Payment terms key to new projects, director says

Cityscape Abu Dhabi head says cash talks key to avoid past wrangles

Payment terms and legally binding documents will be critical, says Wood
Payment terms and legally binding documents will be critical, says Wood

Payment negotiations may be critical for all parties involved in projects from now on, according to one commentator, as investment and confidence from the private sector remains low and liquidity and good risk management climb the agenda.

Many links in the investment and construction chain have learned valuable lessons over the last five years, Graham Wood, group director of upcoming trade show CityBuild Abu Dhabi told CW.

“For sure developers and contractors have learned a great deal over the past 5 years,” he said. “Indeed investors have too, the story of off plan sales is of two extremes.”

“However looking forward, I think payment terms will hold the key to managing risk combined with legally binding contracts that can be enforced. One of the early features of the slowdown was the lack of cash flow due to late or non–payment. That situation had a knock-on effect and exasperated the situation.”

Emaar Properties is one firm whose cash assets almost halved at the end of 2009 from 12 months previously, to AED2.2 billion from AED5.39 billion. Its cash from operations before working capital charges also slumped by almost a billion dirhams (AED3.38 billion down from AED4.36 billion the previous year), and of the AED6 billion net cash gained only AED1.6 billion was ploughed back in to ongoing projects. Its net cash from financing activities slightly increased as it slashed its dividend – though at the same its repayments of interest-bearing loans increased almost AED300 million from AED537 million in 2008 to AED808 million.

Not all companies experienced this, however. Dubai Development Company saw cash flow from operating activities grow to almost AED600,000 profit though it cut its dividend entirely.

Wood added that analysts are focusing on four key areas the industry has to contend with for this year: liquidity, transparency, regulation and risk/reward.

“The central bank is addressing the issue of liquidity, the federal government is tackling regulation which will lead to greater transparency which in turn should help investor confidence,” he said.

“When investors gain confidence it will have a positive effect on the market and therefore reduce risk. This is a very simplistic view and will take time, but we are I believe on the road to recovery.”

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