The impact of war in Iraq is not yet being felt by the UAE's construction sector, a senior official said.
But if the conflict continues for a longer period or escalates further, it will have a negative effect on all the economic sectors including construction, he said.
In an exclusive interview with Gulf News, Grahame McCaig, Dutco Balfour Beatty Construction Group general manager, said,"Due to an ongoing boom in the UAE's real estate and construction sector, the flow of activities in the project sites will continue as usual. So far we do not see an impact of the war on the sector.
"Obviously, we are monitoring the situation closely and, as far as the construction sector is concerned, do not see any reason why one should worry," he added.
Gulf News: Do you think the construction sector is suffering from shakiness or panic?Most of the construction companies are currently executing their projects as per schedule and there is no panic among them. The sector is also not shaky in any way.
On the contrary, we have seen a dramatic rise in the number of projects, buildings in the recent months. I believe new projects are also coming up in Dubai very fast. So the war in Iraq is not at all reducing the pace of development.
However, I'm sure everyone will closely monitor the situation, as expected. What about the hike in prices of building materials? Isn't it going to reduce the profit margins for the companies on the existing projects?
In a way, yes. But most of the companies, while bidding for different projects, take into consideration these type of uncertainties. Most of us procure materials at a fixed price from the suppliers who usually have enough stocks. So the price hike in building materials, up to a certain extent, doesn't affect us much.
But if it goes out of hand, then one has reasons to panic. The situation has not yet reached that extent and I don't think it will, because as long as the air and sea connectivity remains intact, the supply of building materials will continue normally.
However, the increased insurance and war-risk premiums will be passed on to the retailers and that would reflect in the prices as well.
Q: How is the profit margin in the sector which I believe is shrinking due to stiff competition?Ans: Yes, the margin is declining. Currently, a four per cent net profit could be normal. It is not a great margin, of course, though in some segments, the margin is increasing.
However, if you consider certain facts, it is still lucrative for the shareholders because they only have to make a portion of the total value of the contract as investment. There are good opportunities for large contractors as they have solid resources within the company that take care of most of the running costs.
The fixed assets of the company, like the machinery, equipment, manpower, do not need capital investment.
For example, Dutco Group's turnover last year crossed Dh600 million. If you take four per cent as standard profit margin, it comes to Dh24 million. Now, the shareholders or the owners do not invest the entire required amount for the projects.
They probably had to invest about Dh30 to Dh40 million out of the total Dh600 million at one time which, at the end of the year, helped them to make Dh24 million in net profit. So the return on investment is huge if one considers the huge assets the major construction companies possess. Most of the costs are being offset by the companies through its supply chain.
Q: Due to the government's decision to impose security bonds for each employee, to process a visa for a worker now requires additional investment of about Dh4,500. How do the companies cope with these types of additional 'unproductive' costs?Ans: Well, these do affect the costing. Every organisation carefully works on the cost and analysis. In these cases, what most companies do is to pass on the burden to the customers. So it reflects in the bidding process and is being passed on to the clients in the form of costing.
Gulf News