June 25, 2008 / 11:04 AM / 11 years ago

Dubai's palm island developer sees profit booming

DUBAI (Reuters) - Dubai state developer Nakheel sees price increases for construction materials slowing to 10 percent from 30 percent due to a slowdown in the global economy, while its profit margin soars due to huge demand.

Kar Tung Quek, Chief Financial Officer of Nakheel, speaks during a Reuters Global Real Estate Summit in Dubai June 25, 2008. REUTERS/Jumana El Heloueh

The group, perhaps best known for developing enormous palm-shaped islands off Dubai, had seen profit margins jump as much as 500 percent due to intense local and foreign interest in Dubai property, Chief Financial Officer Kar Tung Quek.

“In the six months to a year it (construction costs) has gone up as much as 30 percent,” Quek told the Reuters Global Real Estate Summit.

Developers like Nakheel have had to face soaring inflation for items such as steel and concrete needed to build office and apartment towers.

“Construction costs could stabilize now given the global economy is softening ... I don’t see it rising more than 10 percent from now on,” he said.

Construction material prices have been rising in Dubai, the financial and trading hub of the Gulf Arab region, where the real estate industry has witnessed a boom since the emirate opened its property sector to foreign investment in 2002.

Still, the company has seen its profit margins widen dramatically due to booming demand for luxury homes in the seaside emirate, viewed by some as a safe haven in a turbulent Middle East.

The group sold 20 billion dirhams ($5.45 billion) in properties in Dubai last year. That sum has soared to 35 billion dirhams in the first five months of 2008 alone, he said.

“Marina apartments on the Palm are selling for 3,500 dirhams per square foot now, compared with 2,500 just six months ago and 1,300 two years ago,” he said.

Nakheel had previously been content with profit margins of 300 dirhams per square foot. “Now we make 1,000 a square foot,” Quek said.

Inflation in the UAE, the world’s fifth-largest oil exporter, surged to 11.1 percent in 2007, the highest for at least 20 years, fuelled by soaring rents.

Quek said the group had been forced to delay the so-called pre-sales of planned properties to nearer the delivery date because inflation made it difficult to meet the construction costs.

“Because of inflation in Dubai, what we try to do now is not to pre-sell too early because <that way> you lock in the price but not the construction cost,” Quek said.

Nakheel tries to mitigate inflation by paying contractors in advance and in return gets a fixed-price contract, Quek added.

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“That way we mitigate inflation risk in Dubai,” he said.

Cement prices have been rising, in part because of higher energy costs. UAE cement producers agreed with the Ministry of Economy to cut their prices by almost 6 percent in May as part of a drive to control inflation.

(For summit blog: summitnotebook.reuters.com/)

Reporting by Ola Galal; Editing by Thomas Atkins

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