The
Dubai real estate sector witnessed an unprecedented boom in the wake of
the opening up of the freehold property sector to GCC nationals and
other expatriates. This boom was fully reflected in the land and
property related transactions carried out in the emirate in the past
years, particularly in the last two years. Dubai is experiencing one of
the most unprecedented property booms the world has known; so much so
that big developers from all parts of the world are setting up in Dubai
and in the other emirates.
What
is a correction? A bubble burst? No, it is stabilization and maturity
taking hold. It is the basic principle of a free market, where in the
market corrects itself if sentiment gets too far away from the actual
worth of a product.
Will Dubai’s property bubble burst sooner than later? This is the
question being asked. Recently Donald Trump Jr., the son of American
real estate tycoon Donald Trump, has dismissed talk of a bubble in
Dubai’s property market. According to him a cyclical lull will hit the
market and weak developers are weeded out. But Dubai’s tax free status,
its political stability and the freedom given to developers to design
innovative projects will sustain investor interest. There will be a
correction long enough, eventually because everything is cyclical; a
growth rate of 25% per year is not expected to be sustained. The
property market will re-centre, which will probably happen in three
years. As consumers begin to expect more for their money, and have the
luxury of choice, developers have to create stronger and more
attractive propositions. The time is ripe for some real differentiation
through design, quality, innovation and service – not just gimmicks to
sell more apartments.
Dubai and the UAE property market entering maturity can only be a good
thing and there are some classy economic indicators for this. An
increase in choice for consumers, increasing market share for a few
professional and established players, higher barriers for entry, such
as difficulties in capitalizing projects for small developers, and
tightening of regulations by the municipalities, are all good positive
signs of an increasingly professional and business like approach to the
sector. Moreover, the returns for developers are very attractive
compared to any international markets.
Delays in delivering the units have been a point of concern for many
investors; in a maturing market, delays are not unknown. However,
timely delivery of projects would be one of the key service parameters
in the future.
THE INVESTMENT CLIMATE
Dubai has become a key venue for business and investment in the Gulf,
with one of the most liberal business environments in the region. The
real estate and construction sectors have become the centerpiece of
Dubai’s economy. The strong performance in real estate spurred healthy
development in many other sectors such as tourism, commerce, industry
and services.
Local investment in the UAE economy, the Arab world’s second biggest,
will surge 24.9 per cent in 2006 to Dh. 117 billion ($31.9 billion)
according to the Minister of Economy. The investment estimate is based
on the volume of projects under construction around the country,
including roads, airport expansion and other development activities.
UAE’s GDP at current prices is expected to jump 23 per cent in 2006 to
Dh. 597 billion ($162.6 billion) from Dhs. 485 billion in the previous
year, helped by a rise in oil prices and growth in manufacturing and
services. The UAE economy is becoming increasingly diversified as a
result of its concerted efforts to grow vertical sectors like aviation,
logistics, tourism and manufacturing. The International Monetary Fund
has forecast the UAE’s real GDP will grow 11.5 per cent in 2006. The
overwhelming and continued success of the Free Trade Zones, shows that
the country means business in encouraging investment with its tax-free
status and world-class logistics infrastructure.
Preparations are underway to enact a new Companies law. Another law on
competition and investment is also in the pipeline. These will change
the face of UAE and the inflow of international businessmen and
professionals will dramatically increase.
The Government is also anticipated to go forward in the privatization
of certain government organizations and family-owned businesses
creating more formal corporate structures.
TACKLING INFRASTRUCTURE ISSUES
The issues that accompany rapid economic growth are
normally associated with the infrastructure growth not keeping pace
with the economic growth. Dubai has been able to manage this with great
speed and effectiveness. Mattar Al Tayer, Chairman and CEO, RTA said
based on available statistics for the current development projects, RTA
is planning a road network for a projected population of 5 million
people in Dubai excluding tourists.
Dubai Municipality’s annual
budget exceeds AED 1.28 billion ($350 million), with approximately 90%
allocated to infrastructure development. Dubai plans to invest over AED
22 billion ($6 billion) in infrastructure-related projects in the
medium term: AED 16.5 billion ($4.5 billion) is earmarked for the light
rail and transit (LRT) development, around AED 1.83 billion ($500
million) will be spent on road and bridges, AED 1.1 billion ($300
million) on drainage and irrigation and AED 2.56 billion ($700 million)
on general projects.
With regards to infrastructure in Dubai, HH Shaikh
Mohammad Bin Rashid Al Maktoum recently said “there is a race in Dubai
between projects and the development of the infrastructure. We are
falling behind only in two areas, traffic jams and the increasing rents
which we have capped. We will overcome this issue in less than two
years with the completion of the new roads and bridges and the metro
project, which will reduce traffic jams. He also said only 10% of the
developments planned for Dubai are announced till now. He stressed that
“Impossible is an illusion nesting in the minds of the unable”.
PROPERTY MORTGAGE MARKET
Property mortgaging is also an essential driver of the growth in the
property market. The property mortgage market in Dubai is expected to
touch Dh. 17.5 billion by 2007, according to officials. Dubai’s home
finance sector has recorded a 64 per cent increase in one year,
touching Dh. 11.5 billion in 2006, up from Dh. 7 billion in 2005. The
mortgage finance market in Dubai opened up in 2003 with Dh. 1.1 billion
followed by Dh. 4.1 billion in 2004. Despite starting late, this shows
not only a phenomenal growth in this sector but also the inclination of
finance companies to help high-end consumers owning property on easy
terms. According to Tamweel, the three reasons for the growth in this
sector are – the consumer’s willingness to go for a longer term loan,
awareness about the securitization process and increase in prices of
real estate.
RENT CONTROL VS FREE MARKET PRINCIPLES
The Emirates of Abu Dhabi, Sharjah, Ajman and Ras Al Khaimah recently
followed Dubai’s example by imposing limits on rental increases from 7
to 15 per cent for the next year. Dubai has yet to renew its rental cap
of 15 per cent which has been in force for one year. Although these
measures are applauded by hard-pressed tenants all over the UAE, who
faced rental increases of up to 100 per cent over the last three years,
the long-term effect of imposing rent control could not be good for the
country’s economic health at all. The history of rent control speaks
for itself, which ironically proved world wide that it does not
alleviate housing needs but creates shortages, diminishes standards and
frightens investors away. It’s no wonder that some 31 states in the USA
adopted laws and constitutional amendments forbidding rent control.
Another bad side-effect of rent control unquestionably is the matter of
maintenance and supply of services by the landlord. If the landlord is
forced to accept rents that are not market related he simply cannot
maintain the building in a decent state with the cost of the upkeep
being market related but the rents not. Such buildings take on a very
dilapidated look within a few years. Rent control effectively means
“price fixing” which is totally against free market principles. It
violates an owner’s property rights plus reduces the market value of
the property under control. If investors get the idea that the UAE
authorities are going to intervene in the rental market from time to
time the consequences are obvious. They will take their investments
elsewhere and the local economy will suffer. So the prediction is that
the rent caps can happen in Dubai only for short term as a temporary
relief measure. Another way to look at this scenario is – The 15 per
cent rent cap is higher than the official UAE inflation figures of 8
per cent and Standard Chartered’s estimate of 13.8 per cent. So an
individual can buy now at a mortgage of around 8 per cent, rent out the
property, cover their expenses and yet make a profit. But savvy
institutional investors recognize the prudence of Dubai’s government
creating a sustainable economy in which they feel secure to
invest.
POPULATION GROWTH
The main drivers for the real estate growth in Dubai is a useful
combination of explosive population growth and strong liquidity.
Dubai’s population has topped 1.3 million according to the latest
census. Mattar Al Tayer, Chairman and CEO, RTA said based on available
statistics for the current development projects, RTA is planning a road
network for a projected population of 5 million people in Dubai
excluding tourists. Dubai is also building its infrastructure to cater
to 15 million tourists per annum by 2010.
The infrastructure growth and coupled with the various initiatives
taken up by the Dubai government in attracting foreign investments and
development of businesses in the emirate, are turning out to be the key
contributors for the ‘quality’ population growth in the emirate. Some
examples are:
Dubai Metro Project – expected to employ over 2500 professional
Dubai World Central – expected to have a community of over 250,000 residents
Dubai Industrial City, Dubai Logistics City, Dubai Maritime City and
Bawaadi – all mammoth projects which are expected transform basic
economic outlook of the country and bring in quality population
Other Free Zone Initiatives, such as International Media Production
Zone, Dubiotech, Dubai Silicon Oasis, Dubai Media City, Dubai
Outsourcing Zone – set to attract more than 30,000 high end
professionals.
All these initiatives reinforces the great development pace that Dubai
has achieved within diverse domains to become one of the most
recognized cities in the world.
EMERGENCE OF LAND LAWS
The Dubai Government will be launching the Condominium Laws (Strata
Laws) in 2007 which will outline a unified maintenance and service
charges for all properties. It will also set up an Escrow Funding
mechanism for property purchases which will boost investor confidence.
Another very important law to be strictly enforced is the penalty
clause for delays. This will again boost buyer’s confidence. Real
Estate Investment Trusts (REIT’s) are going to be launched soon. Dubai
realty auctioning is already started with Dubai Land Department’s
participation and auctioneers are heading for a boom in 2007. The Dubai
Land Department will oversee the auction process and will hold the 10
per cent deposit (of the value of the auctioned item), which a bidder
must pay in advance in a trust account – a key factor in ensuring
consumer confidence in the auction method.
ANALYSING THE DEMAND
From being a vehicle to get rich quick, the Dubai Property market has
matured into a classic long-term savings plan for expatriates and
nationals; and banks report strong growth in their mortgage business
creating a true end-user market. The days of the speculator are over.
The market is largely free from speculators and now genuine buyers
would be buying and selling property in the market and that’s good for
everyone. The over-zealous buy-at-all-costs approach to real estate of
the last two years will make way for a more contained marketplace. This
should not be seen as negative, it ultimately bodies well for Dubai as
a sustainable real estate option.
A strong secondary real estate market is beginning to emerge in Dubai,
with residential developments showing dramatic capital increases on
resale, according to the latest UAE Residential Review report from
Colliers International. One contributing factor in fostering market
stability will be large number of homes coming on stream over the next
four years. As of today the total number apartments and villas that
have reached completion will be a maximum of 40,000. Colliers
International estimates the total number of apartments and villas
planned for completion by 2010 will be between 170,000 – 240,000 units.
If we conservatively assume 200, 000 that means a total of maximum
240,000 units only are getting ready. Most of the initial buys were by
speculators and foreigners who may keep it for investment, rent it out
or sell it off. With a current population of 1.3 million in Dubai only
240, 000 units are getting ready by 2010. By 2010 according to the
Government the population in Dubai will reach 5 million with all the
planned and announced developments as of today ready; many more
developments and initiatives are yet to be announced. According to the
Government, Dubai will need at least around 500,000 additional
residential units in the next 5 years. So there is a huge requirement
coming up with the influx of a lot of new professionals and
businessmen. While the free zones in Dubai are expected to create
150,000 new jobs during the next three years, DIFC, Dubai Internet City
and Dubai Media City together are expected to create additional 135,000
new jobs. Within the numerous foreign ownership zones, speculative
investments have been surpassed by the appetite from owner-occupiers,
especially for properties that have been completed or are nearing
occupation. This is leading to a maturing of the market and the
development of an established secondary market, comprising investors
with residential projects who have incurred dramatic capital rises on
resale. Dubai has been a shrewd investment for buyers over the last
four years, with demand for housing acting as a catalyst for increased
prices. While the trend is expected to continue in the short-to-medium
term, the market will eventually go through a period of correction. A
moderate correction is more likely than a crash in prices given Dubai’s
fast-growing economy and an influx of expatriate population.
TO CONCLUDE..,
A booming property market has a number of advantages for the region.
The tourism and hospitality market is one of the first to benefit, with
the manufacturing and industrial sectors close behind. Finally,
infrastructure and support services such as schools and hospitals also
come under increasing pressure to perform better. All-in-all, it’s a
healthy situation for any country.
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