黑洞社区

Dubai is looking more and more like a place with a great future behind it. You can see that most clearly on the billboards erected beside empty sites and motionless tower cranes. 鈥淥rdinary is for other people鈥� says the one where the Trump Tower was to have gone. Well, nemesis follows hubris: at least half of the emirate鈥檚 construction projects are 鈥渙n hold鈥� according to research firm Proleads, and nobody knows when, or if, they will start again.

New signs of the desperate state of Dubai鈥檚 developers are emerging every day. To look at the top three of them is telling: Union Properties has admitted it would welcome a merger after shelving its flagship 拢320m Formula One theme park in Dubailand. Emaar recently announced yet more cancelled projects: Asmaran (a 70 million ft2 , 拢17bn mixed-community scheme billed as 鈥渁 jewel in the desert鈥�), Maysan (three residential towers, also covering 70 million ft2) and Warsan (500 villas covering 3.4 million ft2). Meanwhile, Nakheel is facing a fraud investigation and has put its 拢2bn mall expansion plan on hold. It has also been hit by the halving of property prices on its celebrated Palm Jumeira project. Four-bedroom garden homes on a frond are going for 拢1.2m compared with 拢2.6m in July.

Where does all this leave the British consultants and contractors who count these developers among their top clients?

The short answer is, cash-strapped. Some are seeing their fees slashed 鈥� a 黑洞社区 survey of more than 150 people working in the UAE found that two-thirds of them have been asked to drop their prices recently. Others have been waiting for payments for six months and many are considering legal action.

What went wrong?

The first problem was that many developers were reliant on bank credit rather than oil revenue, as is often thought. Abu Dhabi, the capital of the UAE, has about 10% of the world鈥檚 oil, but Dubai has almost none. Banks were happy to keep lending to its developers as long as property prices were going up, and could act as collateral for more lending and more construction. But when property prices started tumbling, this virtuous circle turned vicious and clients ran out of money to pay consultants and contractors.

Abu Dhabi鈥檚 $10bn (拢7bn) loan to Dubai announced in February appeared to offer a glimmer of hope, especially when the Dubai government said this money would mainly go to state-linked developers. But questions are being raised about how far it will go. For one thing, Dubai has declared that it owes at least $80bn (拢56bn), of which almost a quarter falls due for repayment this year. The boss of a UK consultant with a large presence in Dubai says: 鈥淭he $10bn won鈥檛 even cover developers鈥� interest payments.鈥� He adds that compounding this is the fact that Dubai has so few ways to make money. Last year, 65% of its GDP was from real estate. He adds: 鈥淎nd there is no oil, no exports, no tax and 80% of the population are expats, many of whom are leaving.鈥� Now the fee cuts are spreading to Abu Dhabi, where developer Aldar has written to consultants to ask them to cut fees 鈥� on live projects by up to 20%.

Late payments and fee cuts

So how bad has it got for UK firms? Certainly there is no sign that the government cash is filtering through. A senior source at a UK contractor in Dubai is fuming. He says: 鈥淭he average contractor here is owed about 拢50m.鈥�

A source at a UK project manager says some payments from Dubai developers are up to six months late; Mace and EC Harris are saying openly that it is taking at least three months to get paid. WSP is estimated to have set aside 拢4m to cover bad debts and project management consultancy Blair Anderson now employs someone full-time solely to chase payments in Dubai.

Meanwhile, the head of a British specialist working on a major project that stopped in October says his firm was paid 20% of what it was owed in January. He said he has no idea when he will get the rest, although he believes it will come through eventually, as his client is linked to the Dubai government.

Then there are the fee cuts, which are affecting most firms. Evan Anderson, group director of Blair Anderson, says the firm鈥檚 fees are between 20% and 30% lower than six months ago. But he is still better off than many architects, whose fees Anderson is renegotiating on behalf of clients. He says: 鈥淲e are doing a lot of reverse briefing of designers. We鈥檙e asking them to cut their fees by up to half and to change the materials they鈥檙e specifying to bring down costs by about 30%.鈥�

Contractors across Dubai are having to renegotiate tenders, typically resulting in 15-20% being lopped off their money. The senior contractor says: 鈥淐ontractors here had been enjoying margins of seven, eight or nine per cent. Now clients are trying to get us to take margins as low as three or even one per cent. They also want to lengthen programmes so that cash flow is less onerous. It鈥檚 chaos.鈥�

More pain for consultants is arriving in the form of deferred payment plans. Mark Prior, head of the Middle East for EC Harris, says: 鈥淲e are discussing deals that would mean we will be paid in six months鈥� time 鈥� or half of what we鈥檙e owed in three months and the rest in six.鈥�

Other companies are understood to have been forced to accept payment in the forms of stakes in a development. George Grant, operations director for infrastructure at M&E specialist Drake & Scull, says: 鈥淲e have no experience of taking equity instead of cash but we would consider it. Our view is we want to work with the clients if it means that work goes ahead.鈥�

We are doing a lot of reverse briefing of designers. We鈥檙e asking them to cut their fees by up to half and to change the materials specified

Evan Anderson, Blair Anderson

Others are more wary. Anderson has refused payment in shares: 鈥淭hey offer you 1% of a development that you have had no involvement on and no idea how it works. If you invest in something you want to do detailed research on it.鈥�

Meanwhile, the old model of developers paying contractors with money from sales of units in buildings before it has been completed is a thing of the past. Projects launched on this model are being refinanced. Under the new deals institutional investors are brought in and contractors are forced to accept deferred payments.

Anderson says: 鈥淭he previous model based on off-plan sales is no longer viable, so total financing is being done by investment, and selling is happening when the building is under construction.鈥�

As a result, development is less gung-ho, he adds, which in turn means people are earning lower fees over a longer period. Developments are being built in phases. 鈥淏efore, a developer would build three high-rises at once; now they are building them one by one. They build a tower, sell it, then use the proceeds to build the next one.鈥�

Such is the state of the market that those who are actually getting paid do not want to admit it. Speaking on condition of anonymity, the head of a British architect鈥檚 Dubai office said: 鈥淚 would rather you didn鈥檛 put my name in your article because if other people working for my client find out that I鈥檝e been paid, they鈥檒l be demanding that the client pays them too, and then I鈥檒l have to answer to the client.鈥�

He says at the moment you have the best chance of being paid if you are needed to help with the process of putting a project on hold. 鈥淚f you are not essential 鈥� that is, if you are not putting remedial works in place so the client can put work on hold 鈥� you will not get paid.鈥�

Will developers ever pay?

The gravest concern of all is caused by rumours that some developers are about to go bust. Despite their government links, there is no guarantee the state will step in to save these firms. A source at a project manager in Dubai says: 鈥淚t鈥檚 impossible to say whether the government will pay developers鈥� debts or not. State sponsorship is relatively loose here. Nobody knows whether certain developers are going to be mothballed, merged or go bust.鈥�

Drake & Scull鈥檚 Grant, a Middle East veteran, says: 鈥淭here鈥檚 no doubt some clients have run out of money and will disappear. Not the big names though, they need to renegotiate their finance deals but they will carry on.鈥�

He may be right, but the question of when they will pay is still causing UK firms to fret. Emaar, to take one developer, has just had its debt downgraded by Standard & Poor, the ratings agency, from 鈥揂 to BBB+. It made a loss of 1.6bn dirhams (拢304m) in the last quarter of 2008. Meanwhile, the government has warned that the economy may shrink in the second half of 2009.

Most developers are declining to comment on the payment issue, including Nakheel. A spokesperson from developer Limitless did speak to us and insisted that all creditors would be paid. She said: 鈥淲e鈥檙e renegotiating some payment plans, but not all, as part of our overall response to the global situation.鈥�

An Emaar spokesperson also sent the following statement: 鈥淧ayments for contractors and consultants are based on a credit cycle and set deliverables agreed with them. All payments that meet the criteria have been honoured and will continue to be cleared, in line with our agreements.鈥�

But for those still waiting to be paid and suffering, what recourse is there? Another source says: 鈥淗istorically, if you鈥檙e not getting paid here, you don鈥檛 rock the boat; the last thing you do is resort to litigation. But now people are getting highly emotional. If you鈥檙e working on a huge project and you recruited a huge team to do it, and you鈥檙e owed millions, well maybe it is time to sue.鈥�

He adds that he expects to see 鈥渟ome big disputes in the next three months鈥�, which is perhaps ironic considering that Dubai is aiming to become a regional dispute resolution centre. Prior is among those who admit that 鈥渓itigation is an option we have our eye on鈥�. It鈥檚 a statement that would have been unthinkable in Dubai a year ago.

As the legal cases loom (see box, previous page), it鈥檚 clear that relations between clients and project teams are strained to the limit. The head of another UK consultancy, who asked not be named, revealed a conversation he had with a senior emirati working for a big developer. 鈥淚 said to him, if I don鈥檛 get my money, I will sue. He said, you will never work in Dubai again. I said, why would I want to?鈥�