To make it as luxury real estate in the Gulf region these days, a development must have more than a funky name and a public relations consultant. Nurai, a residential island just off Abu Dhabi’s coast, is one example of a successful luxury real estate development in United Arab Emirates. Launched back in 2008, the project boasts of waterfront living in privacy, “stunning designs” and “attention to detail”.
Zaya, the developer of Nurai, had identified a gap in the ultra high-end real estate market and the project proved resilient in the economic crisis of the following years. With buyers sticking with their commitments to the million-dollar properties on Nurai, Zaya co-founder and chief executive Nadia Zaal attests to the viability of catering to the narrow market segment of luxury real estate targeting high net-worth individuals.
“It is the only segment where demand across the world continues to outstrip supply, which reinforces our belief that this segment has great potential,” she tells Executive. “Ultimately, it’s all about creating the right product for the right people in the right location.”
Adapting to the downturn
While prices haven’t fluctuated too much, Zaya decided to reduce the number of homes after the crisis hit quite early in the construction phase. “We realized it was far better to reduce the size and finish the project,” says Zaal. Commencing handover of residences this month, the developer made efforts to ensure that residents will be receiving value-added — the idea being that luxury real estate will remain in demand if the development package really contains what is said on the box.
As the Dubai real estate crisis recedes, sales in the market tier slightly below the ultra-high end have recently hinted at growing demand for other types of high-end property. When Emaar Properties received an overwhelming response to its launch of The Address The BLVD, it cited the one-day sell out of the project’s serviced apartments in Downtown Dubai as evidence for pent-up demand for luxury residential projects.
However, what works for Emaar in the most attractive corner of Dubai might not be right for every player. “Emaar is able to benefit from its strong brand reputation and the quality of the existing Downtown project. This does not mean that there is strong demand for other projects in Dubai,” says Craig Plumb, head of research for the Middle East and North Africa at international real estate services firm Jones Lang LaSalle (JLL), cautioning developers might be wrong in rushing into risks in this segment.
Compared with the idea of putting cookie-cutter residential units up in the middle or even lower-middle range of the market, the grand image and high valuations of luxury real estate may be tempting, but developers have to be careful of assessing demand and market potentials.
“I think the depth of demand for the luxury sector is very thin, and the risks are therefore higher, there is also much greater competition in this sector of the market in Dubai,” alerts Plumb. His advice for developers thinking to enter the luxury segment is to instead target the much larger and far less crowded middle markets in most of the region.
But where does luxury start in real estate today? For the UAE, pre-crisis price trends in the high-end of the market are reasserting themselves this autumn, suggesting luxury properties carry price tags between AED 5 million to AED 6 million ($1.36 million to $1.64 million) for penthouse apartments and villas, and move up to more than AED 80 million ($21.8 million) for ultra-luxury mansions.
While margins on many other luxury goods, from handbags to cars, are often higher than for mid-range products of the same type, developing luxury real estate is not the most rewarding of property market activities when measured in return on investments (ROI). The ROI on a luxury villa or apartment right now is 3 to 5 percent, whereas mid-range property provides 4 to 8 percent, says David Terry, luxury sales manager at Luxhabitat, a UAE brokerage dedicated to properties valued above $1.36 million.
As the best returns are generated in the mid-range, this is reflected in the profiles of his clients, he points out: “There are investors in luxury property but not that many; we mainly have end-users buying.”
Luxhabitat launched two of Emaar’s buildings, which the company says it sold off in an hour. Off-plan luxury developments, which had been marginalized in the immediate post-crisis period, are no longer frowned upon by buyers. “There are quite a lot of sales in off-plan developments,” Terry comments, but adds that he thinks launching new luxury developments would not be wise at this time.
Despite recent success in Dubai and Abu Dhabi on selling what was already on the drawing board, new announcements of luxury projects have recently indeed been scarce not only in the UAE but the Gulf Cooperation Council (GCC). Well-known names are emphasizing presence, though. In Oman the $3.5 billion The Wave luxury residential and hotel development is selling its first waterfront apartments, and in Qatar two new luxury residential towers are expected on The Pearl Qatar (TPQ).
TPQ master developer United Development Company (UDC) tells Executive that price rates were generally stable over the past six months. The numbers for transactions and inquiries have picked up and the prices for luxury properties in Qatar are expected to go the same way. Wealthy property buyers in this country, with the world’s top nominal per capita gross domestic product, now have domestic choices where the market remains on a learning curve. “More than ever, understanding the issues impacting the real estate market for luxury and mid-market developments will be critical to investors’ success in the next few years ahead and that will also have an impact on the profit and risk margins,” says TPQ’s director of corporate communications, Roger W. Dagher.
Costs of building big
Qatar, perhaps not coincidentally at all, is the most expensive country in the Middle East when it comes to construction costs, sitting 16th out of 53 ranked countries in the 2012 International Construction Costs Report by London-based consultancy EC Harris, and was cited by the firm as example for a country where costs are likely to rise.
The willingness of Gulf-based developers to go luxury could be impacted by an upward spiraling of construction expenses, not only in Qatar itself but there are spillover fears in the UAE, already ranked 17th for construction costs. The concern is that demand in Saudi Arabia (ranked 25th) and Qatar could lead to unbalanced price escalation in the UAE construction sector, due to under-capacity.
Cost hikes are a major risk factor in building luxury properties, given that developers have to manage built-in costs that are higher than in other market segments. “Developing luxury real estate is fundamentally different than developing low to mid-income real estate,” says Zaya’s Zaal. “There are many factors that differentiate the cost. Firstly, even though the raw material cost for concrete and steel are the same, the design of the structure plays a big role in varying construction cost.”
A few feet more in ceiling height may not sound like promising the moon, but larger spaces, more glazing, complex building technology and more advanced mechanical, electrical and plumbing (MEP) elements, along with top interior finishes and fit-out and creation of an exclusive community, all add to the bills that have already been front-loaded with costs for a land plot in premium location.
Despite issues of thin demand and increasing financial risks, there are of course the development diehards and the visionaries of the UAE who see creation of both ultimate and affordable luxury properties as their calling and say their time is now.
Abu Dhabi’s Tourism Development Investment Co (TDIC) is a company that fits this bill. “It’s the right time to launch residential projects, especially luxury products, as we are pleased to see healthy signs of recovery in the property market,” says Ahmed al-Fahim, executive director of marketing, communications, sales and leasing at TDIC.
Responsible for the Saadiyat Island project, designed to become the UAE’s heart of culture with one new museum per year in the next few years, TDIC has sought competitive advantage in creating a prestigious address. To do so and keep luxury flowing into the Abu Dhabi market, Fahim is enthusiastic about the branding of TDIC’s high-end residences and hospitality products with names such as St. Regis, Monte Carlo and Anantara.
In Dubai, perhaps most notable new luxury projects are the two Meydan Group developments announced last month at Cityscape Global. These are the Meydan Tower on Sheikh Zayed, a luxury high rise whose exact dimensions will yet be determined, and Hadaeq Sheikh Mohammed Bin Rashid, a serene garden community in Meydan City, a development centering around the Meydan Racecourse, which is known as brainchild of Sheikh Mohammed bin Rashid al-Maktoum. Both projects, and another new residential community in Meydan City, announced by India-based Sobha Group, will make for very posh living some years from now.
Also bearing a message of luxury to this year’s Cityscape Global was Falconcity’s try for a revival of its bigger scheme, the various world monuments, includes a $1 billion Taj Mahal complete with hotel. A new infrastructure expected to see additional luxury property plans being floated was last month’s approval of the AED 1.5 billion ($408 million) extension of the Business Bay Canal by the Dubai government. When it is completed after its scheduled two years of construction, the new urban waterway aims to attract high-end residential and hospitality projects.
Although the new pipeline of luxury developments in the UAE is just taking shape at this stage, aspirational property buyers of today and tomorrow can be assured of one thing: there will always be a supply of new high-end abodes in the dream cities of the Gulf.