Five years ago it was the building frenzy and Dubai, at least on paper, looked bigger and dinosaur-crazier each month. Then an unprecedented phase of correction meant the survival only of the fittest projects and the leanest developers. Today, the emirate and the entire federation are in a new growth mode that can be likened to a natural evolution, master-planned.
On the ground this translates into a cautious buzz from visible construction activity. This entails airports and hotels and further solidification of the United Arab Emirates’ hospitality and tourism infrastructures, but in Dubai in particular it means that roads are being completed and multi-unit residential projects are bit by bit transformed into the communities they promised to be.
Put in numbers, real estate transactions executed in the UAE over the 12 months ended September 17 totalled around 15,500 with median prices of about $280,000 per transaction, according to Dubai-based emerging markets real estate information company Reidin.com.
“There is a significant revival of developers’ interest in specifically the residential and hotels market. You can expect more residential projects but on a much slower pace than before,” Ahmet Kayhan, chief executive of Reidin.com tells Executive.
According to Reidin.com the total number of registered and licensed real estate projects in the UAE as of September 17 amounted to 1,051 residential projects. The company identified some 470 of these projects as being in various stages of execution and 353 completed, plus 153 which the company believes to be on hold, and 19 known to be cancelled. In the offices segment, 151 of a total of 489 projects were identified as completed, 214 under construction, 71 on-hold and 10 cancelled.
Even though the real estate regulators in the different emirates have been improving their gathering of market information, Kayhan says it is not always easy to get a clear picture of the markets. His company, besides using official information, relies on lots of proprietary research and data gathering. “We believe some of the on-hold projects are really on-hold but most are cancelled. Some will restart soon, but mostly they won’t,” he says.
Some residual data insecurity notwithstanding, the mood in the UAE’s real estate sector entering the fourth quarter in 2012 is positive, according to Craig Plumb, head of research for the Middle East and North Africa at international real estate services firm Jones Lang LaSalle (JLL). “The current sense is one of cautious optimism, replacing the previous cycle of exuberance followed by despondency,” he says.
Master-planners at work
In engineering this moderated buzz, Dubai’s master-planners have done what they said they would. They took a close look at the boom-time mega projects to trim and adapt them to market circumstances, while continuing to build the infrastructure to base future development on. One example for the cityscape’s evolutionary adaptation is the new opera house and modern art museum cultural district announced in May for Downtown Dubai. Its anchor, the Dubai Opera House, was transplanted to the area near Burj Khalifa from The Lagoons, a 2008-announced, $25-billion paper tiger of artificial islands and high rises that is currently on-hold and likely to remain so for the foreseeable future.
A rather telling example of far-reaching adaptation to reality is Meraas Development, a corporate child of the emirate’s wild property days that was born in 2007 into the far-flung business tribe of Dubai’s ruler, Sheikh Mohammed bin Rashid al-Maktoum.
Thanks to its late birth, the company did not play a part in any of the Dubai mega projects that were ongoing in 2008 and ground to screeching halts overnight. However, it came onto the stage of breathtaking property displays at the 2008 Cityscape Global real estate show by exhibiting a vision of urban reinvention in several well-populated districts between Downtown Burj Khalifa and the seafront.
The project was inconspicuously called Jumeirah Gardens but would have involved not only a further extension of the Dubai Creek from Business Bay (canals were en vogue in new projects back then based on arguments that these water bodies would refresh the desert and that waterfront properties are more lucrative) and another 600-meter tower (always a favorite among male project owners) but also required deep cuts into the existing Al Wasl and Satwa residential quarters.
The Jumeirah Gardens $95.3 billion testimony to mega-sized planning has not yet moved any closer to becoming a reality, but the company seems to have the stamina and the land to pursue its underlying vision when conditions and interest of foreign investors make projects of this scope possible.
In the meanwhile, Meraas, which as a developer is still one of the better-kept secrets in the UAE real estate market, has been continuously adapting its master plan for market conditions. Its current line-up of projects includes the infrastructure of the Pearl Jumeirah Island and The Avenue, a 1.1 kilometer retail project to be developed in three phases along Al Wasl Road. In hints at its future, it announced the Dubai Adventure Studios theme park at the end of last year, and Dubai Properties Group (DGP) recently announced Meraas will contribute a mall in low-rise towers over the next 18 months to its popular JBR Walk. Trumpeted with a hefty AED 2.2 billion ($599 million) price tag, the theme park is to be built in Dubailand.
Controlled rise of residential
Looking farther across the Dubai developer landscape, multi-unit residential projects are making their comeback but also in a controlled fashion. “Market activity at this stage is focused on the master developers with Nakheel, Emaar and Dubai Properties all launching, or re-launching, properties this year,” Matthew Green, head of research and consultancy for the UAE at real estate services firm CBRE Middle East, tells Executive. “This trend has been prevalent over the past 18 months with the major developers generally pushing to complete their live projects and further establish master-planned communities.”
The government-owned (via Dubai Holding) DPG just announced at the beginning of September the restart of its Mudon project in Dubailand. Citing rising demand for up-market dwellings, DPG will complete some 348 villas and townhouses. Shells of the Cairo Townhouses, one of five city-themed building clusters in the partially complete development, have been gathering dust for more than two years as the project lay dormant. At its unveiling in 2007, it was touted as an $11 billion community for 50,000 residents.
Nakheel, buoyed by a 36.5 percent increase in first-half 2012 profit to AED 767 million ($209 million), has progressed with handovers of townhouses and apartments in projects it restarted in 2010 and 2011, and this year moderately increased its pipeline of new residential developments on The Palm Jumeirah. The ambitious company, which had been battered more than others during the 2008-09 downturn, needed an $8.6 billion cash injection via the Dubai Financial Support Fund (DFSF) in 2010. Part of its $10.5 billion debt restructuring is lately emphasizing the completion of The Palm Jumeirah, with both homes and commercial projects, the most flamboyant being The Pointe, a major retail and hospitality strip. The developer has been busy talking to banks about raising the more than $80 billion it will need to make it happen since January this year, claiming indicative positive responses.
Hospitality is big on the mind of Damac, which claims to be the largest private sector developer of luxury real estate in the Middle East. Among 10,000 units in its current project pipeline and a new swathe of projects to be announced in the near future, the company plans for 4,000 serviced apartments, General Manager Ziad el-Chaar tells Executive.
Emaar’s focus is Downtown Burj Khalifa where it is expanding Dubai Mall and has just announced another project, ‘The Address BLVD’ — a hotel conjoined with serviced residences that will stand 340 meters tall. The enthusiasm to snap these residences up, though, smelt of an unhealthy return to speculation, judging by reports of queues forming days before they went on sale. Back in May the developer boasted of selling all 224 units in a mid-rise apartment development, Panorama at The Views, “within hours” of its launch. Another project, the Alma 2 community within the Arabian Ranches development, has also met resonance with buyers.
Based on market indications and marketing incentives offered by developers who want to rapidly sign buyers for projects like Panorama, Executive calculates that sales prices fetched by developers of well-positioned apartments and villas these days would be about equal to where prices stood in late 2007, signifying a substantial recovery from the depth of the trough, at least for residential projects with good infrastructure and a good reputation.
“Clearly there is improved sentiment in the market and that is portrayed by a return of off-plan sales launches,” remarks BRE Middle East’s Green. “However, there is a note of caution to sound, with investor focus still firmly on completed and income-generating assets. Whilst some interest has been evident for newly launched products, this appears to be speculative rather than from end-users or long-term investors.”
Despite some off-plan selling being successful, which was not the case a year ago, the real drivers of real estate development these days should be economic fundamentals, for which JLL cites growth outlooks for both Abu Dhabi and Dubai. In the case of Dubai, gross domestic product growth prospects of four to five percent are mainly based upon its healthy tourism and trade sectors, while Abu Dhabi continues to diversify and cut its reliance on oil.
What the market needs
“What we really need to see is a more sustainable model of development being established in Dubai. Something that is built on true end-user demand and solid fundamentals rather than simply relying on speculative demand to forward-fund projects,” Green adds, reiterating what has become the consensus on Dubai’s evolutionary real estate needs.
The office sector, though, appears to be suffering from oversupply as vacancies of 80 percent in Business Bay speak loudly, while Dubai’s offices in general are half full. Single ownership offices, representing 60 percent of Dubai’s supply, would be the ones to fill up first, but the remaining ones are strata, or multi-owner, titles and perceived as a headache by potential occupants, according to JLL.
“There is definitely not enough new demand to fill up all the empty space in locations like BB [Business Bay]. Expect strata space to be more difficult to lease than that in single ownership,” comments Plumb, adding that free zones still attract an, albeit subdued, premium when compared with onshore offices.
“The only type of development we really need right now is for pre-committed tenants — there are a number of new industrial projects being built for identified tenants and there are also some major office requirements that are looking at having premises purpose built for them rather than leasing spec built space,” he says.
JLL’s second-quarter Dubai market overview states that, according to developers, 24,000 residential units should be handed over in the second half of 2012, but Plumb doesn’t expect all of them will be. “Although they cannot be delayed forever, as most of these are pretty much finished and just require the contractors to be paid and the power to be connected,” he explains.
CBRE’s Green meanwhile believes the number of units to be delivered during 2012 hovers around 14,000, which he says is significantly down on historic annual supply figures. Of those, 3,000 are villas, which Green reckons could lead to inflationary pressures being felt on rents of well-positioned and good-quality villa products.
What is clear is that the new buzz in the market has had its effect on prices, sales and leasing, and the impact is mostly positive for developers, as buyers ability over the last few years to influence prices their way is decreasing. However, what one may call a ‘great divide’ continues to rule Dubai’s real estate market: established areas — such as Emaar’s success with its Panorama and Alma 2 projects suggests — win.
“In established areas we have already seen the market move from stabilization into increase in rents,” says Plumb. “In the less established locations owners are increasing asking prices more out of enthusiasm than reality. I suspect these areas will continue to see rentals decline for the next 12 months. There is a huge amount of new stock just waiting to come on-line, such as in Sports City.”
The majority of the future supply pipeline lies in the emerging secondary locations such as Jumeirah Village and Dubailand, home to Sports City. “This may result in growing vacancy rates and further availability of landlord incentives in those areas that are most impacted by oversupply,” Green explains.
Across the Emirates
Casting a quick eye across nearby northern emirates Sharjah and Ajman, occupancies and rental incomes are looking up but also with softer spots mixed in. According to the April 2012 property update by Cluttons, Sharjah’s Al Majaz Waterfront is offering a new flair to the emirate and is likely to see higher occupancies, but Asteco’s second quarter report on the Northern Emirates highlights dropping rents in Sharjah. In Ajman, resurging building activity in developments alongside Emirates Road has made some of the residential towers rise in height but it is not clear when Ajman’s Emirates City will become a liveable place.
Taking a drive in the opposite direction to Abu Dhabi and the immediate visual impression is of new towers which seem to have sprung up over the last two years, such as Etihad Towers and Sowwah Square. According to Cluttons, Abu Dhabi has seen occupancy levels in the Grade A spaces improve in these office developments, as well as in Aldar’s HQ tower and in Grade B office spaces available on Reem Island.
The capital of the UAE is not suffering from oversupply in residences and residential rents in Abu Dhabi are still 15 to 20 percent higher than in Dubai, despite recent handovers of Reem Island, Al Reef, Al Raha Gardens and of Saadiyat Island. Rent-to-own schemes are working well in the capital, according to Cluttons.
“A large number of projects have either been put on ice or, where started, the projects have been stopped or delayed,” says Richard Paul, Associate Director at Cluttons. “This put upward pressure on any available premium property and in consequence rents have either held or are even increasing.”
CBRE’s Green, however, believes that Abu Dhabi is reaching the peak of its development cycle and that is reflected in the continued deflationary pressures on rents. “Looking forward we see further downside for rents in Abu Dhabi over the next six months,” he says. “This is particularly true given the large number of units set to be delivered in the capital over the next two years.”