Stretching the limits of market maturity

Last week Dubai announced yet another icon - the tallest building in the world - but the desire to build tall is nothing new. With the achievement of the Burj Dubai, the UAE will again show the world that, despite being a desert 35 years ago, it has built something no other place on the planet has within its borders. Dubai has proved that growth limitations can be stretched, not only with iconic skyscrapers but also within a booming real estate market.

Over the past few months, Dubai real estate analysts and observers have warned that the booming market has reached its peak and is now going to go through an adjustment. The handover of thousands of apartment units in Jumeirah Beach Residence, for example, was rumoured to be the trigger for rental price slowdown, however, even today, if you check any daily newspaper, you will find that neither the rental, nor sales price of any property in this market has dropped.

Last year, a market report entitled Dubai or Not to Buy published by Egyptian Investment Bank, EFG Hermes, caused a sensation. Widely circulated among investors and market watchers, the report predicted that the Dubai real estate market would reach maturity in 2008, and that rental yields would be on a par with the global average by 2009. Sana Kapadia, research analyst and one of the authors of the report views the Dubai market with a slightly different approach taking into account the changing dynamics of the market.

"We are still collecting information on the market, however, our initial analysis suggest that on a year-to-date (YTD) basis, on average rental price increases are in the range of 10 to 16%, whereas up until last year it was 30%. This is due largely to the implemented rental cap of 7% as well as the fact that the market has reached its peak and there is not much of an uplifting space to rental price," she continues.

Although Kapadia admits that some areas have seen increases in both leasehold and freehold prices, she says that the leasehold market has reached a peak. However, she adds that the ‘softening' of the market is occurring at a far slower pace than many had forecast. "We predicted that this year, with the release of mega projects such as International City and the Jumeirah Beach Residence, that we would begin to see a slowdown, with the delivery of these projects acting as an acid test.

"But we have to admit that it is a bit too early to tell the effect of these projects on the entire market. The real slowdown will begin next year once the majority of projects are handed over as expected."

Kapadia stresses that every market is cyclical and that Dubai will slow down at some point. "The fact that it will slow down means that the market is maturing. This is not negative, quite the contrary, it gives more sophistication and transparency to the market allowing it to have a sustainable prosperity."

She explains that customers have begun to pay more attention to location, developer reputation and product quality. She also stresses that the expansion of property developments across the surrounding emirates in the UAE, such as those in Ras Al Khaimah, Ajman and Abu Dhabi are having a positive impact.

From a real estate agent perspective, the demand for residential and commercial properties has not waned at all. Billy Rautenbach, operations director with agency Better Homes, says: "Business for real estate brokers has not slowed down, but we have seen a reduction in offplan apartment sales, while completed properties, especially villas, are in very high demand. Developers are now facing more competition than ever to sell products to customers that have increasingly high expectations in terms of quality, but we have not seen any slowdown at all."

Better Homes sees the increase in demand for off-plan sales of commercial properties as significant, and estimates that this trend will continue for at least the next 12 months. "We believe that the market will stabilise over the next 12 to 18 months time. It will become more competitive for developers with an increased supply of delivered products and still new products being launched.

"The agency arena will also become more competitive allowing the more professional organisations to be recognised, while the less professional agents and brokers will lose significant market share," Rautenbach emphasises.

Similarly to EFG's Sana, Rautenbach says that customers now only expect the best when it comes to buying property in the UAE. "Location, price, the right payment plan, completion date and contractor... investors are now checking whether all the boxes are ticked before making a decision," he says.

Dubai still an attractive market in a bigger picture. But if the Dubai market slows down in the near future, will there be any opportunity left for new buyers to come in? Steve Brice, regional head of research (Middle East) at Standard Chartered bank points to the ‘Big Dubai Story' theory.

"We have seen some softness in investors' and buyers' activities in the UAE real estate market. Particularly, we see the digestion of Jumeirah Beach Residence, which consists of 6500 units, to be an issue to affect the demand/supply balance."

Brice has been predicting that the Dubai property market will see a peak towards the second half of 2007, mainly due to the issue of properties at JBR. However, he also suggests that as it takes a while to hand over a property, that the real shock could well kick in later.

The Dubai real estate market has seen unseen boom levels due to significant excess demand for both residential and commercial properties.

It may be the case in the near future, however, that with the completion of a number of projects, this excess demand could calm down.

"We have started to discuss the ‘segmentation' of the Dubai real estate market, rather than simply looking at the market through one lens," says Brice.

He adds that the market will become increasingly sophisticated and perceived as high-end, while mid-range and low-end products will increasingly lose out.

"Lower end apartments seem to be particularly vulnerable, for example in Dubai Marina, however, there is still a shortage of villas in Dubai. Sought-out products will most likely maintain good levels," he explains.

So is it still worth investing in Dubai? Brice says that investors should hold the long-term perspective. "If you are ready to buy into the ‘Dubai Story' of growing into a major global business hub, Dubai real estate products are still cheaper than those in New York, Singapore, Hong Kong, Tokyo or London. You should also remember that if you are planning to rent out the property, the yield curve is still very high. All the stories of a market slowdown may just be signs of a maturing and stabilising market." Brice also stresses that we should look at the large population growth Dubai and the UAE is experiencing and expecting: "People often ask what will happen once construction has halted but the crucial thing is that the construction will never end. Dubai will keep on building. Besides, things are not being built without a purpose. The construction and real estate sector is building infrastructure to support the future growth of Dubai."

"However, we have to be realistic and accept that cycles do exist in any sector. Economies and their real estate markets have them too, but as some people might be worried, the Dubai real estate market will not see a crash that will hit the UAE economy. The mega projects are likely to succeed. We don't build motorways into the desert for no reason."

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