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.