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Engineering the new – Economic city

The intense drive for growth

by Executive Staff

What are the three most important things for GCC real estate developers? The proper answer has to be (1) strategy, (2) strategy, and (3) strategy. This is the case for both the master planners in governments of kingdoms, emirates, provinces, or special economic cities and the entire field of private, listed, or state-backed property firms.

The magnanimity of governments and leading developers in the Arab World is reflected unequivocally in their plans to build new cities. This drive to growth is so intense that we have become used to take immediate notice of a project announcement if it carries an investment price tag in the double-digits — of billions of dollars, mind you. A cost expectation of mere millions or one or two dollar billions for a new residential district or financial center in a GCC country nowadays will hardly stir the attention of the media and other market observers.

Viability is the test for new projects

These investment dimensions represent an immense responsibility to provide returns to stakeholders, which are the current and future generations of the cities, provinces, or entire emirates whose decision makers have committed these resources of land and cash to real estate projects that will depend on being economically and commercially viable over decades and perhaps centuries.

Already in the short term, a litmus test of viability for big development concepts can be applied by looking at their productivity in economic terms, measured through the price that the market is allocating to offices and commercial properties through rent, lease, and sales contracts.

For most mixed-use mega-projects, like the six economic cities on the construction agenda of Saudi Arabia, the chances for tallying real track records for demand are still years away. The demand for office real estate in new UAE business hotspots, however, is already very measurable.

By this yardstick, the quest for creating a regional or international financial hub in Dubai, for example, has matured way beyond the vision that it was at the turn of the 21st century. The Dubai International Financial Center (DIFC) currently counts among the most sought-after office locations in the Middle East and Africa, and one can easily include numerous European capitals in the list.

Soft evidence for the demand comes from stories of companies who queued for months to get a lease on an office at DIFC, accepting basically any size and price only to establish a presence there. Hard evidence comes from price surveys that put prime properties in Dubai into the range of the ten most expensive cities worldwide for cost of occupying an office. Other market assessments say that office rents for prime space in the emirate went up 35% in New Dubai from January to September 2007, on back of an estimated 50% average increase for prime office rents in 2006.

Rental rates for sub-prime offices in New and Old Dubai are also reported to have increased massively, with some less pricey areas even narrowing the gap to the top rental category where some analysts say space is offered at average annual rates of $60 (AED219) per square foot while others put the average paid in top business locations at almost $90 (AED329) per square foot. Real estate experts working in the UAE are in consensus that vacancies in office space in the main cities are practically nonexistent. Occupancy rates of “99%” apply equally to Dubai and Abu Dhabi, where according to a senior manager at developers ALDAR Properties, “any commercial, office, residential tower in Abu Dhabi is being sold like hot cakes right now.”

Looking forward, the expectation is that office rents will continue to move up for a while because demand growth is far from over and delivery of new office space is lagging behind developers’ forecasts, similar to the UAE-wide delays of residential construction. The latest assessment of the UAE office market, by EFG Hermes researchers, expects nonetheless that commercial space in Dubai will increase to 75 million square feet by end of 2010, three times its volume at end 2006.

Office space demand is difficult to identify

Factors influencing future occupancy of office space in the UAE business centers include demand from international companies and new economic initiatives created by the various emirates. A March 2007 research note by financial firm Prime said that the supply-demand dynamics for office space in Dubai is more difficult to identify than for the residential sector, adding that industry insiders expressed uncertainty over the future direction of commercial property.

Prime estimated that about 14,700 new companies would have to set up shop in Dubai from 2007 through 2010 in order to fill the forecasted supply, assuming an average office size of 3,500 square feet per company. It compared this to the number of new business licenses issued by the emirate’s Department of Economic Development in 2006. These numbered 13,170 and to 92% were licenses for commercial and professional activities, which the researchers viewed as likely clients for office space.

EFG Hermes, for its part, expects that commercial rents in Dubai will slide back gradually from 2008, reasoning that the bulk of new office space will hit the market in 2008 and 2009 and that the totals spelt out in current development plans will all be available by end 2010. The flooding with new space in 2008/9 will align office rents again with international averages, EFG Hermes wrote.

In addition to price expectations, the scenario is also changing noticeable in matters of quality. As market participants observed, supply limits of the last few years made companies accept secondary or temporary locations when space in their desired office tower or business zone wasn’t available. But with higher pricing and diversification, the market for commercial properties has entered a process of increasing sophistication. This, according to UAE real estate management companies, accentuates the differences between well-designed and managed office towers that have been constructed with clearly defined client needs in mind and towers that were put up with vague use concepts by general investors, based on having land and money to build.

The vagaries in charting long-term prospects for commercial real estate in Dubai illustrate how strategies will be paramount assets for developers and governments. Location is very valid as classic parameter of selecting a property, be it for construction of a project or as site to rent/buy for a retail outlet, corporate headquarter, or home.

What, however, if it is locations that are being created? In the big schemes of regional growth, the players — in the UAE real estate market they are the governments of the seven emirates and the development companies they have established — are aiming to produce destinations and locations where largely no discernable commercial and social value concentrations had been perceived prior to the development initiatives.

The choice of locating one’s regional business office in a commercial center in Ras al-Khaimah, in Bahrain, or in the King Abdullah Economic City in Saudi Arabia is not going to be the same as making the more profitable pick between Park Lane and Old Kent Road in a game of Monopoly or deciding between the Champs-Elysees and a street off the Porte de Clignancourt for opening a luxury boutique. All mega-projects and larger development schemes in the GCC have characteristics of what is commonly called greenfield projects and decisions by companies to move there will be influenced by a confluence of factors, among which age-old reputation of the place will be the rarest.

Perception is crucial — it’s not all the same

From an outsider’s perspective of the UAE and other portions of the Gulf coast, similarities in climate and scenery are pervasive, although it is perhaps in the same way in which the distinct Japanese, Chinese, and Korean ethnicities of East Asia are regarded to look the same to outsiders. But as long as perception is crucial, it will be quintessential for master planners of Arab nations to devise their multi-billion-dollar projects in ways that create a mix of regulations, cultural settings, social and economic emphases, natural features, and lifestyle appeal that is just right for what they want to be. A challenging task for a community design if there ever was one.

According to the prospectuses and marketing presentations of various visionary communities in the region, the usual suspects for being included in a mega project are things like huge shopping malls, golf-course and marina adorned gated residential areas, a financial center or a dedicated free zone for specific industries, top-notch commercial infrastructure, and a tourism growth target calling for multiples in visitor numbers.

Within the UAE, emirates and cities without super-ambitious growth targets seem to be fewer than emirates with such plans. The best example for this national ambitiousness is Abu Dhabi. It has an array of development plans which by their size and number should be likened more to a flower garden than to a bouquet, ranging from a new airport and heavy industry outside the city to urban renewal and transformation of the natural islands surrounding the city, itself also located on an island. The summary net worth of real estate projects in the UAE capital is projected at $270 billion (AED986 billion).

Abu Dhabi developers say that the emirate has an advantage in devising its next steps with an eye on Dubai — in order to avoid its not so perfect experiences. “Dubai created a development blueprint and has put this area on the map, doing an unbelievable job in marketing. They compromised several things, one of them was infrastructure; we were lucky and saw this happen and studied it,” said Mohammed al-Mubarak, director for establishments and infrastructure at Abu Dhabi’s ALDAR Properties, the company that is mandated with key functions in the emirate’s real estate projects together with its counterpart, Sorouh Real Estate.

The view is shared by Samia Bouazza, marketing manager of real estate firm Tamouh Investments, who told Executive, “Abu Dhabi has the learning curve working to its advantage,” when compared with its two neighbors, Qatar and Dubai. Tamouh Investments, which is a major developer with projects in several UAE emirates, has a current 60-40 projects split between residential and retail space. Tamouh is the real estate arm of an Abu Dhabi based holding called Royal Group.

In Mubarak’s opinion, Abu Dhabi struck it right with a three-pronged focus on culture, education, and medical centers which the emirate is implementing through partnerships with international entities. It is building one museum under the Guggenheim name, which is reputed as franchisor in the elite activity of museum branding. It is also building a museum linked to the Louvre, which is the first-ever instance that the French institution lends its name to a distant branch in this form, and how can you get more elite than the Louvre? A whole island, Saadiyat, will be given to host culture and leisure.

For educational and medical excellence, Abu Dhabi will also collaborate with big international names, including MIT, NYU, Tufts, the Denver School of Mining among colleges and Johns Hopkins and Cleveland Clinic in hospital operations, Mubarak said, adding that ALDAR Properties will have a great opportunity in building integrated medical facilities under the model provided by Cleveland.

On the residential side, Abu Dhabi is exerting its power in Al-Raha Beach, a suburb for 120,000 people, and Al-Reem Island, where a current expanse of infrastructure works is preparing the ground for settling 200,000 in three residential districts by 2012. Not to forget green, Abu Dhabi has stated its ecological commitment and added a project for building Masdar City as the world’s first zero-carbon, car-free and waste-neutral green community for 50,000 residents. Carbon appreciators will not be ostracized either, as the circle of mega-projects is rounded off by Yas Island. This is going to be a $50 billion or so development with resorts and shopping, where construction of a Formula One circuit is one month ahead of schedule and race fans shall be able to smell rubber from 2009 on. The tourism-centric island will welcome visitors year-round at a Ferrari theme park and driving school.

The combination of development angles in Abu Dhabi — which is by no means exhausted in the aforementioned projects — is certainly daring and intriguing. It also represents a form of public-private partnership in which memories of 20th century models for central planning meet with private sector sagacity for commercial initiative under an in the best sense communal umbrella of tutelage.

Collaboration between developers

This mode of collaboration is such that the government tightly guards the overall planning and developers — which commonly have the state as controlling shareholder — wrangle in a competitive way over which projects they win. Knowing a certain type of project is underway, the government will likely not want to duplicate something too similar, “so you’ll see all the developers meeting together and discussing their projects,” said Bouazza.

By their parameters, Abu Dhabi’s governmental authorities and urban planners (a department with international expertise) will instruct the companies with plots in a mega development to avoid duplicating nearby projects, Mubarak told Executive. “The interaction is such that we see the urban planning department as our big brother. It is a give and take that puts us on the right track. Once we have approval for the master plan, we take it to the next level.”

The UAE real estate companies, with their massive capitalization and 0-to-100-in-four-seconds attitude, are young giants bursting with developmental vigor, and the money it takes to make good on their ambitions. Coming generations will have to answer if the many mega plans and master projects in the region are sustainable and put together in the right proportions to serve their stakeholders and have been blessed with that mysterious touch that turns a drawing-board urban design into a fascinating, eminently livable location. Cultural references of the literary Western past may not work in these times.

As for Mubarak, he is more than confident that Abu Dhabi will become one of the world’s great capitals and that the growth of the near future will be something to behold. “I can see [Abu Dhabi’s] population doubling or tripling in five years. We want families to come and live here. All projects in Abu Dhabi are planned for generations,” he says. And: “The next two years will be a very exciting time.”

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Executive Staff


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