Contractors bear the brunt of rising costs amid Hormuz Strait disruption, according to the UAE’s credit rating agency, Moody’s

Developers continue construction of 2026 and 2027 delivery projects despite the 20-25% increase in imported material prices due to fixed price contracts

Despite the unexpected disruptions to shipping through the Strait of Hormuz, the UAE’s real estate developers have been coping well with the consequences and maintaining the schedule of construction works, as stated in a recent Moody’s Ratings report.

As per the report, the inventory is adequate, the contractors have been able to absorb most of the cost increases so far, and the developers are preparing for contingencies to ensure cash flow because the logistics chain is being rerouted.

An MoU was agreed upon between the US and Iran on June 17 to implement a 60-day ceasefire and facilitate the free passage of vessels while discussions on long-term solutions take place. Though hailed as a credit-positive step, the ceasefire agreement has already faced violations by both parties, indicating that de-escalation will be a slow process. Disruption is likely to prevail well into autumn, according to the baseline forecast of the report.

The uncertainty makes it all the more important for the developers to be able to source materials and deliver their projects within the stipulated time because it is significant, considering that project deliveries account for between 20% and 40% of their revenues in Dubai and Abu Dhabi and 60% in Sharjah.

Delivery on schedule

According to Moody’s, feedback received from the rated issuers stated that deliveries for 2026 and 2027 are still on track. The inventory for construction materials now covers two to six months, with the more advanced buildings having greater quantities of fit-out materials, because the majority of imported materials go to interior works.

Main materials like concrete, steel, aluminium, and ceramics come mainly from local sources and are relatively unaffected by any disruption. However, products like lifts, HVAC systems, MEP elements, lighting, wood joinery, stone, and furniture are more vulnerable because they depend on imports.

With projects nearing completion, builders tend to stock more buffers to prevent delays at the last mile; hence, most properties due for delivery by the end of 2026 were already nearing completion or had their materials arranged before the disruption occurred. Ships travelling via the Gulf ports have started taking alternative routes to Oman, Saudi Arabia, and the Eastern coast of the UAE to bypass the strait.

Cost absorption by contractors, not developers

The cost of imported building materials has gone up by about 20-25% compared to pre-conflict levels, according to developers. Importantly, these cost increases have so far been absorbed mainly by contractors and not developers.

As per Moody’s, the majority of developers who are rated, such as Emaar Properties, Aldar Properties, Damac Real Estate Development Limited, DIFC and Arada Developments, depend mostly on third-party contractors, whereas companies like PNC Investments and Binghatti Holding have construction capabilities.

In any event, short-term cushioning is through either fixed-price construction agreements or prices for materials settled in advance, impacting margins and cash flows in the coming year by only a limited amount, according to the global ratings agency.

Meanwhile, contractors seem to be coping well with the extra pressures for the time being, owing to the improved margins they have developed during the recent boom in UAE real estate. Easing labour shortages relative to pre-conflict levels is another factor helping to keep operations running smoothly. There does not seem to be any sign of widespread contract renegotiation, but this could change in 2027.

Even in the case of complete pass-through, the report indicates that the cost of construction will only increase by 1.5 to 2 percentage points every year, even if the impact on gross margin is proportional, given the assumption that there will be cost pressures on only about half of the total projects.