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Analysis: Dubai's real estate market beyond the 'absolute statistics'
Source: BI-ME , Author: Trevor Lloyd-Jones
Posted: Tue February 13, 2007 12:00 am

INTERNATIONAL. Several international and regional organisations specialsed in real estate investment advisory and operating in Dubai issued reports over the past few weeks with their views on the future of the real estate market in their operational area. These reports were based on the little supply and demand statistics that are currently available in the market and provided projections mostly dependant on these statistics. 

Tariq Ramadan, Chairman & CEO of RichVille Advisory Group, commented: "We, at RichVille Advisory Group, reviewed most of these reports and, while we agree with the methodologies and assumptions used by these experts, we feel there are many other factors that can be taken into consideration, which can actually provide a much brighter outlook for the real estate market here in Dubai."

He referred to some of these areas in which the Dubai market is difficult to predict, and in which it is a unique case in the world.

Unlike many other countries and cities in Asia, Dubai is blessed by a visionary Ruler who has already proved his ability to deliver on his vision and promises as he works in the best interest of his country, the emirate, and the people, said Ramadan. Dubai's Ruler hs made it clear that what we see now is just the beginning.

Dubai has been a pioneer in introducing laws over the past five years that attract international investments to Dubai, as well as they encourage migration of businesses and professionals to the emirate. There are still a number of regulations to be introduced that can offset any risk on the economic growth of Dubai, especially when it comes to the real estate market which is a major driver of the economic growth in the emirate.

Dubai is no longer dependant on oil as a income source, instead, it has become more and more reliant on tourism and business and is on its way to become one of the major tourism, shopping and business hubs worldwide. In fact, Dubai attracted over 6 million tourists in 2006 and this number is expected to increase to over 15 million by 2010.

Furthermore, Dubai's economy has been one of the fastest growing economies in the world, offering one of the highest per-capita incomes worldwide.

Dubai is one of the few business hubs in the world that offer a tax-free environment for both business and individuals. This proves Dubai is a major attraction for incoming international investments as well as professionals from all over the developed world. Dubai also attracts many companies to either re-locate to one of its free zones or at least open a regional office in the area.

And after September 11, many professionals from Middle Eastern origins living in the US and Europe started a reverse migration to the Middle East. Of all cities in the GCC, Dubai is probably the sole city to offer professional and Western life style options. This fact creates an extra demand for residential properties.

The political situation in several countries in the Middle East is resulting in the migration of a lot of capital from these countries, and where else but to Dubai. In addition, the migration of families because of the conflicts in parts of the Middle East also contributes to the increased demand on residential property in Dubai.

While still trying to keep up with the tremendous growth in construction, Dubai government has allocated billions of dollars in its five-year budget to be spent on infrastructure projects, including a new airport in Jebel Ali, a metro system, new bridges and roads. These infrastructure projects on their own will probably result in additional population (of construction company executives and workers) that will fill in any gaps on the demand side.

Oversupply only at the high-end

RichVille also points out that Dubai's population almost doubled over the past ten years; however, most of this increase happened in the last two years, which indicates an accelerated rate of population growth over the coming five years.

Ramadan said: "Our expectation is that the population will actually double over the coming five years, especially once all the 'specialised free zones' are completed by 2008-2009. Furthermore, the population mix will also shift to more high and mid-high income professionals, when in the past the majority was mid-low and low-income professionals as well as many laborers. Based on these facts, we expect the population of Dubai to grow to 2.5 million by 2010, leading to an additional demand on residential units by around 480,000 (based on 2.5 persons per unit)

The expected projects scheduled for completion by 2010 do not exceed 500,000 'residential' units. The rest is office and mixed use developments. Ramadan said: "We do not expect most of these developments to be actually completed by 2008 as scheduled, given the construction progress of these projects, the difficulty of finding good contractors, as well as the cash flow management from the developers. Therefore, we expect that at least 50% of these projects will be delayed until 2009 and 2010, leaving little room for over supply."

The current over supply projections are mostly limited to high-end properties. The projected demand based on expected population growth rates, which as explained earlier, is not accurate, according to Richville. Hence, the projected demand does not take into consideration the fact that almost 50% of the demand on such high-end units actually comes from second homebuyers (not investors) from Saudi Arabia, Kuwait, Abu Dhabi, the Northern Emirates, as well as Qatar. More Europeans also started to buy second homes in Dubai. These buyers create a significant demand on such units, way beyond population growth rates.

Current return on investment in the residential market is above 12%. In addition, there is a price appreciation of around 20% to 30% as projects are completed. As long-term returns, these are considered significantly higher than international rates. As explained above, Ramadan said, we do not expect a significant gap between supply and demand over the coming five years, however, should there be any over supply for certain periods, we expect that returns will always be attractive and above international standards, at least for the foreseeable future.

Most historic sales were driven by speculators who drove the 'quick' sales of several projects; however, with the increased construction cost and prices, this target segment is disappearing. This makes of the market more of a real one, based on end-buyers as well as long-term investors. In other words, demand from the 'true' buyer of projects has not declined, but actually it is increasing especially since many projects are getting close to completion.

Office and commercial market unique in the world

In addition to some of the factors highlighted above, Dubai's office market is currently offering one of the highest returns worldwide, while prices are considerably below international average. The current return on offices exceeds 20%, and it is expected to increase over the coming two years.

The current office space available in Dubai is around 12 million sq m, and is expected to increase to over 30 million sq m over the coming five years. Current occupancy rates are around 99% and are expected to maintain their position for at least the next two years.

And with the significantly increasing current demand, office rents are also expected to increase by 30% to 40% over the coming two years.

In the unlikely case that demand does not keep up with supply over the coming five years, occupancy rates will not go under 75%, which is higher than market averages around the world. Furthermore, return on office rental income will likely continue to be higher than current rates and significantly above international averages.

All the above will likely keep office properties prices at the same level they are at today, according to Richville, with some minor difficulties in return, as supply and demand exchange the lead.

Ramadan commented: "As you can see from the above, while we agree with the experts’ interpretation of the available statistics, which are suggesting some sort of correction or softening in certain real estate segments, we believe that there are several measures and factors that can offset any risk of a market downturn."

RichVille also points out that there is a considerable upside yet to come, in the form of certain additional regulatory steps the Dubai government may take. 

What if …. Dubai dovernment issues a new regulation where by property owners from all nationalities are entitled to a residency visa regardless of which free hold or lease hold project they buy in.

What if … Business Bay area becomes a 'general' free zone area (with certain exceptions), or alternatively, all companies operating in Business Bay have the option to operate in Dubai without a local sponsor (in certain non-regulated business sectors) subject to a 10% income tax.

What if … the Central Bank applies new regulations that ease approval terms and conditions, and reduce interest rates on residential and commercial mortgages, including allowing international banks to operate in Dubai (more competition), reducing the connection between interest rates and the US Dollar (which is currently restricting the Central Bank’s control over interest rates) and or reducing the restriction on local lenders (required loan-to-deposits ratio)

What if … Dubai government delays the launch of certain mega master-projects (or parts of these projects) until after 2010, examples of which would be Dubailand, the Palm Deira and the Dubai Waterfront

The above are just few thoughts and examples of regulations that can enhance the real estate market performance over the coming few years.

Note: While the RichVille report was concluded by 31 January 2007, a historic presentation by HH Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of UAE and Ruler of Dubai was presented on the vision and strategic plan of Dubai 2007 to 2015. This phenomenal presentation made on 3 February 2007 confirms many of the optimistic projections for the real estate market in Dubai and actually made them very realistic. Some of the highlights of the plan included: the Dubai oil sector accounts for only 3% of total GDP; the plan is to increase Dubai’s GDP by 11% annually to US$108 billion as well as increase the per capita annual income to US$44,000 by 2015; the plan includes the creation of over 800,000 jobs by 2015, and we all know what would be the implications of such job opportunities on the population growth.

RichVille Advisory Group is a Dubai-based real estate advisory and marketing company offering turnkey investment and development solutions to investors and developers in the GCC. The company has over AED3 billion in projects under management and is working with several local, regional and international clients operating in the GCC.

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