Real estate prices in the Gulf countries have been rising across the board. High liquidity during the last few years and promises of big returns have seen investors from Jeddah to Abu Dhabi and beyond throw money at the sector with remarkable results. Yet the buying frenzy, coupled with double-digit inflation and a global financial crisis, has begun to make investors across the region think twice before dumping even more cash into the sector. Questions about the true value of property and the possibility of a regional credit crunch have begun to crop up almost as fast as the towers punctuating Dubai’s skyline.
The Price of Land
“Waterfront property in Dubai costs between 600 and 800 Dirhams [$160-$220] per square foot gross floor area,” said Abid Junaid, executive director of ETA Star Properties. He added that land in the Business Bay area is selling for a similar amount due to its prime location and that plots around the Burj Dubai demand another 20% on the price tag. These prices represent some of the highest yet seen in Dubai, as residential real estate values in the emirate have risen by over 25% per year over the last few years. And it is not only the exclusive neighborhoods that cost more. “Affordable housing areas range anywhere from 250 to 400 Dirhams [$70-$110] per square foot,” Junaid suggested. While these numbers may fail to impress the Emirati real estate neophyte, it is important to note that plots of land in Dubai are priced according to the projected size of the structure to be built. Thus, if a developer wants to build a 30-floor building on 1,000 square feet of land, priced at 700 Dirhams ($190) per foot, he must multiply the 30 by 1,000 by 700 to discover that the plot of land will cost him 21 million Dirham ($5.7 million). This means the selling price of the land will then amount to 21,000 Dirhams ($5,700) per square foot.
These high numbers have become prohibitive for many of Dubai’s residents, who have begun to seek refuge in the neighboring emirates along the Gulf coast. “Sharjah has always been a bedroom community for Dubai. There is a huge demand for residential apartments in Sharjah because they are on average 30-40% cheaper than those in Dubai,” said Jean Pierre Nammour, managing director of Al Nahda Real Estate and Trading. But the increasingly popular emirate just northeast of Dubai has seen its own share of price hikes in recent years. “The last plot of land we purchased was in 1996 at 65 Dirhams [$17] per square foot. Six months ago, we bought a plot across the street from us at 1,300 Dirhams [$350] per square foot,” Nammour explained. Mercifully, however, in Sharjah the size of the structure to be built does not impact the cost of land, so the price quoted is the final selling price.
Ajman
A little farther up the white sand beaches of the Gulf is the emirate of Ajman. This sleepy little town is slowly being transformed into the new Sharjah as it is an even more affordable home base for those who do not mind the slightly longer commute. “Prices for residential property in Ajman have hit 900 to 1,000 Dirhams [$245-$270] per square foot,” noted Rami Dabbas, CEO of Aqaar Properties. In Ajman the purchaser will again have to deal with the complex mathematics of calculating the land price based on structure size. Four Dirhams ($1) per square foot per floor are added to the final selling price. While this means that prices are still cheaper then Dubai and Sharjah, even this emirate is not immune to rising values. As Dabbas pointed out, “In the past year and a half prices in Ajman have gone up by 30-50% in some cases.”
Other Gulf countries are also feeling the pinch. In Bahrain, just as in other countries in the region, land is no longer cheap. “Even by conservative measures, land prices in Bahrain have seen a consistent increase in comparison to previous years. Some of Bahrain’s prime areas have seen a tripling in prices,” asserted Mahmood al Koofi, CEO of Reef Real Estate Finance Co. Growing interest from foreign and regional investors and petrodollars have been the primary drivers in the market of late. “More developed residential areas garner prices in the range of 45 to 55 Bahraini Dinar [$115-$120] per square meter. Commercial plots today go for as much as 70 to 90 Bahraini Dinar [$185-$240] per square meter and investment lands have reached up to 300 Bahraini Dinar [$800] per square meter,” Koofi said.
Saudi Arabia has seen rising real estate prices as well. Again, oil wealth plays a role, as do the plethora of announced architectural mega-projects scheduled to starting going up in many cities in the country, including the famed coastal town of Jeddah. Rakan Tarabzoni, managing director of Blue Print Communications, a firm specializing in real estate advertising, pointed out that, “Jeddah has a very dynamic real estate market, especially with the announced revamping of the landscape. Depending on the location of the land, prices may vary from 1,000 Saudi Riyals [$265] in distant suburbs to 25,000 Saudi Riyals [$6,600] for mainly high profile locations like the Corniche.”
A Healthy Market?
There is no doubt that average real estate prices throughout the Gulf have been steadily climbing for years and have reached spectacular levels. But many people wonder if this trend will continue into the future. Perhaps one of the most important indicators of what may happen in the regional real estate market is Dubai. With its liberal tax regime, openness to foreigners and a ‘can do’ attitude, this emirate of 2.2 million inhabitants is a local trendsetter.
Most of the current indicators in Dubai suggest that the real estate sector could not be better. Occupancy rates are near 100% and every year over 350,000 new visas are issued to people coming to work in the emirate. Relatively cheap credit for developers and the incredible demand for accommodation lead to a 30% surge in the number of projects planned since the beginning of the year resulting in a total pipeline of $952 billion.
“There are many projects in the pipeline and most of them are expected to be completed in 2009 or 2010. There will be excess supply in the market [should all those projects be completed],” said Turker Hamzaoglu, an economist at Merrill Lynch. Perhaps sensing the impending shift in market dynamics, the Dubai government has taken steps to cool the overheated economy and tame the runaway real estate sector with new regulations. Stiffer mortgage laws and the tacit acceptance of higher finance rates are just a few of the actions the government has taken.
Disappearing credit
While these new regulations are significant, the single most important element in the equation is the evaporation of credit due to higher costs. With funding more scarce and a global financial crisis rising, many developers will have to cut their projects. According to a recent report by Merrill Lynch, “approximately $320 billion worth of planned construction projects (a third of all project investment) are likely to be shaved.” This dynamic may be positive in that it keeps supply in check, but it will likely result in the squeezing out of many middle and lower level developers.
Hamzaoglu, however, believes that these bumps “will be a catalyst for normalization of the real estate market.” Noting that Dubai’s economy has been overheating and the monetary policy has been over expansionary, he suggested that these developments may not be such a bad thing. “If this weren’t happening right now, the correction in the future would be much more painful,” he said.
