Up until the second quarter of this year, “growth” was the only word that would come to one’s mind when referring to the UAE’s real estate market. Surging demand, accompanied by a high level of liquidity and top market performance were a perfect combination to rank Dubai and Abu Dhabi as two of the fastest growing cities in the world. Additionally, the population growth triggered an ever rising demand on property. According to the Ministry of Economy, the UAE population is projected to grow by 6.12% in 2008, reaching 4.76 million people, compared to 4.48 million in 2007. Next year, the growth rate is expected to rise to 6.31%, causing the population to cross the 5- million mark.
According to Future Brand’s Gulf Real Estate 2008 report, the UAE currently claims 5% of worldwide real estate sales, increasing by 1.35% since 2007. The report also stated that 25,000 people per month are taking up residence in Dubai. In other words, every two minutes someone is choosing to make Dubai their new home. Moreover, the increase in the UAE’s transparency has encouraged foreign investors to further enter the market on a speculative basis, driving growth and prices upward at an excessive rate.
Before the Crisis
Ever since Dubai’s real estate boom began, demand was on a steady increase, as all kinds of projects were being launched in an attempt to keep up. “Developers in the UAE have been exploring all possible avenues in terms of developments, ranging from condominium units to hotels, villas, shopping malls, etc. As the market has a dearth in all of the above, there has been huge motivation for developers to consider building a mixture of all of them,” said Hayan Merchant, CEO of Ruwaad Holdings LLC.
Despite the developers’ attempts, supply remained short and prices were escalating accordingly. According to a Future Brand’s report, since last year alone property prices in Dubai rose by approximately 40%. Sheikh Zayed Road, being one of the most popular residential areas, recorded the highest annual rental growth of 51%. Bur Dubai and Ghusais followed suit registering 40% and 42%, respectively.
Abu Dhabi experienced a 200% increase in the commercial real estate rental sector, the highest in the world. Colliers International reported that in the Emirates’ capital, price growth of residential units reached 54% in 2007/08, compared to 18% in 2006/07. “Until the crisis occurred, demand was on a continuous increase and projects were unable to keep up. You would have a launching of a project of 500 villas that would be sold off within a day or two,” said Jean Pierre Nammour, managing director of Al Nahda Real Estate. “You could have anything on sale and people would buy it,” he added. Nammour also explained that even prices in Sharjah increased, the price of one square foot of property going up from $150 to $230.
“With more expatriates flocking to the UAE, whether as a result of the natural growth of the country as a business hub or as a result of the financial crisis, the focus is to build residential units to fill the demand gap,” said Mohamed Al Zarah, CEO of Great Properties. Oxford Business Group (OBG) reported that supply shortage in residential units reached 50,000 units in Abu Dhabi and 21,000 units in Dubai.
Additionally, Colliers International reported that office supply is expected to increase to 5.6 million square meters by 2010 and 160,000 units are expected to be delivered to the market in the same year. Although no projects were canceled, increased governmental regulations and the liquidity squeeze that gripped the banking sector recently raise doubts about the capability of developers to meet the demand.
Since late last year, developers had to worry about the rise in construction and labor costs which lead to the delay of some projects and to a further increase in property prices. According to OBG, this shortage resulted in a monthly inflation of around 1%, leading to an increase of 20% in construction costs since November 2007. Also, because of the high demand suppliers of construction materials could not fulfill more than 45% of their orders despite their efforts to increase capacity. Furthermore, finding better living conditions at home than in Dubai caused laborers to turn up their nose at low wages. This shortage did not only present itself in construction, but in any type of labor. “There was also a shortage of office staff, you could not find a secretary or accountant in town,” said Nammour.
Currently, the cost of material has dropped, but real estate companies are not initiating any new projects since the global financial crisis hit, not to mention that some have also started firing their staff. “Supply that was supposed to hit the market over the decade will definitely slow down as projects and plans are being reviewed,” averred Merchant.
When crisis hits
Although experts agree that the UAE real estate market is not as affected as the North American or European markets, it cannot be denied that it is suffering from severe turbulence that led to increased government regulations and put developers and buyers on guard.
Since the beginning of the global financial crisis, the real estate sector in the UAE has been experiencing a slowdown in demand and even some “panic selling,” stated Nammour. “I think that what is happening is a correction in the market, but there is an overreaction by investors, there was no need to go to the extreme of panic selling,” he added. Nammour also explained that panic is contagious, since if one person started selling property, many others would quickly follow.
Since May 2008 the availability of property in the UAE market has increased 150%. Real estate agents have been very busy listing properties for sale — during October, 100 to 200 properties were added to the market every day. For example, between September 10 and the end of October, availabilities at Palm Jumeirah increased by 52%. Availability at the Dubai Maritime City increased by 250%, while at Al Barari availability jumped by 117%. Moreover, the number of properties for sale also increased in Sharjah by 50% in the Al Khan area and by 151% in Ajman’s Emirates City.
Consequently, prices have started to decrease. HSBC reported that in October prices fell by 4% in Dubai and 5% in Abu Dhabi. Prices of villas recorded a 19% decrease in the same month. Additionally, the average advertised price for some ready properties decreased by 32% in Dubai Marina and 38% for off-plan properties in the same area.
Since the UAE market is known to be driven by speculation, it seems that these investors are the ones who are slowing demand and leading prices to drop. “The first effect is obviously that the investor and speculative buyers are not in the scene anymore. It is the end user who is still there,” said Isseb Rehman, managing director of Sherwoods Independent Property Consultants. He explained that big investors are now trying to cover their position. “They have exposure to lots of big projects that were released during the year. Their exposure is so large that they are now trying to cover their position or sell short, even at a loss,” he said.
Merchant stated that off-plan sales were the worst hit in the market. “The last 18 months have seen exceptional growth in the sector and this has led to prices being inflated for off-plan sales, price corrections were imminent in these areas. Even now, the biggest corrections are starting to take place in the areas where speculation was at its highest,” he said.
Rehman explained that this stage is natural in every growing market. “When the market is booming at the rate it has, it had to reach a phase where it started to mature. Right now Dubai is in a transition period from a very young market to a semi-mature one. And this transition period is where you find people refocusing on what they are doing.”
Until June 2008, mortgage lending in the UAE doubled, reaching $23.84 billion compared to $12.5 billion a year earlier, according to UAE central bank numbers. However, since the beginning of the crisis, the banking sector started to tighten lending due to global market conditions and in the fear that developers’ staff could default on their payments, since more job cuts are announced. For example, Lloyds TSB has stopped offering home loans to people wanting to buy apartments in the UAE and offered only 50% of the value of villas. Overall, banks used to offer up to 90% financing, but now have reduced that to 50- 60% only. This has further led to a slowdown in sales. “People are waiting for liquidity to fall in and lending needs to come back,” said Rehman. Even though lending has been cut, developers like Emaar, ETA Star Property and Union Properties are announcing easy payment plans to attract and hold on to buyers. “While this will certainly affect the developers’ progress on the projects and payment to contractors, it will give everybody a chance to reassess their plans and understand how the market will recover from this crisis,” commented Al Zarah.
Looking at the current state of the UAE property market, “growth” is certainly not the word one would use anymore, or at least not before things get clearer. The market is experiencing a correction and it is difficult to say if the situation will get worse. A survey conducted by Arabian Business showed that 85% of its readers believe that the real estate market will get worse before recovery comes, while only 10% stated that the worst is over. Additionally, 63% stated that investors need to be prepared for a major price correction and 22% believed that more companies will be forced to make further cut jobs.
“At the end of the day, everything corrects itself. But as long as the market thinks that the bottom has not been reached yet, there will always be speculators and investors that will dump their properties,” said Nammour. Therefore, all stakeholders should be optimistic as it will be their expectations that will drive the market upwards again.
Al Zarah believes that the situation will be clearer in January 2009. “At the moment we are running into the holiday season and the New Year, so it is difficult to predict. January 2009 will witness a new US president and we will also understand his plans to relieve the US and the world from this situation,” he said. His advice to investors is that, “those who already invested earlier this year or last year should hold on until we know what 2009 will bring. They should remain optimistic.”
Merchant said that the long-term effect of the crisis will be rather good to the whole market, since “investors and developers will have a more realistic and end-user focused approach to the development of the real estate and will reduce expected returns to those that are more reasonable in any given market,” adding that: “as an investor in the UAE and across four other continents, I am confident that towards the end of 2009, the markets should start showing signs of recovery, stability and improvement.”