Coronavirus: The Waiting Game
Industry experts give their opinion on the short- and long-term impact of the COVID-19 pandemic on the construction and real estate sector
The COVID-19 pandemic and its immediate impact on the construction and real estate industry reflects the economic disruption that vital businesses globally and regionally are facing. Though the exact effects are unknown, any disruption to real estate markets are likely to be a near term delay or a knee-jerk reaction, rather than a fundamental downturn over the long term, predicts real estate advisory firm Savills.
“The impacts of current restrictions imposed to tackle the pandemic is not just limited to the construction and real estate sector but also on all the ancillary industries that support this sector.
“Supply chain disruptions in any one industry can have a ripple effect on the overall economy,” says Swapnil Pillai, associate director, Research Middle East at Savills.
“In the short term, there is likely to be minimal impact on ongoing construction activity due to the existing inventory levels, but a prolonged lockdown will result in the delay of raw materials thereby impacting project timelines and completions.”
On the other hand, he states that deteriorating investment confidence due to looming threats on employment and economic growth will have a short-term impact on the construction and real estate sector.
Similarly, Saleh Abdullah Lootah, CEO of Lootah Real Estate Development, acknowledges that the global situation has led many businesses in different sectors to shut down, resulting in significant revenue loss.
“With COVID-19 disrupting the supply chain, there are delays when it comes to logistics in the trade sector as well as job cuts for those who can’t sustain their operational expenses. Although construction sites are still operational, due to the rising cases in the UAE, the government may order a complete suspension of work. This will affect labour and logistics further and result in delays in the handover of properties.”
Pillai made a similar note that this current situation may lead to a slowdown in project completions and developers may defer the launch of new projects.
Analysing the situation, Ujjwal Goel, managing director of La Sorogeeka Interiors – a vertical at Teraciel Group, weighs in that the over-reliance on single territories for the global supply chain will have a significant impact on the construction industry.
“China and Italy contribute a large part to the hospitality, residential and commercial projects in terms of supplying luxury interior materials. We will see a change in perception and procurement strategies as there will be an inevitable slow down and backlog as factories revive operations.”
“Moreover, countries such as India has also closed a lot of its steel plants, whose resumption will be time-consuming, while the sudden surge in global demand as life resumes to normal will put added pressure on these industries,” he asserts.
But are all long term ramifications on the regional construction and real estate industry at a disadvantage?
Pillai believes differently. “Fundamentally, the demand for real estate in the UAE is strong and offers good value across select developments/micro-markets. Investors can take advantage of projects offering sale and leaseback options, discounted pricing and other investment incentives during this time.”
“The upfront financial requirement to buy property has reduced as individuals now have an additional 5% as part of the relaxed LTV norms. The Abu Dhabi government has also waived off (for the entire year) real estate registration fee of 2%. As a result, transaction activity by residents may increase as individuals who are currently renting will find it more affordable and lucrative to purchase their property.”
Moreover, he believes that the slowdown will help to balance the supply/demand dynamics, leading to a more mature and stable real estate market.
On this note, Lootah agrees with Pillai and points out that a decrease in property rates, interests and deposits will reignite investors and first-time buyers. On the flip side, he says that this will make managing cash flows a challenge for developers and institutional landlords.
Delving deeper into the issue, Lootah says the real estate industry can benefit from the comprehensive stimulus packages that are offered by the government.
“This includes the easing of financial responsibilities of the company and relaxation of renewal for licences by cancelling the 25% down payment for the instalment of government fees. It has also exempted permit fees for new sales and offers.”
“Another benefit for the sector is the reduction in water and electricity bills for a period of three months; company funds saved from this directive can be allocated to other expenses,” the developer states.
To this end, Goel comments that the industry will require a government stimulus to ensure that at least “last mile financing” is provided for projects that are running late due to a cash-flow crisis. However, it is equally important that governments take a severe role in ensuring completion of off-plan projects. The impact of default on completions may create a downward spiral by driving consumer sentiment downwards and a further loss of sales for developers, he explains.
Pillai adds to this: “While some sectors may witness consolidation, others, such as warehousing will be driven by an increased appetite for e-commerce, and food delivery (cloud kitchens) will observe strong demand in the medium to long term.”
Standards and Regulations
From a legal standpoint, the outbreak of COVID-19, its subsequent pandemic classification and significant economic impact may have led many stakeholders to revisit their contracts, says Joanne Strain, partner at King & Wood Mallesons, Dubai.
“As projects stall or slowdown, contractors and developers are, where possible, quickly asserting “force majeure” clauses. Such clauses typically seek to exempt contracting parties from liability where performance becomes impossible due to a non-foreseeable event beyond their control.”
“Force majeure contractual clauses are commonplace in UAE commercial contracts and will be applied in accordance with their terms. The FIDIC Red Book (1999) refers to “force majeure”, a non-foreseeable, exceptional event or circumstance beyond a party’s control, which could not reasonably have provided against nor avoided and which is not substantially attributable to the other party.”
She emphasises that force majeure is a well-established concept under the UAE law.
“Article 273 of the Civil Code provides, as a mandatory provision of law, that if performance becomes impossible owing to force majeure, the corresponding obligation is extinguished and the contract cancelled or cancelled in part if part performance remains possible.”
Strain observes that in the future, more contracts can be expected to expressly provide for whether pandemics will qualify as a force majeure event, and what the specific consequences will be for the contractual parties.
“Contracts may seek to deal specifically with the consequences of site closures, labour shortages and delays in receipt of materials, due to circumstances beyond either party’s control, and to consider, at the outset, which party should bear the associated risks.”
“Going forward, stakeholders in the industry may also wish to decrease supply chain disruption risks by placing greater scrutiny on where suppliers obtain materials to ensure geographical diversification, with correlated contractual provisions to ensure supply chain transparency.”
In order to protect themselves, contractors and developers should document the steps taken in response to COVID-19, including associated costs, Strain adds.
“This extends to complying with legal or regulatory changes and steps taken to mitigate losses, which could become crucial in any future litigation proceedings. Any applicable insurance policies, which may cover business interruption events, should also be reviewed, along with provisions for notification of claims.”
Coming back to how the regional construction and real estate industry can be better prepared for the future, Lootah says.
“Leaders can focus on implementing long-term plans for more resilient building infrastructures—those that will be equipped to face future outbreaks. These include creating contingent designs that may act as preventive measures, as well as observing not just quality living, but a healthy and hygienic environment for its investors and community members.”
Goel expands on this: “Each organisation needs to develop a disaster management strategy. There should be engineering and procurement phases in place for work to go on even if teams are put under lockdown. Additionally, personal protective equipment (PPE) needs to undergo an evolution to allow our teams and us greater protection from airborne or highly contagious viruses.”
“In summary, we will be better prepared for such situations in future through innovations in PPE, investments and evolution of mass sanitisation methods for large workforces entering/exiting sites and an overall change in strategy for organisations to manage health, safety, hygiene of sites, accommodation and offices,” he elaborates.
Pillai also states that banks will likely step-up their exposure to real estate and the construction sector, a spike in re-mortgage activity may also be witnessed in the coming months due to attractive borrowing rates.
He concludes: “The UAE Government has been very proactive. There have been various measures implemented to ensure business continuity while also ensuring that the current situation is contained.
“Going forward, private sector participation would be key to address any industry pain-points and creating a road map for speedy economic recovery. Companies should also start business risk planning and implementing strategies and technologies to ensure business continuity.”
