By David Godchaux
The emirate’s multiple ‘prime central areas’ means it will not see significant price differentiation, as experienced in other global cities.
Identifying the boundaries of the centre in any large metropolitan area is an interesting - and often controversial - exercise, as central real estate prices typically command a premium.
The reason for this premium is not only the added convenience to be close to everything, social distinction and the prestige of being at the heart of a city, but also because investors recognise that what is the centre today will still be the centre tomorrow and in 10 years’ time. This is a geometrical and geographical fact, and this added certainty is another contributing factor to the price premium.
As city centres are typically, by definition, limited in space, the lack of land will drive land price and overall property price appreciation. As land is scarce, and prices go up, developers are also incentivised to develop high-end products, meeting the demand for prime properties with long-term capital preservation in mind (offered by the ‘stability of the location’) rather than fast high yield return targets.
Aside from a few counter examples in North American cities during the 1980s, this phenomenon has been well verified in most of the largest old world cities. Moscow, London and Paris, the three largest European cities, are all very concentric and have each seen one city centre of prime and more expensive real estate emerging over hundreds of years.
This is not to say that secondary prime areas cannot emerge out of these locations, as we have seen with Neuilly and Versailles around Paris, Rublyovka around Moscow and Wandsworth, Richmond and Wimbledon Village to the south west of London, where real estate sometimes reaches similar levels of central prices.
The question generally becomes much more complicated when looking closely at large cities in emerging markets and trying to identify the location of the centre and subsequent growth patterns.
But even then, most newer cities have been following the same principle, where a unique centre, consisting of prime real estate and higher prices, has become very identifiable over a moderately short period of time: Hong Kong, Seoul, Singapore and Panama City have all followed the same model, mainly because of physical constraints. For example, the small islands of Hong Kong; the small, dense, country island of Singapore; and the canal, sea and mountains for Panama City.
Such constraints do not exist in Dubai as there is plenty of land to build on, and the challenge is trying to determine the potential areas for growth, the location of future prime areas and if the possibility exists for Dubai to have an established, resilient and relatively unique city centre driving such long-term investor confidence.
There are strong, demographic forces in play to mould what becomes an established city centre over time. What is true of cities with large urban and suburban areas, with over 10, 15 or 20 million inhabitants which saw their urban geography moulded over hundreds of years, is difficult to translate to a market that is 10 to 20 times smaller, where exponential geographical evolution and growth has occurred over a much shorter period of time.
The demographic pressure is not as strong and effective in Dubai to naturally mould a city centre as efficiently as what has been demonstrated in many other global cities.
The reality is that Dubai is a unique model, with very few historical examples to compare it with: it seems that the city, being largely a collection of master planned districts with a central infrastructure effort connecting them, has from the beginning followed a very different path, where the centre was likely to be created ad-hoc, rather than being an historical consequence of hundreds of years of demographic pressure, real estate demand and physical constraints.
The causal relationship is actually reversed here, in a unique city where flagship projects appear to create the demand and momentum ex-ante for the construction of entire districts, in contrast to modern landmarks and recognisable flagships which have been created ex-post, or more organically, often within pre-existing city centres elsewhere in the world.
There is certainly no lack of flagship projects here – whether these are existing, in the development stage or the construction pipeline. There is also no lack of quality real estate gravitating around these landmarks.
The offering, target markets, lifestyle, and products are different in Downtown, Dubai Marina, the new upcoming Jumeirah (City Walk and the new canal) and Dubai Creek districts. But as powerful as all these anchor districts are in terms of consolidating a significant share of the total demand, creating hubs and, as a result, causing local price appreciation, it is interesting to see that they will de-facto compete with each other in the future for a very similar type of real estate demand, hence restricting long-term steep upward pressure on prices in any of these districts.
In the short-term in Dubai, I do not foresee the emergence of a unique city centre of established prime real estate, in contrast to many other global cities, with significant price level differentiation between very few unique prime central areas and non-central areas. The existing and relatively successful model of connected hubs is unlikely to give way to a more organic growth model around one or two unique anchor districts forming a consensus in being the established centre of Dubai - at least before Expo 2020.
Over time, and as more landmarks and districts come into the competition, the “old world organic model” could come back in play, simply due to new geographical constraints - how far can we build ‘prime’ properties out in the south? Sharjah is the physical limit to Dubai in the north; the sea is a limit in the east; and Al Quoz gentrification is more complicated to accomplish than converting increasing amount of land to freehold in Jumeirah.
This will essentially leave one area - a more mature Jumeirah district, anchored by the canal developments, City Walk, and new freehold projects plugged into these two magnets - to become the natural geographical centre, and the most likely place for future long-term investors to see their prime city-centre anticipations self-realise.
David Godchaux, CEO at Core, UAE associate of Savills.
Easy: It's the graveyard at Al Quoz. It's been the dead centre of Dubai for years.