Tens of thousands of homes set to come online, as vacancy rates across the emirate hit 40%
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.
So far, the buyers have paid 30 percent to 65 percent of the purchase price, he said. The buildings, originally due for completion in March 2010, won’t be finished before 2013, Emaar said a year ago. Work restarted in September after a two-year suspension.
Under a 2007 law, advance payments are held in an escrow account overseen by Dubai’s Real Estate Regulatory Agency to ensure the money is spent on the project that investors are paying for. Payments made prior to the rule went straight to developers without restrictions on which developments they funded.
The typical contract allows developers to miss a property’s delivery date by as much as 12 months, Lunjevich said. Buyers trying to recoup their investments can make claims against any of the company’s assets, including performance bonds or even advanced payments made to contractors.
Nakheel, which along with Emaar spearheaded the building boom in Dubai, said it will restart work on seven projects in various stages of completion after halting construction in 2008. The developments, which include hundreds of homes in places such as Al Furjan and Jumeirah Park, are scheduled for completion by mid-2012.
“There is a reputation factor here,” said Mala Pancholia, a Dubai-based analyst at NBK Capital. “If you finish a project in a down market, there is a trust factor that you can build with customers and that can have a cash impact when a developer decides to work in other countries.”
Emaar halted all its Dubai projects following the crisis except the Burj Khalifa, the world’s tallest skyscraper. The company said that it’s focusing on completing developments that have been started and sold and may consider new ones “in view of the improved economic conditions and demand for properties especially in downtown Dubai.”
Building costs have dropped by more than 40 percent from their peak in 2008, giving developers another motivation to restart work now, Pancholia said.
“Since construction costs are so cheap, it makes sense for the developer to finish the project at the lowest possible cost now, rather than wait until there is a recovery,” she said.
Drops in UAE interest rates have also been an incentive to move forward on projects and collect further payments from buyers. The UAE’s three-month interbank offered rate or EIBOR dropped by more than half to about 2.13 percent from its highs in October 2008.
Many developers that took short-term loans at interest rates of 7 percent or more are seeking to repay those debts to get new loans at lower rates of around 4.5 percent.
“With the lower interest rates now, it makes sense for developers to go for new loans, which they can only pay by collecting money from buyers,” Pancholia said. “To do that, they must show that construction is progressing.”
Some work is restarting as developers find that some of Dubai’s prime locations held their value even as the rest of the market declined. In March, privately owned Damac Properties started building the 49-story Burjside Boulevard apartment tower across the road from Burj Khalifa, which opened in January.
“We are not adding to current supply, but simply completing and delivering to customers the projects that we have already committed to building,” Niall McLoughlin, senior vice president of Damac, said by email. “Like all global developers, the financial crisis has forced us to reassess our timelines for delivery.”
The problems with the Dubai property market are nothing to do with the collapse of Lehman Brothers!
If you were to use that rationale then the whole Global Financial Crisis was down to Lehman's!!
Dubai's problems are down to one thing and one thing only...greed.
Developers kept building because buyers kept buying blinded by greed, none of these people bothered to look to the future and realise that the bubble HAD to busrt....it was unsustainable.
People who thought they would get rich quick by flipping properties are now left with huge debts, unsellable assets and high service fees that they probably never bothered to think about as they thought they would have sold and made a quick profit before they had to think about this.
This, like all other stories about the Dubai property crisis, will likely start the usual comments about the residence visa issue but I am sorry to say that is not the problem.....it's greed! You played a high stakes game and you lost...accept it.
Excellent point Expat writer.
I'm tired of reading the fallacy that Lehman's brothers failure or the financial crisis led to the Dubai property market crash.
If anything the financial crisis helped curb the insanity that was the Dubai property speculation bubble. Banks could no longer lend out buckets of money to anyone who came along the newest and greatest real estate project. Of course as we now see the vacancy levels, the damage was already done.
Absolutely spot on.
Properties were being sold at prices that had no rational link to the cost of construction, land,quality of finish , location or any other factor that should dictate the price.
Most of the construction is low quality and some may not last as long as the mortgages. Unfortunately nobody , even end users looked into the reality of the situation. owning a property in Dubai is like having an open wound that will not heal. You have to keep paying in one way or another to tend the wound.
So sad,if they had concentrated on building quality, fair priced homes in all the different price ranges for end users that could REALLY own them,they would have attracted people to help grow and develop the country instead of instilling greed in the population and attracting the inevitable greedy developers. TOO LATE NOW.
Lower property prices may be good news for Dubai as it increases its attractiveness to business and residents.
Dubai should assist by easing / removing restrictions (visa etc.) for bona fide future residents.
I agree with the previous commentators. There is an Arab proverb "the best way is the middle way!".
It's a pity that the Dubai government did not take action to curb the frenzied growth. You can't run a marathon if you start by sprinting like the 100 meters!!
I suggest you read the book "A Colossal Failure of Common Sense" written by, Lawrence McDonald an ex-VP in Lehman brothers.
You will realize that the global financial crisis indeed was down to Lehman brothers and their work practices over the years since the late 90's.
Investments always involve risks and they will continue in that matter. The higher the returns the higher the risks involved, this is how the global financial system is built. People who bought into the Dubai property market made great returns on their investment as the market was full with rich investors. Banks had appropriate procedures to vet loan seekers securing collateral and asking for all necessary paperwork.
Investors saw good returns in the property market and kept making money until August 2008 when Lehman's bad practices finally caught up with reality on an epic scale.
It's not greed that put Dubai's investors in a bad position now, it's the financial crisis. So, please save us your nasty tone.
I am afraid you're wrong.
Dubai's market had all the same flaws as the US, Ireland, Spain, Bulgaria and other markets that fell heavily. It just had them even bigger. And because the economy did very little else except build houses, it was a classic pyramid scheme - what jobs were all the people who were supposed to live in these new houses do? Answer: construction! Building even more houses!
And in the run up to the crash, Dubai was confident - some might even say arrogant - in insisting it was immune and its economy was not dependent on international money markets because all the houses were being bought by rich people. And so it carried on building and lending when it should have seen the risks. I saw them!
If it was all the fault of Lehmans, then why has Dubai fallen 65%, and continues to fall while other markets fell much less and some even continued to rise (e.g. Canada, Germany)?
It seems to me you just want to blame it on someone else. Especially Americans!
There are countries where investing your money in property makes sense. The UAE is not one of them.
The point is this: The positive collapse in value of Dubai's property was not caused by Lehman Brothers. The market set it's course without using any reliable maps. It's captain didn't know where he was going. The navigator, first mate and other hands were clueless and gave absolutely no indication that they knew what they were doing. Did you really think that they were going to arrive at their destination? I never... But I'm sure they'll end up where they ought to be.
I am with HEDrP on this one.
I would add two remarks. 1 no politician will ever bust a bubble. It is not popular, most people (I.e., voters) believes "this time is different". Only valid option is let it go an then mop up the mess. That is why individuals can claim that is a bubble and still nothing happens. Of course it would have helped if governments had not fueled the bubble... But it felt soooo good at the time.
2 the bust of Lehman was a symptom, not the cause of the financial crises. I was at my MBA at the time Glass-Segall was reprise in e us. Even them we had some people there warning of the dangers of giving short term bonuses on long term risks. That is the real issue with financial services and investment banking. Until that is addressed we will keep having this because there is an incentive to engage in reckless behavior.
Thats a good proverb - thanks for sharing that Omar