By James Bennett
Next year could see Dubai's real estate market entering a new ‘cooling down' period.
If 2007 was the year of ramped-up rents, increasing government regulation and a closer focus on the information homebuyers need before purchasing a property, many experts are predicting the Gulf real estate market in 2008 will forever be remembered as the year when saturation came to town.
A quartet of expert studies over the course of the past few weeks have suggested that the real estate market in the Gulf, in particular the UAE, is in danger of seeing residential supply outpace demand by close to 40,000 units and customers finding it increasingly difficult to differentiate between the hundreds of developers touting their business on billboards, print pages, radio, TV and the internet.
As the market overloads with competitive messages, promises and overpromises, branding becomes more critical for success.
Many pundits have long been predicting that supply would exceed demand in Dubai, the Gulf's most developed real estate market by some distance. It was a matter of when and not if.
The first on the scene was regional investment bank EFG-Hermes, but its focus had a twist. Although it suggested that supply would outstrip demand in the next 12 months, it explained that a decline in prices was not expected until 2009.
The report highlighted that the market had witnessed a "far slower pace" of completed project handovers so far in 2007, with only 11,000 units of the expected 57,000 units coming on stream, meaning that supply continues to currently lag behind demand. It added that this lag had led to revised housing unit supply forecasts for the next three to four years, with estimates of 25,000 housing units for the whole of 2007, 64,000 in 2008, and 68,000 in 2009. Meanwhile, as Dubai's population continues to grow so does the demand for property. "Based on the assumption that the population of Dubai will rise to almost 1.9 million by 2010, up from 1.4 million today, demand now calls for 45,000 to 50,000 new units a year," Sana Kapadia, research analyst at EFG-Hermes said.
A price decline is some time away - something that won't please anyone living or planning to buy property soon - but the booming Dubai property market is still set to face a first in the next few months. Property management specialist Asteco predicted in a report that the Dubai growth phase is likely to cool down in 2008. "A mismatch between supply and demand is expected to soften the Dubai residential market, impacting the high-end apartment units (by 2008)," it said in a statement.
"In contrast, however, apartments catering to middle income residents are in limited supply and will continue to see high occupancy and price levels.
"In both cases a situation of oversupply is unavoidable by 2009, which will put downward pressure on prices. The extent of the oversupply situation will depend on the timeliness of deliveries," the report added.
A report by real estate consultancy Colliers International made similar predictions about inflation falling for residential rents due to a period of oversupply, and it also said that commercial projects could face even tougher times.
It estimates the area available for commercial leases will more than triple to 5.6 million sq m (60.28 million sq ft) from 1.6 million sq m now. That would start hitting office property prices as early as the third quarter of next year as rents fall, Colliers said.
The retail rental market, it added, should also brace itself for a flood of supply. Colliers said it expected the total retail space available in Dubai to more than double to over four million sq m.
UAE mortgage lender Tamweel's outlook on the Dubai property market, however, is more optimistic. Chief executive Adel Al Shirawi, says it "continues to be healthy" due to the phased entry of new properties on the market. Tamweel's latest research on demand and supply of residential property in 2008, however, paints a slightly bleaker picture with demand in Dubai outpacing supply of completed units by 37,200 units.
Al Shirawi calls the outlook for the Middle East real estate market "extremely promising yet challenging", led by high oil prices and held back by the global credit crunch. "The overall regional market is still in its growth and early expansion stage, attracting large amounts of capital to the region and prompting greater expert analysts' coverage.
But while regional development continues to advance at breakneck speed and the industry continues to mature, an increasing number of brands are vying for the attention of local and international customers. Rina Plapler, executive director of global brand consultancy FutureBrand, tells Arabian Business this is becoming a major problem and one that will, in future years, become synonymous with Gulf real estate in 2008. FutureBrand's third annual Gulf Real Estate Study shows that the line between developer and customer is being blurred with customers no longer able to tell who's who and what each developer is offering and why.
"As the market overloads with competitive messages, promises and overpromises, branding becomes more challenging and more critical for success," says the report. "Additionally, as real estate developments are growing in scale, they are being considered as destinations in and of themselves. Often they need to market themselves as places and not just as buildings."
She urges developers to do a better job of selling themselves. "They have to create a better story. By design or default it has to happen," Plapler warns.
"To keep up developers have to form a brand, saturation has caught up. It happens in any mature category but having a strong brand is the real way to differentiate yourself."
Plapler adds that the market is seeing "more work" by developers to differentiate themselves, but that "far more has to be done" as the industry becomes increasingly saturated. "Regulatory boards are forming, customer associations continue to be created and the category is, on the whole, maturing. Customers have higher expectations and more to choose from, and they require more attention than ever before.
"There are more model homes coming on stream because buyers are demanding they see something before they sign on the dotted line. But the old days are gone. They need to use more imagination to get their message across," she adds.
The Gulf Real Estate Study however, notes that there are more branding challenges facing developers in Dubai than ever before. The amount of new competition and projects being unveiled almost every day have rendered the chances of creating and launching a new brand and building awareness almost an impossible task for smaller, non-government backed brands, says Plapler. Without naming names, even the more established regional developers, she adds when faced with fixing a declining project image that is negatively affecting sales and investor interest, are finding it increasingly difficult to recover and rebuild reputations.
One way to remedy this, say experts, is to launch a long-term branding and marketing campaign to build up public awareness of a company's name way in advance of it actually announcing or beginning the construction phase of a particular project. One example is Ruwaad, a business that advertised across Dubai for almost 12 months before revealing details of its plans to build a theme park-style project in conjunction with Hollywood studio Paramount.
"A brand, in its highest state, should create an identifiable, compelling and unifying platform," adds Plapler. "To achieve this, the role of brand building must accompany every aspect of the business, from concept and product development through to sales, culture building and employee training. With every customer touchpoint, real estate brands have an opportunity to create preference, lasting value and an acceptable return on investment."
Saturation may be heading towards Dubai's real estate industry, however other cities and countries are seeing unprecedented growth as they play catch-up to the emirate's progress.
Abu Dhabi has some major property plans in line with its huge 2030 vision tome. Plapler calls the UAE capital's approach "studied". "It is creating a very balanced city with a lot of social development, and the aim of maintaining the Emirati culture."
The rest of the GCC is also going property crazy, the Gulf Real Estate Study showed. In Bahrain developers are hustling to build residential and office space to support the emerging financial centres of Bahrain World Trade Centre, Bahrain Financial Harbour and Bahrain Investment Wharf. Native Bahrainis, however, await more affordable sale and rental options to come onto market. In Doha, Qatar, the construction of large-scale, mixed-use developments is booming. Communities are nearing city proportions with The Pearl project expected to house 40,000 people. It is estimated that real estate demand is four times that of supply. Lastly, land and property prices are on the upsurge in Oman with rental prices rising 12% to 15% in 2006, most severely in the capital Muscat.
While the rest of the region plays catch-up with Dubai, if the emirate's real estate market is to continue to grow developers will soon be obliged to smarten up their acts and the industry will have to batten down the hatches for its coolest year on record. 2008 may well be a year to forget.