction contracts awarded in 2011 are standing at US$ 39.8 billion. The numbers are more than US$ 35.5 billion in the year 2010.

 

This increase of 12% is really significant in the time when the Middle East is feeling heated as of political uprising. In fact the social and political grip of government in United Arab Emirates is making the country beneficiary of what is happening in the surrounding.

 

Other than commercial, residential and public construction projects Emirate of Abu Dhabi is also enhancing in infrastructure construction. The rail project for UAE is another big attraction. The game is in dollar billions that reflects the vision of oil rich and heavy sovereign reserve state & UAE being a country of diversified economy.

 

Over a rough estimate about US$ 800 billion worth construction projects are underway in United Arab Emirates i.e. mainly in Abu Dhabi and Dubai. Ajman, Sharjah, RAK & UAQ share minor fraction anyways.

 

United Arab Emirate is taking a distinct lead over the Saudi Arabian Construction Industry that stands second with about US$ 290 billion construction projects. Even Qatar is emerging in hope of major events like football world cup in 2022 and economic diversity within the country.

 

All above statistics are really magical but it equally brings challenges for an emerging construction industry corporate executive like me.

 

I always have a clear sense that the economy of United Arab Emirates shall grow good in next five years whereby the country have state of the art infrastructure and top security to offer. Dubai has seen construction and real estate crises of 2008 but the construction projects that delayed have to be completed. Otherwise it shall damage the landscape of the Emirate. I am sure that the government of Dubai shall not like it.

 

I am confident that the construction activities in Dubai shall be restored in later 2011 and 2012. Even where the properties are sold at handsome rates the construction cost is really feasible to attract new contractors. It is rather started happening in first quarter of 2011 whereby we have witnessed many projects being taken by high liquidity contractors from development groups like Nakheel etc.

 

The real challenges in this time are new labor regulations, liquidity [seed capital for projects] problems for middle financial size contractors & subcontractors, shortage of labor, Delay in payments by contractors to subcontractors, shortage of skilled workforce as of migration towards big emerging economies, uncertainty in investors, supply chain of construction material / prices and strict financing policies trigger by the central bank.

 

In the time when everyone wants to avail the opportunity in construction scenarios labor supply is the real challenge for contractors and sub contractors. New labor & human resource policy buzz is clearly indicating that companies shall have to spend more under HR cost whereby they are creating their business plan soon after financial crises that has already absorbed their liquidity.  

 

The proposed mix of human resource nationalities is also a biggest challenge whereby selecting the best man for the job shall be difficult. This is why institutional framework as of staffing is the biggest question before business planners.   

 

As it is the common practice in construction industry that contractors delay payments of subcontractors the importance of bridge financing is vital. In the age where we are seeing massive liquidity in the market acquiring financing is indeed not easy due to various financial market regulations and private equity shortage over investor confidence front.

 

It is indeed not possible for big contractors to carry construction activity of about US$ 800 billion solely. They have to catch subcontractors anyways. Subcontractors are chasing for labor that is short and once they gets the labor than the cost of handling the labor and making sure their efficiency is the great art whereby availability of construction supervisors is not up to the mark or it is not under their budget. It is difficult to acquire a qualified person that went towards big emerging economies from UAE.

 

All above features carry one point that if the construction cost start increasing then what shall be the pricing mechanics of new commercial and residential projects. The market that is not seeing the real estate price stability due to excessive supply of units and low rentals have very few chances to absorb increase in property prices in at least next two years. Yes once the core economy will expand more then employment level, salaries boost and new population will turn this to brisk property market even.

 

If liquidity position of various subcontractors shall go worst then hardly few can manage to be in the game and this can create delays and shortage of work engines in construction industry. It is the time when many contractors and subcontractors who have been working in the region have already disappear i.e. courtesy to financial crises of 2008-09. So the policy makers have to take this point in account while developing macro economic policies related to construction industry.

 

Availability of material shall play a significant role whereby the construction activity shall go on high rise. Even the construction of South Sudan being a country in Africa shall be an interesting part to see in next 5 to 10 years that can really raise the competition in construction market and materials.

 

I hope that the visionary leadership of the United Arab Emirates shall address all these issue. Even all above are the biggest challenges in their own magnitude but the companies who believe in strategy of winning shall have all their chances to earn great.

 

In this scenario financial management of construction and contracting companies shall play a vital role. In the market where challenges are hardest over the front of liquidity management, labor supply and consistent changes in regulatory framework those who knows how to play  limitless in limits without over or unrealistic aggression shall win.

 

Being a business we never have a point to surrender and when we are seeing billions of dollars to be work in construction industry UAE it is hardest to leave the game rather developing a plan that manage all that looks so difficult. The one who have good constraints or key factor management skills shall be the king in this market. Those contracting companies that accumulate private investments shall be able to manage liquidity gaps. It is then that they shall enjoy payment certificates and cheques.

 

As an analyst and Director of Strategy & Finance to my company I am really optimistic. I am confident that whatever looks difficult shall sharpen our management skills and once the time of big play will reach those who work limitless in limits and those who manages finances & ops well shall go on to enjoy long running construction phenomenon in the UAE and the region.     


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Diana Says:

Interesting

27 - May - 2011 03:33:37 PM

Younus Talha Says:

very interesting

28 - May - 2011 09:46:01 AM

Shehzad Says:

Good one

28 - May - 2011 01:26:27 PM

amjad Says:

I really dont understand as to where are these so called projects. as a simple indicator , the concrete industry is in direstraits with few to no projects. In such a situation how can one say that there are projects? I believe that , only a handful of high value projects that too mostly in the oil and gas sector do not constitute or reflect the over all business situation currently prevelant in UAE.

09 - June - 2011 09:48:15 AM

ikram rasheed Says:

I think 5 years are too short for UAE but can be accepted for Oman and Qatar . In 5 years this will consolidate and UAE will see activity again like 2007 by end 2022.One shud not be too optimistic for UAE

10 - June - 2011 02:54:56 PM

Saqib Omer Saeed Says:

Thanks for comments everyone. I would like to respond Mr. Amjad and Mr. Ikram. First of all thanks indeed of your valuable input. @Mr. Amjad: I think you missed a part that not at any point of this article the projects are termed as indicator. Merely it was scenarios that were discussed with all potential positives and negatives. I think everyone have to understand that you can not judge business and economy with specific emotions or experiences of people who lost the money 2 or 3 years back. If someone is saying something for today or future, it has to be backed by concrete figures and statistics. You can not ignore the half done projects over the surface and if you work a little out for research you can find movement over them. No analysis over business can be brought from living rooms or isolation. @Mr. Ikram: How come you know UAE’s activity in construction shall be started again in 2022? I hope if you travel across Abu Dhabi and parts of Dubai so you can see by your own eyes the things starts moving in term of constructions. Even $ 500 billion plus construction activity is in Abu Dhabi that is even more than Saudi Arabia. If you shall spend a little time in Abu Dhabi you can see majority of them working. I hope the comments you make has to be exclusive be fully backed by relevant statistics. Kindly put your data in comment boxes to back your comments. Oman and Qatar are good potential markets but I am really sorry they have no comparison to UAE. You can check various independent analysis companies for knowing the reality.

12 - June - 2011 10:27:50 AM

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Mr. Omer

Mr. Omer [1982 born] started  his professional career as a commercial / investment banker after achieving Gold Medal in Finance at master level from University of Karachi in 2006.

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