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Boomtown no more?

Boomtown no more?

Construction analysts can’t seem to decide if Dubai is facing a construction slowdown or a housing oversupply. Which is it?

September 24, 2008 1:54 by

Yet another company has come forth and said the Gulf building boom is threatened by rising construction costs. ESI International, a project management and training company, says soaring salaries for technical professionals is threatening projects in the Gulf region worth $2.4trn.

Previously, most of the hand-wringing about the sustainability of the region’s building boom has resulted from the rising cost of raw materials, in particular steel and cement, or from concerns that prices would undergo a correction as an oversupply comes onto the market.

Yet cost pressure on the steel and cement front seems to have eased since the start of this year. Gulf News reported today that the price of steel in the UAE, after rising from Dh3,000 ($817) per tonne early this year to Dh 6,000 ($1635) over the summer, had dropped again back to a more moderate Dh3,500 ($954).

The ESI report is part of a string of warnings about the sustainability of the region’s building boom. In January, Saudi-owned developer Rakaa Properties grabbed headlines with a report that some 40 per cent of the current Dh1.5 trillion ($400 billion) worth of real-estate projects in Dubai had been “temporarily suspended” because contractors and developers could not afford to pay for raw materials, the cost of which had shot up in preceding months.

While steel and cement have come down, concern about costs obviously remains.

ESI is now saying that it’s not just the cost of raw materials that is threatening the boom, but the rising salaries of professionals such as engineers and project managers. Perhaps the statement can be taken with a grain of salt, as it appears to be part of a prepared statement by the company – in other words, a press release.

Business Intelligence Middle East carries the press release in its entirety, noting that ESI International is “the leading provider of project management training and business analysis” and Haddad is “an expert on the attraction and retention of key personnel.”

Still, the fact that companies feel emboldened enough to promote themselves by warning of a slowdown in Dubai’s much-vaunted boom speaks of the obvious strain on resources, both material and human, that is being exacted by growth pressure and rising costs.

If projects’ completion is truly threatened, it complicates efforts to forecast future movements of the property market. Dubai in particular is increasingly talked about as a potential real estate bubble, with regional investment bank EFG-Hermes recently predicting a 20 percent fall in housing prices by 2011 after a peak in the first half of 2009.

Morgan Stanley has mentioned a Singapore-style meltdown, following the model of the Southeast Asian statelet in the 1990s, as a possible worst-case scenario for Dubai.

Yet it’s difficult to imagine that happening if development stalls and builders can’t afford to build fast enough to keep up with rising demand, be it due to rising salaries or soaring raw materials costs.

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