Labour camp investors face cut to their bottom line

Many of the dormitories between Dubai and Sharjah lie empty while landlords are forced to accept rents that are 65 per cent lower than two years ago.

Gulzar Mohammed works in his barber shop at Sonapur on the outskirts of Dubai. Mr Mohammed says business has dropped significantly in the past few months.

Gulzar Mohammed's barber shop once made Dh1,500 (US$408.35) a week from the building workers of Sonapur on the outskirts of Dubai. Now, in a good week, he makes half as much. The sprawling collection of dormitories between Dubai and Sharjah was once home to 50,000 people employed on hundreds of construction sites across the emirate. But now many of its buildings lie empty while the landlords who own them are forced to accept rents that are 65 per cent lower than two years ago.

Fridays should be Mr Mohammed's busiest time, when the streets of Sonapur bustle with workers from India, Pakistan and Sri Lanka on their day off. He used to return from Friday prayers to be met with a queue of people waiting outside his shop. Last week there was no queue and only one customer inside. "We have felt the pinch more in the last two, three months," he said. "Workers are not getting paid regularly and when it comes to making a choice between eating or getting a haircut, eating wins. Our expenses are the same as they were but our business is not."

At the height of the boom, worker accommodation became hot property as a shortage of serviced camps sent rents rocketing and encouraged investment funds to gain exposure to the sector. But the rapid decline in the building industry has led to rents tumbling and triggered a mass migration of workers from Sonapur to other locations closer to downtown Dubai. Today, about half of the labour lodgings built to accommodate the influx of construction workers during Dubai's six-year property boom are empty.

While rents have halved in areas such as Al Quoz, the Dubai Investment Park and Jebel Ali, the drop has been even more pronounced in Sonapur. Some 842 projects valued at more than $350 billion are currently on hold and a further 111 projects worth $14bn have been cancelled, according to Proleads, a construction intelligence company based in Dubai. Brokers say the list of available labour camps is growing.

Asif Choudhry, the managing director of Vertex International Real Estate in Dubai, has been trying to rent out about 20 camps for more than a year. "The demand is extremely weak for camps. To lease or sell a labour camp is the most difficult thing for a broker at the moment," he said. "There is no new labour coming, only workers moving from other emirates or from older to newer buildings." An unabated demand for labour lodging and an average capital appreciation ratio of between 12 and 15 per cent had attracted a steady stream of investment into the sector from property-focused funds and institutional and private investors. But that has changed considerably.

"Returns have massively shrunk on this once high-yield asset class. Add the mark-to-market effect on valuation of properties and you see both the investors and the lenders are badly hurting in this segment," said Adeel Khan, the chief executive of Potentia, a UAE-based financial advisory company. With construction activity unlikely to gain momentum in the near future as project finance remains tight, and with so many empty labour camps, investors in the sector are now looking for an exit.

"The stress is more now since the investors don't want to hold on to an asset which is not income-producing. There is pressure from institutional investors who want to exit," said Mohanad Alwadiya, the managing director of Harbor Real Estate in Dubai. Mr Alwadiya is representing one client who is looking to exit from three labour camps in a prime location in Al Quoz with 10,000 rooms in each. "These are large facilities and very difficult to sell and they are [now] on the market for over six months. The assets value could have been close to Dh2bn at peak but we are hoping to raise Dh1bn to exit," he said.

As an alternative, Mr Alwadiya is now advising the client to invest in mid-tier staff accommodation that could be pitched to major corporations, airlines and retail chains. While investors and landlords are suffering, contractors are benefiting from the rental decline. Savings made by moving to cheaper lodgings close to job sites can help ease their cash flow difficulties and improve operating margins that have been under pressure lately.

Back in the barber shop in Sonapur on Friday, one Dh10 haircut is all Mr Mohammed's colleague Mohammad Asif has to show for his morning's work. [e-mail]