Marcus Taylor, managing partner at Taylor Sterling Associates, outlines how liquidity issues are affecting the Middle East’s construction sector
Somewhere around the start of 2009, as the financial crisis set in, the cranes came to a halt, ushering in an era of low liquidity in the Middle Eastern construction sector.
Prior to the crisis, many of us here in the region had experienced the luxury of easily available funds. In hindsight, we now know that the crash was inevitable; it was just a question of when it would happen. But now the dust has settled, and it is clear the game has since changed.
The beginning of 2016 represented a steady, if not generous, start. During the last quarter, however, we experienced another sobering slowdown. The paranoia of landing on Mayfair with two hotels during a game of Monopoly reared its head once more.
This April, Drake & Scull International, a Dubai-listed construction firm, announced it was seeking shareholder approval to raise $136m (AED500m) by issuing new shares, with a minimum value of AED1.25 per share.
But Drake & Scull is by no means the only construction company to be affected by liquidity challenges in the sector. Analysts warn that construction companies’ margins in the region are expected to remain slim, with the exception of contractors involved in projects for Expo 2020 Dubai.
It is not only the consultants, contractors, sub-contractors, and suppliers employed in the industry that are suffering. Construction is one of the UAE’s leading industries, and many sectors are dependent on revenue from construction projects, so when it is affected, many others are too. The dark days of 2009 created a severe lack of trust when it came to getting paid. At the drop of a hat, and without warning, payments were withheld from the top down, fuelling a boom in the claims industry, for those who could still afford to pay.
Ours can be a volatile market, and it takes time to sort out disputes concerning who owes what to whom. But construction overheads are large, and there are no easy solutions for international firms.
A number of employment trends have emerged in the industry as a result of the lack of liquidity. Towards the end of 2016, there was a dramatic slowdown in some sectors and a mere levelling out of others. Fuelled by fear and the challenges faced since the start of the crisis in 2009, some firms have exaggerated the lack of hiring or awarded projects across both sides of the industry.
Many of the projects that had restarted were brought to a close and the new ones were scrutinised down to the last morsel by many developers. This led to further delays.
While many companies that had experienced a resurgence in the last two years are now experiencing thinning, in many cases this is a tactical rebalancing of overheads versus talent.
At Taylor Sterling, we have noticed that trimming by the larger firms is usually due to management restructuring to better compete with the smaller firms – that have lower overheads – which are being established across the region.
While I am no master of economics, I am definitely an optimist and believe that the problem of low liquidity will improve in the coming years. There are reasons to be cheerful, with megaprojects under way in Dubai including the Dubai Metro Red Line extension and the Dubai Harbour project. And, of course, there is Expo 2020 Dubai, as well.
A warning is necessary, however, as with more work being awarded to fewer reputable firms that are submitting cheaper tenders, it is only a matter of time before quality is compromised by a desire to limit costs. Companies operating in the industry should choose their partners carefully.
By erring on the side of caution, some have created fierce price fights to gain work from investors and developers that have a reputation for honouring their payment schedules. Those who survived the global glitch are now in commanding positions. They remember the companies that did the right thing and, more importantly, those that did not.