Foreign construction firms are trying to secure contracts in Dubai by offering to fund viable projects, but industry experts said most UAE developers would continue to rely on equity and short-term debt financing to control cost levels.
Khalid Bin Kalban, CEO of Dubai Investments, said some contractors were offering to provide funding after conducting their own feasibility studies above the condition that land was fully owned by the developer and assigned, but not mortgaged, to the contractor.
"The playground has changed. We have few proposals from foreign contractors who have their own funding for our new projects. They have come, looked at what we do and said 'if we are selected as contractors,' [then] they will help fund our projects'," Kalban told Zawya.
"These foreign construction companies are willing to partially fund the project and even offer grace periods for repayment as well."
Kalban said developers would be required to pay a 20 percent down payment and then could start repaying the contractor six to 12 months after the project is completed.
"You pay them in installments and that gives you more time to sell your units," he reveals.
Dubai Investments, the largest investment company listed on Dubai Financial Market, recently announced that it was launching Phase 3 of Green Community Dubai Investments Park and also Mirdiff Hills.
Samir Munshi, Managing Director of Orion Holdings, told Zawya that big construction companies from China and Turkey with strong lines of credit were among the firms expressing interest.
"Internationally, interest rates are quite low (4 to 5 percent) but their returns here can be significantly higher than 10 percent, which is a good business opportunity for them," he said.
"Some of them even look at taking equity in a project. We have had some proposals from some contractors who wanted to take equity stake in our projects and fund them... we are still studying them."
A Zawya Projects analysis conducted in November 2013 valued the ongoing projects in the UAE at USD1.38 trillion, followed by Saudi Arabia (USD 1.02 trillion), Qatar (USD 420.12 billion), Kuwait (USD 326.55 billion), Oman (USD 189.90 billion) and Bahrain (USD 104.74 billion).
The UAE market has recovered from the real estate crisis of 2008-2010 and a number of developers have announced new projects in the last year, mostly, in Dubai. The numbers are expected to soar once infrastructure plans for the World Expo 2020 site are finalized.
Andrew Rotteveel, Head of Project and Development Services at Jones Lang LaSalle, said cash-rich or government-backed construction firms could attract some developments competing for financing with the expected increase in the number of projects.
"We have heard that some contractors are using this facility to try and kick start projects to ensure that they can maintain their labor force numbers in the UAE and not have the scenario where they have to send laborers home and then bring them back when the market recovers," he said.
Chris Seymour, Head of Property and Social Infrastructure in UAE at EC Harris, a global built asset consultancy, said that while his firm sees this method becoming more common in the region, it is unlikely to be a 'widespread trend.'
"Local banks are willing to provide project-based debt finance and most developers will find this option lowers the cost," he told Zawya, adding that his firm is working with some developers considering several options including contractor-derived credit.
Some contractor-supplied credit is normal on most projects, such as ordering long lead items or contract retention, which has required contractors to work closely with banks and funders.
Seymour said the model of more extensive contractor-led funding had worked in the United Kingdom and Europe to bridge short-term cash-flow gaps in government-sponsored contracts and later for private developments backed by physical securities or guarantees.
"We see some challenges in the UAE and the region where funding risks are generally considered as higher, which will drive increased costs," he said. "The costs themselves will appear in the construction package and so there also could be less transparency around what the actual cost of finance is."
A more sophisticated approach is either equity participation by the contracting partner, which is not unusual for large schemes, or Public Private Partnerships (PPP) where government schemes are concerned, Seymour said.
"The latter has seen increased interest in the region, particularly, for large infrastructure projects where the model can vary from a fully financed package delivered by the contracting provider in return for a regular payment over the life of the concession to a solely operational provision," he stated.
© Zawya 2014
