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Dubai contractors face cash flow crisis

By Robin Wigglesworth & David Fickling

Dubai contractors face cash flow crisis

By Robin Wigglesworth in Abu Dhabi and David Fickling in London

Published: March 2 2009 19:40 | Last updated: March 2 2009 19:40

In the latest sign of the slowdown enveloping the Gulf, contractors working in Dubai are facing severe cash flow problems as state-linked developers, hampered by blocked credit markets, ­fleeing investors and a tumbling local property market, fail to meet their financial commitments.

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Building debt: labourers work on site in Dubai. The shine has gone off the Emirate, once seen as an El Dorado for contractors
Some contractors and consultants have not been paid for up to six months, and large Dubai-affiliated developers owe billions of dollars, according to contractors, lawyers and executives.

They say large government-controlled developers in the emirate, such as Nakheel and Emaar, are among those failing to pay.

Not so long ago Dubai was an Eldorado for construction and property companies. Attracted by some of the world’s most ostentatious and expensive projects, contractors from round the world flooded in to help the ambitious emirate turn itself into a modern metropolis.

Now, according to economists at National Commercial Bank, Saudi Arabia’s largest lender, $250bn (€199bn, £178bn) of projects have been cancelled or delayed in the seven-state United Arab Emirates – the majority in Dubai.

“The economy just stopped in the middle of November,” said Chris Cole, chief executive of WSP, a British design consultant active in the country.

Spending on two of WSP’s contracts, the Dubai World Trade Centre and Meraas Developments, has been reined in since last November and the company is estimated to have set aside more than £4m to cover bad debts in the emirate.

Justin Atkinson, chief executive of Keller, a UK-based foundations specialist, said the company was still waiting to be paid for sums outstanding on the Palm Deira, an artificial island development that was scaled back late last year.

“The official line from developers is that we will be paid, but probably not this year,” said the regional head of a large European property consulting firm. “That is hard to explain to headquarters. We have our own bills to pay.”

Neither of Dubai’s largest developers would confirm any delays in payment, saying that they would continue to honour contracts. “Payments for contractors and consultants are based on a credit cycle and set deliverables agreed with them,” said an Emaar spokesman. “All payments that meet the criteria have been honoured and will continue to be cleared, in line with our ­contractual agreements.”

A Nakheel spokesman said that all contracts would be honoured but the ­company was seeking to renegotiate some in light of falling material and ­construction costs.

Payments have become harder to predict because they frequently depend on advance off-plan sales which have dried up, say some developers. “These days cash inflows are a matter of guesswork,” said Abid Junaid, a director of ETA Star Properties in Dubai.

Lawyers said the room to renegotiate signed contracts was limited. “The courts and arbitration centres are getting bogged down with cases,” said Graham Lovett, managing partner at law firm Clifford Chance. “The volume is such that the entire system is in danger of being clogged up with these disputes.”

Saud Masud, a UBS analyst, estimates that defaults by housebuyers and residential property investors in Dubai alone could cost developers as much as $25bn over the next two years.

The federal UAE government has said it will lend $10bn to Dubai to help its state-linked companies refinance debts. However, with Dubai groaning under $80bn of debt – about $15bn of which is due this year – most of the $10bn is likely to be used to meet quasi-sovereign bond commitments, not contracting bills.

Despite the cost and time involved, some contractors are readying lawsuits. “Politically and commercially it might make sense to just keep working, but after a while it starts hurting too much, and the gloves come off,” said Paul Davies, head of Denton Wilde Sapte’s regional property practice.

“There certainly seems to be a willingness to sue the Dubai government-related companies that wasn’t there before,” said a partner of an international law firm in the UAE. “The argument ‘You will never work in this town again’ isn’t as persuasive when you’re facing bankruptcy.”



    
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