PROJECTS: ‘Construction sector still impacted by materials price rise and liquidity challenges’

Materials cost inflation, supply chain disruptions, financial difficulties of contractors hit by the pandemic still stymie UAE's construction sector

  
Image used for illustrative purpose. An Asian labourer works at the construction site of a building in Riyadh, Saudi Arabia August 2, 2016. Image used for illustrative purpose.

Image used for illustrative purpose. An Asian labourer works at the construction site of a building in Riyadh, Saudi Arabia August 2, 2016. Image used for illustrative purpose.

REUTERS/Faisal Al Nasser

The UAE construction sector continues to face major challenges such as material cost inflation, supply chain disruptions and liquidity crunch among contractors induced by the ongoing pandemic crisis since 2020, but the market is improving, according to industry players.  

Sean Ellison, Senior Economist at Royal Institution of Chartered Surveyors (RICS), has listed a lack of demand and financial constraints as the two main challenges facing the industry. 

"The two, which are likely related, were cited as constraining market activity by most of the respondents from the UAE in our recent Global Construction Monitor survey. Further, there are some concerns that these will become more severe after the Expo 2020,” Ellison said and added that a few chartered surveyors had highlighted supply chain disruption as a significant constraint. 

They also expressed concerns over the availability of steel and supply of labour as the UAE industry heavily utilises them. 

Supply bottlenecks 

"There are clear signs that supply bottlenecks are impacting the construction sector's ability to source materials. Chartered Surveyors in the UAE expect materials costs to rise three percent throughout 2021. It is a significant increase and is well above what was expected, which will give rise to supply-side issues in view of the overarching lack of demand in the market. Moreover, tenders are expected to decline roughly one percent,” he said. 

Prasoon Shrivastava, Director, Prasoon Design Studio, said most of the finishing materials are sourced from Europe and India, and these geographies were severely hit by the pandemic and prolonged lockdowns, causing supply chain interruption. Even the supply of aggregates and sand from other Gulf countries has been affected. 

“Inter emirates border lockdown created a severe labour shortage, since the labour camps were in different emirates. These factors have affected manufacturing sector also, which continues to experience delays,” Shrivastava said. 

The cumulative impact of these factors is felt across project timelines, especially the projects which were at an early stage. 

“The overall budget has been impacted with delay in supply of cement, tiles, carpets, mechanical equipment and other finishing items. The delay in supplies has forced contractors to overstay in the project, thus increasing the overall project cost,” he added. 

Liquidity concerns 

However, Bharat Bhatia, Founder and CEO of Conares, said materials availability is not a concern.  

“Replenishment of inventory with higher cost materials is the central issue at present. Most of the projects can find the required quantities, but the only issue is the overdue payments by the contractor to the traders," he said. 

"Liquidity is the major concern at the moment. Most of the projects are well aligned with the new pricing structure, but the overdue payment issue should be addressed, as it leads to delays in projects and costs are rising due to the same." 

"Steel is not facing any issue with supply; steel prices have gone up by almost 25 percent compared to the last quarter, and this has been accepted very well. This increase is linked with raw material and logistics costs. If one agrees to pay on time and accept the increased price, there is no problem," Bhatia added. 

Below cost bids 

According to RICS Global Construction Monitor, 56 percent of respondents from the UAE said that they are consistently receiving bids below a reasonably estimated cost.  

Ellison says that in-market productivity is seen to have fallen 10 percent as a result of the pandemic. 

"Although supply-side issues are likely to be transitory in the medium term, the upward pressure on materials prices is likely to grow over the next two-three quarters. It is difficult to quantify this given that it largely depends on the speed of vaccine rollouts globally. The supply bottlenecks the UAE is facing are not isolated to a single market."  

"Based on feedback from chartered surveyors, we estimate 11-15 percent of projects in the UAE have been cancelled because of the pandemic, and several have been delayed. Given that many of the major challenges the market is facing are externalities, supporting cash flow in the construction industry should be a priority in the near term," Ellison added. 

Renegotiation of contracts 

The Building and Cost Consultancy Services team of Colliers MENA said in an emailed statement that over the past 18 months, the market had seen a dramatic rise in material costs due to the ongoing pandemic and its implications on the industry when it first started in second quarter of 2020.  

"Negotiations between contractor and client are centering around certain material price increases for renegotiation of contract prices and on the logistical time delays on existing contracts. 

"For example, two tangible construction materials, steel rebar and electrical conduit, have increased nearly 30 percent each during the pandemic. It demonstrates difficulties facing contractors in pricing future projects and dealing with long-term contracts that were already awarded. 

"This had implications on large contracts where sudden price increases are causing concern. Up to now, it has been managed on a project by project basis. If the global traffic and price fluctuations continue to normalise, this will feed positively into the local economy. We would envisage that any contractual issues will remain isolated project cases.” 

Colliers MENA observed the market returned to some normalisation in  the second quarter of 2021. "Although the volatility is continuing, we are seeing this beginning to settle. Recent oil price rise, general economic expectations that oil prices are to stabilise in the $70-80 range in the near future will help maintain price certainty.” 

Cost management and specialist consultancy services firm WT Partnership Middle East said it experienced delays in the supply of materials, particularly in the finishes trades for its projects. 

Nick Hayman, Director at WT Partnership Middle East, said that a delay is evident throughout the material cycle -- from raw ingredients to finished products. There is an associated cost increase as well. 

"We are seeing projects where budgets were fixed pre-pandemic having to reconfigure their budgets and in some instances re-prioritise areas of the design to suit the increase in forecast cost. The most impacted materials that we have seen are timber, metal and steel, though other imported products like stone and tiles have also increased."  

"The situation had been prolonged from what anyone anticipated in the first quarter of 2020. The experience of the past 12 months makes planning for the next 12-18 months easier as clients know what to expect." 

Hayman added that projects are now priced accordingly, and programmes need to accommodate longer lead times for material supply.  

“The government has generally done a superb job keeping supply routes open, which cannot be said for many other parts of the world. We are expecting the current trend to continue and are hopeful as a global economy we return to some normality in fourth quarter 2021– first quarter 2022," he said. 

Freight charges rise 

The freight charges have soared since the fourth quarter of last year with no signs of abatement, said Rizwan Sajan Chairman and Founder Danube Group.  

"Importers face higher freight costs, pushing up the prices of products and commodities. Although it is a temporary crisis due to the Covid-19 related restrictions, it is affecting businesses, not only building materials but all other shipments." 

Due to the shipment and other industry-related issues, prices of certain materials have also shot up, affecting the overall construction and real estate market. 

The rising cost of materials coupled with soaring freight charges poses a challenge for all in the building and construction industry.  

"Those projects that were planned before the pandemic will become costlier now. Real estate developers who had launched projects in the first quarter of 2020, or before the pandemic, had offered properties on a specific price range based on the cost of construction calculated at that time. 

"However, now that the prices have escalated, the contractors, who secured the construction projects based on the pre-pandemic prices, will either have to absorb the additional costs or pass on the added costs to the clients,” Sajan said. 

“Developers and contractors usually make provision for three to five percent price escalation when calculating the costs. However, the unusual price escalation or inflationary pressures will create problems for those involved in the entire construction value chain. Some will overcome this due to large stocks or high margins, but others might end up in losses, especially those who operate on a thin margin,” he said. 

Sajan sounded optimistic when he observed that things are improving and economic activities will gear up from this year, recovering from last year's slowdown. 

(Reporting by Hina Navin; Editing by Anoop Menon & Bhaskar Raj) 

(anoop.menon@refinitiv.com

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