Dubai can’t kick building habit as property glut expands

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About 40 percent of homes and offices in Dubai are empty

About 40 percent of homes and offices in Dubai are empty

Construction sites are buzzing with work across Dubai more than two years after the financial crisis set off a real-estate slump that caused values to fall by more than 60 percent.

In the next two years, tens of thousands of new properties will come onto a market where about 40 percent of homes and offices are empty.

Developers have chosen to complete projects started before Dubai’s property market collapsed rather than canceling them and facing a legal obligation to return all advance payments to customers. Falling construction costs and low interest rates also provide an incentive to build now rather than waiting for property values to increase.

“The cost of walking away from these projects is much higher than completing them,” said Ahmed Badr, head of Middle East real estate research at Credit Suisse Group.

“Developers would rather continue to build and get some of their investment back than stop and be forced to pay buyers back while their projects stand half-built.”

Homebuyers in Dubai typically pay 10 percent up front and make further installments based on how much work is completed. That means a developer that sold a home before the crash and collected 50 percent of the price so far would have to pay back more than the property’s current value if the project was cancelled. Average prices in the emirate have dropped 62 percent since the peak, Deutsche Bank said this month.

As many as 48,000 homes will be completed in the next two years, increasing current supply by 12 percent, Landmark Advisory estimates.

London-based real estate broker Cluttons predicts that 35,000 will be completed through 2012, prolonging the price slump for another 18 months.

Around 12 million sq ft of commercial space probably will be completed in Dubai this year, according to Jones Lang LaSalle Inc. Office vacancy rates stood at 41 percent in the fourth quarter and may exceed 45 percent over 2011, the property broker said on January 23. Average rents dropped by 30 percent during the fourth quarter.

“Developers who launched projects and took money have entered into contracts with purchasers and those contracts have timeframes,” said Michael Lunjevich, a partner at Dubai-based Hadef & Partners. “If a developer doesn’t deliver, the buyer can sue and ask for the contract to be terminated and the money returned.”

The new homes are coming onto a market that’s being shunned by buyers. Residential transactions declined 53 percent by volume and 65 percent by value in the year through September, according to Jones Lang.

The backlog of unfinished projects is a legacy of Dubai’s rapid rise and fall. The sheikhdom had the world’s fastest- growing property market from 2006 to mid-2008 because of rising demand from a growing expatriate workforce and speculation fuelled by borrowing.

Prices quadrupled in the six years following the 2002 decision to allow foreign ownership of property in designated areas.

That ended after Lehman Brothers Holdings collapsed in September 2008, setting off the global financial crisis. Banks across the UAE soon stopped lending and two months later, shares of the country’s two biggest mortgage lenders, Amlak Finance and Tamweel, were suspended.

Speculators caught with multiple properties and little chance to turn a profit fled the market and defaulted on purchases. Other buyers continued to honor their contracts, often paying installments even after work was halted in the aftermath of the crisis. About 50 percent of Dubai real-estate projects were cancelled or suspended after the collapse.

Mehdi Nosratlu says he already paid 65 percent of the AED3.1m ($844,000) he owes on a property purchased in April 2008 in the 29 Boulevard project. The 55-year-old German citizen heads a group of almost 400 investors who agreed to buy homes in the two towers and are trying to reach a settlement with developer Emaar.

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Posted by: SA

Looking at current situation ....an extremely high public debt, low GDP & GDP growth, no reforms in legal framework, work permit visa reduced to 2 yrs (from 3yrs), no benefits (& safety) to Investors, turmoil in the region....etc..etc

I think it will take another 2-3 yrs for the rents/price to stablized, with another 12 to 15yrs for a booming economy.

Or unless, you have oil gushing out from all over Dubai :)

Posted by: Risk taker

I am in investor of a villa in springs and a two-bed apartment in Greens towers. I have to say that the worry is not inexistent but the income I am getting by renting both places is covering mortgage, maintenance fees etc. and still giving me extra income. If I sell now, I might still make around AED 900,000 but i think I will take the risk and wait. Yes, I will get some interesting aswers to this message. The worst that can happen is that I will break even. A rental of AED 300,000 pa from both properties is not a bad investment at the end of the day. Five years from now, Dubai WILL get back on its feet (hope there is not another recession with what is going on) - Dubai is the only place in the M East with some business sense. Bubble or not bubble, things happened. I respect Dubai for taking the risk and yes, some mistakes has been done but who does not? America, Europe, Singapore, Hong Kong? everyone had their share in the past. See Singapore and Hong Kong today!!

Posted by: SA

You are lucky to get 300K for a villa in spring and 2-br in Greens tower.
Going by the rental ads in classified, others would be happy to make 200K.

Posted by: Wildwine

Risk taking on a mortgage...............wow!!

Posted by: gordon

if I look at the sale price in the Tiara on the Palm it is between aed 1200 and 1600per sq ft.

Net rent (minus service fee) about aed 60 - 70 per sq ft

If I was looking for 6 pct yield then I would pay aed 1000 per sq foot.

If I was looking for 8 pct yield then I would pay 800 - 900 per sq ft.

We have rents in free fall just now...so sale prices still have a long way to go before property becomes attractive.

Posted by: Nav

Keeping all the bubble bursts and the current real estate situation in Dubai, many folks are recommending that this is the time to buy a property in Dubai specially when it has reached its lows. What do you suggest on this?

Posted by: Prabhu

Nav, sounds like trying to sense pulse of the investors... Keep it up. Return is too low and will be with this over supply keep coming even today... We need people to fill those 40% vacancy...

Posted by: Telcoguy

Nav, you must be really naive to ask financial advise from a bunch of people you will never meet in real life.
I have nothing to add to HEDrP but one note on risk and how it will affect valuations.
Some people will argue that Dubai will be seen as a safe haven and this will bring life back. Other people will claim that this is "the end of the word as we knew it" and business will drop. There is some truth to both views; yes Dubai is clearly a safer/better place than most places around and it will remain safe and stable, inshallah, and this will attract people here who need to be in the region. But you should also consider that many people will simply decide they do not be in the region at all.
Net effect is hard to forecast, I would expect the UAE to become a bigger fish on a smaller pond, but I seriously doubt the events in the region will have a substantial impact on RE prices. Let see.

Posted by: Jebel Ali Baba

Hello Nav

Not much to add to Paul's words. Except the reliability, quality of build and legal situation of the real estate market in the UAE. Nothing has changed to the better. Usually one is planning and financing property over decades. This is simply not possible in Dubai as a foreign buyer. Together with the political and social situation in the Middle East at the moment, I expect a further down slide of the property market. The end is not reached by far. It will be reached when the prices represent the real value. And this will be another 50% down.

Posted by: Dod

The Dubai property bubble would have burst without the Lehman Bros collapse, although it would have come later and BIGGER.

If we think there is over supply now just think what it would have been like if the Waterfront project etc had gone ahead. Luckily the madness was stopped in time because of LB.

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