With the weight of the financial crisis still holding back real estate developers, some are finding it necessary to delay or even cancel projects.

Nakheel, one of the world’s largest privately owned real estate developers, announced in mid-January that it has stopped construction on the Nakheel Tower for 12 months. The tower will purportedly be one kilometer high, making it the tallest in the world. This has lead to the layoff of construction workers, in addition to the 500 employees already axed by Nakheel in Novemberw 2008.

In the first week of January, Dubai’s real estate company Meydan LLC canceled the Nad El Sheba racecourse construction deal with the Malaysian firm WCT Berhad — formerly known as WCT Engineering Berhad — and Arabtec. Meydan’s chairman told Arabian Business that the deal was canceled because the joint venture of the two companies was unable to “deliver certain zones” of the project on time and was confident that Nad El Sheba will not be delayed for the Dubai World Cup in 2010 since new contractors will be appointed.

The magazine added that WCT told OSK research the racecourse faced minor delays two months ago, mainly due to changes in the project designs required by Meydan. It was reported that WCT will request compensation of $84 million for the cancellation. WCT and Arabtec refused to comment further on the issue. The $1.3 billion development will include a 1.2 kilometer grandstand with a capacity of 60,000 people, a five star-plus hotel, restaurants, a museum and covered parking for 10,000 cars.

Two weeks after the Nad El Sheba racecourse was canceled, Arabtec was also forced to stop work for a year, at least on the $654 million Atrium project, after the Dubai-based Sunland group — the project’s developer — called for the delay without announcing why. The Atrium project is located in the new Madinat Al Arab area. It covers more than three million square feet, includes three basement levels and two 68 story residential towers blended together and was supposed to be completed in 2013.

As well, the Harman City Complex, which is part of the City Complex in Las Vegas, has been canceled. The complex was being developed by Las Vegas-based CityCenter holdings, a joint venture between MGM Mirage and the Dubai World subsidiary Infinity World. Robert Baldwin, president and CEO of CityCenter told Emirates Business 24/7 that, “by cancelling The Harmon condominium component, we will be able to avoid the need for substantial redesign resulting from contractor construction errors.” The cost saving anticipated by the company due to the cancelation amounts to $600 million.

Al Futtaim Group Real Estate, the company developing Dubai Festival City, has also delayed work on parts of the $2.99 billion project.  According to The National, at least three projects in Dubai Festival City had been stopped, including W Hotel, the Al Badia Business Center, an extension to the retail facilities that opened in 2007, as well as the Four Seasons Hotel. The company has taken this step in order to benefit from a further fall in construction costs due to the financial crisis, which would enable it to reduce its expenses. Other real estate companies in the region are also suffering.

In Qatar, the Ras Laffan Industrial (RLC) City, run by a Qatar Petroleum management team, is revising projects due to the drop in oil and construction material prices. RLC, located 80 kilometers northeast of Doha and covering 106 square kilometers, is one of the most important projects in Qatar. The city hosts an industrial port and several industrial facilities. It provides integrated services to businesses including modern infrastructure, security, fire and safety facilities, a medical center, an environment section and a support services area.

As more projects are frozen, either due to the lack of liquidity, the fall of construction material prices, or corporate disputes, these delays will further deteriorate investors’ confidence in the property market and set back its eagerly anticipated recovery.

Abdulla Bin Sulayem is the operations director of Palm Deira, which will be the largest man-made island in the world and a new city within Dubai for more than a million people. It is the final part of The Palm Trilogy consisting of Palm Jumeriah, Palm Jebel Ali and Palm Diera. Nakheel, the world’s largest privately held real estate developer, is driving the project. Nakheel now has 16 major projects under development in Dubai across a range of sectors. The company’s portfolio spreads across more than two billion square feet of land and is projected to be worth more than $30 billion.

E When did Nakheel start construction on Palm Deira and what stage has the project reached?

In 2003, the deal was signed between Nakheel and Van Oord, the company that is creating the island for us. Right now we have more than 36 percent of the island completed, which is equivalent to more than three times of what is available at the Palm Jumeirah in terms of land area. Currently, more than 50 percent of vibrocompaction is completed, which basically makes the land stable and ready for construction. That is the same method we used in Palm Jumeirah and that people use all over the world. Palm Deira will eventually hold a population of 1.3 million people. The difference between Palm Jumeirah and Palm Deira is that Palm Deira is going to be a city on its own. It will have a lot of facilities, offices, retail, swimming pools and even firefighters; everything that you find in a normal city will be available in the Palm Deira. One of the reasons for this is that we have tried to minimize the traffic going in and out of the Palm, so if you live there you can work and be entertained there as well.

E Has the construction at Palm Deira been affected by the ongoing financial crisis?

These difficulties come from corporate Nakheel. We work together with them to adjust our business plans. Obviously the financial crisis is affecting the whole world and changing plans. What is good about Nakheel is that we took a lot of sukuk funds from the market, so we have secured a good amount of cash to finance the project. Nakheel is thinking to complete the committed projects, where people already paid for villas and apartments. For other projects, we will have to readjust our master plan based on the market conditions.

E Are some parts of the Palm Deira projects going to be delayed because of the market conditions?

I would not say delayed, but we are re-examining the programs and making them more flexible. Some properties that were sold to investors, we are continuing to complete these and have the land ready for them. Other than that, we have one bridge that is already under construction and that is still ongoing. We have our sales office that was under construction, which is going to be completed in a month’s time.

E What about delivery times? Are they the same as planned?

Of course the delivery of the project will all depend on the market conditions. If we have a commitment to someone, we are still committed. The other parts that we were thinking of creating or planning to do, these will be slowing down until the right time comes.

E In November, you denied rumors that the project was on hold. Where did these rumors come from?

At that time some information was given to the public that we are stopping Palm Deira, which was incorrect. So in November we came out to the press showing them that we are still continuing. Of course with the financial crisis, we would not be continuing as fast as we were before, but the project is not canceled and that was our message. We still have a team of over 100 staff from Nakheel in Palm Deira working on the project. Mainly in Palm Deira there were many rumors before, maybe because of the prices of villas and there is a lot of history behind it. But what is good now is that we have more than 36 percent of the island completed and we showed that in November, so after that period we felt the market now understands we are still going ahead with the project. It could be because of the magnitude of the project, people weren’t sure that we would go through with it. Of course the crisis has had an effect on everyone and we are not moving as fast as we were moving, but that is the sensible thing to do since our direction is based on the market. For example, if we were planning to sell two bedroom apartments and demand is there for one-bedroom apartments, obviously we will divert to the demand. We have one private investor that joined the venture with Nakheel. We have not announced their name yet and maybe this month or next month it will be announced. This private investor will jointly construct 50-50 with Nakheel a development that is to be announced.

E Have you launched any part of the project yet?

No, not yet. The launch will depend on market conditions. So the launch will be 50-50 with the private investor. It will be launched in stages depending on market conditions.

E Congratulations for winning the developer of the year award. What do you think made your company the winner?

I would say that we have good management, which believes in empowering the business unit to come up with ideas. Nakheel is working in a very healthy environment and what we like to do here is show our experience in different areas, so we always come up with innovative ideas.

The grim reality of the global financial crisis is biting hard in Dubai, especially for the many living beyond their means. Of late, people have taken to measures such as dumping their cars at the airport and fleeing the country, with police having recently removed 22 cars from Dubai International Airport.

The National reported that last year 3,241 cars were reclaimed by banks, a 123 percent increase on 2007. Debt collectors report a boom in business as banks ensure loan defaulters do not get away with their “park and run” attempts. The reports of abandoned cars has created a lot of activity in the blogosphere with many living in Dubai blaming the phenomenon on the ease in which you can buy a car. As one blogger said, “It was so easy to buy cars in the UAE no guarantor required, no down payment, pay a minimum of up to 5 years, the car prices are all tax free and cheap.” Another blogger summed up the attitude in Dubai that has left so many in financial ruin. “To succeed in life I must lose all moral and ethical intuition, move to a foreign country, take out loans for assets, roll the dice, pop the champagne or book the return flight.”

However, for some the implications of the financial crisis go far beyond the mere ‘dump and run’. Sharjah Police reported the suicide of a Pakistani businessman — who had lost millions — by self-decapitation with an electric chainsaw. Police say they are expecting a rise in the suicide rate as the financial crisis progresses, thus it may be that abandon cars at the airport are among the more mundane symptoms of ‘crisis’.

The Middle East is seeing a rapid increase in the number of angels and their networks. Angels are individuals of high net worth looking to invest  in private companies and ventures at an early development stage.

The Arab Business Angel Network (ABAN), funded by Dubai International Capital, has been actively encouraging the creation of business angel networks across the region. Walid Hanna, the CEO of ABAN, stated that the concept of a business angel investment and a business angel network is based around the idea of “smart money.”

Unlike venture capital firms that invest other people’s money, angels invest their own money in the venture proposed, replacing the traditional methods of accruing seed capital: FFF (friends, fools and family). Business angel networks are created to gather angels together and to help them find propositions that they can put seed capital towards. The aim of these networks, Hanna states, is to, “create companies, diversify the economies of the region, boost cross border trade and most importantly create jobs.”

These four goals are paramount for virtually all MENA economies and thus business angels are unsurprisingly being created at a rapid pace. The popularity of business angels has also been helped by positive returns on investments that have even surpassed private equity firms’ results at a general level. In the US, a report by the Angel Capital Education Foundation stated that angel investments reported a return of 2.6 times the original investment in three and a half years on average, although 52 percent of angel investments returned less than the capital put in by investors.

The prospect of good returns for investors has meant that in 2009 already three memorandums of understanding (MoUs) have been agreed, two in Saudi Arabia and one in Lebanon, to establish business angel networks. Antoine Abou-Samra, managing director of Bader, who signed the MoU with ABAN to set up a network in Lebanon, said the creation of a business network with ABAN will be highly beneficial in terms of, “the exchange of knowledge, deal flows and business contacts.” Hanna said  Jordan and Egypt are following Saudi and Lebanon and signing MoU’s with ABAN to set up Angel networks. As networks grow across the region, hopes are that the angels live up to their name and bring the blessing of “smart money.”

Officials in GCC countries started to set rent caps in the last couple of years in order to curb the skyrocketing inflation hitting the real estate sector and their economies in general. In the UAE, Qatar and Bahrain, rent caps were set to deter greedy landlords who were increasing rents at excessive rates without restriction. In the UAE, the rent cap for 2008 was five percent for both Dubai and Abu Dhabi, and ten percent in Bahrain. In Qatar, the cabinet decided in March 2008 to freeze rents for two years on contracts signed after January 1, 2005. No clear statement said how much landlords can increase prices after the two year freeze expires, but contracts signed before January 2005 can increase between five and 20 percent.

Experts agree that the rent caps are not very effective, since most landlords have been ignoring the law and adopting a ‘take it or leave it’ strategy. Most tenants were forced to pay the increase for fear of not finding other accommodation. The total number of complaints received by the rent committee in Dubai was 8,000 in 2007, 9,000 in 2008, and 320 by mid-January of this year.

Dodging the cap

Amin Al Arrayed, general manager of First Bahrain, believes that one way to circumvent the law is to change the ownership of the property. “Let’s say the building was in the name of the son, he transfers it to his mother’s name. That is the new owner, so she can increase the rate [as much as she wants]. And then the next month she can transfer it back to her son,” explains Al Arrayed. “You can play a lot of games to go around the rules,” he added.

An index of rental values for residential units in the Emirate of Dubai in second half of 2008

In 2009, the rent caps for Abu Dhabi and Bahrain remain unchanged and no modifications were introduced to the cabinet’s decree in Qatar. However, with the expiry of 2008’s five percent rent cap in Dubai, tenants found themselves in a state of confusion with no legal protection from extraordinary rent raises. Nevertheless, with many people leaving Dubai due to job losses caused by the financial crisis, some experts say that a rent cap is not necessary anymore since rents are likely to soften. With the demand reduced and new supply coming to the market, landlords are currently allowing more flexible payment terms and are expected to stop increasing — or even start to decrease — rents if the market conditions persist.

Marwan Bin Ghalita, chief executive of Dubai’s Real Estate Regulatory Authority (RERA), stated that a freeze in rent is needed to replace the five percent rent cap. Ghalita told Gulf News, “We don’t need a rent cap this year. We need to freeze everything. Two-thousand nine is a tough year and we shouldn’t interfere with rents too much.” Consequently, RERA has issued a decree freezing rents on residential and commercial properties in Dubai for tenants who renewed their contracts in 2008. Yet, if the rents were more than 25 percent below the recommended figures in Dubai’s newly issued rental index, then the freeze does not apply. The new index sets the highest and lowest average for residential and commercial properties in Dubai and serves only as a guideline for both tenants and landlords. The new decree stated that rents that are between 26 and 35 percent below the index can be raised by five percent. Those who are between 36 and 45 percent below can increase by 10 percent. Those between 46 and 55 percent can be raised by 15 percent. Beyond 56 percent, the increase allowed would be 20 percent.

Worries in waiting

Concerns are emerging from experts saying that some people will face hefty rent rises due to the new index. Nicholas Maclean, the managing director of CB Middle East Region Richard Ellis explained that some people might be paying much lower rents than the minimum set by the index and may be subject to a substantial and unaffordable increase in rents that would drive them out of their property.

Additionally, the rental index, which was set during mid-2008, is considered outdated and irrelevant due to changing market conditions. It also sets an average for areas where both old and new buildings exist, which can make the average rate below or above the building’s fair price. In the coming months, Dubai will have a clearer view about the effectiveness of the index since it is too soon to know if landlords will use it to their advantage in order to inflate prices or it will represent a fair guide to Dubai’s rental market.

In the GCC, countries like the UAE, Qatar and Bahrain are feeling the global financial crisis in their real estate rental markets. This is due to many factors, including a decrease in demand resulting from the outflow of expatriates, as well as a fall in property prices and new supply coming online.   Currently most rent prices in the UAE and Bahrain are somewhat stabile, and a decline in rental rates was already felt in the office market in Dubai in the last quarter of 2008. Experts predict, however, if demand and property prices continue to drop, rents will soften in 2009. In Qatar, Asteco’s general manager David Oayda seems more optimistic. He predicts that rents will stabilize and not decrease, since Qatar’s real estate market is less affected and its demand will remain strong. 

Lower demand

Since the financial crisis began, some experts expected that rental demand would increase as people were shifting from being buyers to tenants due to lack of mortgage financing. This would certainly be a positive sign for the rental market. However, the downsizing of companies and less available cash on the part of tenants is having an effect on the rental market and leading to a slowdown in demand and prices. Nicholas Maclean, managing director of CB Richard Ellis Middle East Region, explained that, “in the residential market, there was some level of rental growth, but I think that the view for the market at the moment is that rents have declined for weeks in Dubai, partly because of people leaving due to redundancies in the real estate sector and also due to the lack of confidence.” The same applies to the office market since businesses are currently delaying expansion plans and even shrinking, which results in a lower demand for office space.

In Bahrain, the market is mainly based on domestic demand and is therefore less affected than the UAE. However, general manager of First Bahrain Amin Al Arrayed, explained that the expatriates in the kingdom are seeing smaller incomes. When that is combined with unemployment, demand for apartments might slow down. “A lot of jobs, especially in the banking and real estate sector are heavily commission based, so a lot of people’s incomes have been affected because they are not making as much commission as before,” explains Al Arrayed. He adds “If the economic situation keeps deteriorating, we could see more weakness in that market since there are less jobs and people will start to move elsewhere.”

Rents and prices

Another reason why rental rates are expected to come down is their tendency to track asset prices. However, the change in rents is slower and not as significant. So when property prices were increasing quickly in the last couple of years, rental rates were following suit. “Prices of apartments, offices and homes were all going up very quickly, so there was a lot of inflationary pressure on rental rates,” says Al Arrayed. He added that, “this crisis has resulted in the fall of asset prices and so the expectation is that we will see more softening in rental rates if [the crisis] continues for much longer.”

Iseeb Rehman, the managing director of Sherwoods Property Consultants, links the decrease or stabilization of rental rates to rental returns, which investors expect to range between eight and 10 percent. Therefore, if the value of the property has decreased, it is normal for the rental rates to slow down. Yet it is important to keep in mind that rentals “hold stronger” than property values and therefore do not decrease as fast.   

New supply

Additionally, the real estate rental market is expected to be negatively affected by new supply coming to the market, not only from developers, but also investors who are unable to sell their properties and therefore choose to rent it in order to secure income. The increasing availability, assuming that the demand will further decrease, will trigger downward pressure on rents in all sectors.

In Qatar, David Oayda, the general manager of Asteco Property Management, explains that some developers rethink their strategy when it comes time for the handover and they decide to rent instead of selling due to the current situation. However, Oayda does not seem worried about the increase in supply since he thinks Qatar — even if witnessing a slowdown in its real estate market — is better positioned to handle the current crisis. “We are looking forward to [the new supply]. There are going to be some handovers taking place within the next six months on the Pearl and throughout West Bay,” asserts Oayda. “We have already got registrations and expressions of interest for lease, commercial and residential.”

Facts and figures

So far, the crisis has hit rental rates in Dubai where office rents in free zones have dropped in comparison to 2008’s third quarter numbers. Rents in Jumeirah Lake Towers, Media City and Deira have already dropped by 16, 11, and 14 percent respectively, according to Asteco’s fourth quarter report. Asteco also stated that the rental rate growth for apartments and villas in 2008 was only four and eight percent respectively, with no changes over the last three months.

Abu Dhabi stands stronger since property has always been less available in the emirate, which has inflated real estate prices further in recent years. Experts agree that the capital’s rental market will be less affected by the crisis than Dubai since demand will continue to outstrip supply due to the city’s better economic situation and the lower availability of property. “The rental market in Abu Dhabi will remain stronger because it is the capital and a lot of diplomatic missions are there,” said Rehman. “That is naturally a good catalyst for rental. A lot of companies are based there and supply is very short,” 

Some villa rental rates even witnessed growth in Abu Dhabi in the last quarter of 2008, with the highest seen in Al Raha Gardens and Khalifa ‘A’ developments. The rental appreciation for three-bedroom villas in these projects was 14 and 16 percent respectively according to Asteco. This growth was driven by companies using villas as offices since rental rates are cheaper compared to office space in towers. While villas were still in high demand, apartments and offices did not follow suit. Rental rates for one-bedroom apartments increased only one percent, while two and three-bedroom apartments did not witness any change since people are currently looking to more affordable units for rent. Demand for large offices has decreased but no numbers were available.  

In Qatar and Bahrain, it seems that there is more of a stabilization in the rental market since a high portion of growth was mainly driven by domestic demand and both markets were less speculative, which made the impact of investors’ withdrawal less damaging than in the UAE.

In Qatar, Oayda explained that opposed to what press releases or distributed figures might say, prices of properties have not been reduced and consequently rents did not witness a decrease. However, a certain level of stabilization is observed in the market, since prices of residential property over the fourth quarter have increased less than 10 percent and office rents showed no variation during the same period. “Landlords were certainly asking very courageous prices,” said Oayda. “Now companies are reconsidering what they have been paying and they are certainly being more stringent in what price they are paying.”

However, the real estate markets in both countries are witnessing a slight dip in high-end property leasing. The demand for this sector was mostly investor-driven and with the withdrawal of these investors, prices of high-end properties are declining, consequently causing rents to drop. Additionally, people are trying to lower their expenditures due to lower incomes and financial pressure and thus choosing more affordable properties. Al Arrayed estimated that the decrease in rents for high-end properties could be estimated at 20 percent in Bahrain. No numbers were available yet for the Qatari market. Al Arrayed said that the rate of decrease is hard to estimate since rental rates that are advertised can be negotiated with the landlord and are not final. However, it should not be significant since middle-income housing was relying on domestic demand, which is still strong. 

Extended rent payments

Paying one upfront check to landlords for the whole year’s rent is becoming more and more unaffordable in the UAE, especially with tight lending from banks and the uncertainty of tenants about their future. Therefore, landlords are settling for quarterly or even monthly payments in order to attract tenants in the prevailing market conditions. “I have lived in the UAE for years and I have not seen that before,” said Maclean. “I think the reason for that is the landlords are competing with one another for the tenants,” he added.

Expectations

In the UAE, experts predict a drop in rental rates, though it is still too soon to tell how far the fall will be since it depends on many factors, like the future redundancies expected by companies, property prices and investors’ sentiment in respect to the sector. “The market is going to soften up and landlords are expecting lower rents,” predicted Rehman. “They are going to be coming to more affordable levels and it remains to be seen where the bottom is.”

Maclean expects rental rates to decline in 2009 and by the end of the year the property sector will stabilize. He explains that it is good for the UAE since “the market was too overheated” and lower rents will create more confidence in the market.

Al Arrayed expects rental rates to soften in Bahrain in 2009, especially for high-end properties, since middle-income demand was not as much affected. Additionally, if the fall in property prices continues and banks do not start lending like before, the declines in rents will be stronger.

Oayda believes that in the next three months, rents in Qatar will be stable and the new supply will certainly not have an adverse effect on prices of rents since the lack of confidence in the market has no basis in Qatar, and once the confidence starts to rise, the whole market will start picking up again.