As developers shun the practice of creating relevant supply to stimulate demand — the build it and theyll come strategy — they are confronted with a new dilemma: should they deliver new supply in tune with demand or complete projects based on announced timelines? Some analysts say it is essential for developers to manage their deliveries for the market to recover, while others maintain that the development pipeline is in tune with expected population growth.
JLL estimates around 78,000 new homes due for completion by 2020 based on developer announcements — a 15 per cent increase on historical forecasts. With this much supply, it would be prudent to keep deliveries in check. There would certainly be an oversupply if all the 78,000 announced residential units were to complete over the next three years, Craig Plumb, head of research at JLL Middle East and North Africa, tells PW.
Meanwhile, a report by Global Capital Partners (GCP), based on Reidin data, which gathered 2017-18 supply information from developers, shows that there could be more than 100,000 new units entering the market.
On the other hand, in the second quarter of this year alone, JLL estimates around 3,000 units were delivered, while a Core Savills report states that around 11,200 units are expected by the end of the year.
He adds that the materialisation rate, which compares units delivered with units announced, is likely to remain the same. There seems little likelihood that we will see a major change in this rate over the next few years as many of the announced projects are already experiencing delays.
The GCP report, based purely on data collected from developers, states that 34,127 and 70,785 units would be handed over in 2017 and 2018. However, a revised projection that takes into account cancelled and conditional projects and stalled and slow-moving projects reveals that 2017 and 2018 will have a realisation rate of 79 per cent and 44 per cent, thus dramatically reducing the supply curve, according to the report.
A simulation of different population growths reveals that if Dubai continues to grow at its historical norm of 5 per cent, the supply is in line with the demand, the GCP report states, claiming that fears of oversupply are mostly unfounded. If the population grows more than 5 per cent, which it did in 2016, we can expect a shortage of units, pushing prices upwards.
JLL says that many developers are targeting investors and overseas buyers, but for this market, securing tenants is essential to generate a good return on investment. Meanwhile, Astecos Dubai Real Estate Report Q2 2017 forecasts downward pressure on apartment rents to continue as projects are completed and delivered to the market.
Farhad Azizi, CEO of Azizi Developments, tells PW that the World Expo 2020 remains a strong motivator for many projects in the emirate. The strong demand in the run-up to the Expo 2020 is creating a wealth of opportunities for residential real estate and hospitality, says Azizi, who has over 18,000 studio, one-, and two-bedroom apartments lined up for delivery in the next two years in Meydan, the Palm Jumeirah, Dubai Healthcare City, Al Furjan, Dubai Sports City, Dubai Studio City and Jebel Ali. Additionally, the global event is already encouraging developers to establish new projects in emerging locations across the city and we expect this to continue in the medium term.
We have completed 1,000 units over the last three years across our nine projects in Dubai. We have 100 projects currently in various stages of development.
Plumb says expectations need to be balanced by caution. There is an expectation that the real estate market will peak in 2020 and that prices may well decline after the World Expo, says Plumb. This is certainly providing developers with an additional incentive to complete, or at least sell, projects over the next three years. This incentive is, however, being balanced by the knowledge that if all the announced projects proceed, the market is likely to be oversupplied and prices will be negatively impacted.
With new supply coming from numerous developers, managing new deliveries will be a decision each developer has to make. Given that developers are facing similar circumstances, history would suggest that they will tend to come to the same conclusion, hence the discussion of a herd mentality in many real estate markets, Plumb says.
As the market matures and developers target multiple buyer profiles, the demand drivers are also becoming diverse. Azizi says, Dubai continues to attract growing interest from developers who are creating adequate supply to meet the current market demand. The existing demand is being driven by a growing number of expatriates, big-ticket events like Expo 2020 and an improved regulatory environment.
Ensuring that the developer sticks to the timelines announced is important for buyers, especially when the demand is tilted towards off-plan units. Plumb says that almost 70 per cent of the sales recorded by the Dubai Land Department (DLD) over the first five months of the year were from around 12,000 off-plan transactions, compared with 5,400 transactions for completed projects.
Nobody doubts the long-term growth potential of the Dubai property market, which has shown strong signs of stabilisation, underpinned by increasing sales activity mainly led by off-plan property launches in the past couple of years, says Azizi. Further growth depends on the successful delivery of these projects, which already look like they are well on track. International investors from the GCC, India, Pakistan and China continue to show a healthy interest in off-plan property, so we expect that it will positively impact the market in the medium term.
According to a Core report, off-plan sales already impact secondary sales in some apartment districts. As existing owners try to attract the same pool of investors and attempt to sell their ready properties, they contend with highly competitive and attractive payment plans offered by master developers, for instance in Downtown Dubai, the Core report states. With a wider variety of products to offer, they can exercise a higher level of price control on the area and retain their edge over individual landlords, hence affecting a portion of the secondary market.
Meanwhile, Plumb believes the market will ultimately fix its deficiencies. With Dubai becoming a more established and mature market over the long term, we would expect demand from owner-occupiers to increase, relative to that from investors, says Plumb. By definition, most owner-occupiers will be seeking completed or nearly completed projects and the percentage of off-plan sales is therefore likely to decline over time.
JLL estimates around 78,000 new homes due for completion by 2020 based on developer announcements — a 15 per cent increase on historical forecasts. With this much supply, it would be prudent to keep deliveries in check. There would certainly be an oversupply if all the 78,000 announced residential units were to complete over the next three years, Craig Plumb, head of research at JLL Middle East and North Africa, tells PW.
Meanwhile, a report by Global Capital Partners (GCP), based on Reidin data, which gathered 2017-18 supply information from developers, shows that there could be more than 100,000 new units entering the market.
On the other hand, in the second quarter of this year alone, JLL estimates around 3,000 units were delivered, while a Core Savills report states that around 11,200 units are expected by the end of the year.
Delays and oversupply
Historic evidence suggests that developers have consistently over promised in recent years, so much so that only 40 per cent of all the units announced by developers have actually been delivered over the past five years, says Plumb.He adds that the materialisation rate, which compares units delivered with units announced, is likely to remain the same. There seems little likelihood that we will see a major change in this rate over the next few years as many of the announced projects are already experiencing delays.
The GCP report, based purely on data collected from developers, states that 34,127 and 70,785 units would be handed over in 2017 and 2018. However, a revised projection that takes into account cancelled and conditional projects and stalled and slow-moving projects reveals that 2017 and 2018 will have a realisation rate of 79 per cent and 44 per cent, thus dramatically reducing the supply curve, according to the report.
Population growth
This supply can only be absorbed if the population growth is higher than the number of units entering the market. Rather than basing it on announcements versus deliveries, the GCP report looks at actual supply and population historically. It notes that over the last nine years, residential stock has increased at a compound annual growth rate (CAGR) of 7.7 per cent, whereas the population has a CAGR of 5.92 per cent.A simulation of different population growths reveals that if Dubai continues to grow at its historical norm of 5 per cent, the supply is in line with the demand, the GCP report states, claiming that fears of oversupply are mostly unfounded. If the population grows more than 5 per cent, which it did in 2016, we can expect a shortage of units, pushing prices upwards.
JLL says that many developers are targeting investors and overseas buyers, but for this market, securing tenants is essential to generate a good return on investment. Meanwhile, Astecos Dubai Real Estate Report Q2 2017 forecasts downward pressure on apartment rents to continue as projects are completed and delivered to the market.
Incentives to develop
Developers rarely share information about the percentage of their planned projects that actually make it to market within the announced time frame. However, analysts believe most developers will try to deliver much of their stock by 2020, when real estate prices are expected to peak.Farhad Azizi, CEO of Azizi Developments, tells PW that the World Expo 2020 remains a strong motivator for many projects in the emirate. The strong demand in the run-up to the Expo 2020 is creating a wealth of opportunities for residential real estate and hospitality, says Azizi, who has over 18,000 studio, one-, and two-bedroom apartments lined up for delivery in the next two years in Meydan, the Palm Jumeirah, Dubai Healthcare City, Al Furjan, Dubai Sports City, Dubai Studio City and Jebel Ali. Additionally, the global event is already encouraging developers to establish new projects in emerging locations across the city and we expect this to continue in the medium term.
We have completed 1,000 units over the last three years across our nine projects in Dubai. We have 100 projects currently in various stages of development.
Plumb says expectations need to be balanced by caution. There is an expectation that the real estate market will peak in 2020 and that prices may well decline after the World Expo, says Plumb. This is certainly providing developers with an additional incentive to complete, or at least sell, projects over the next three years. This incentive is, however, being balanced by the knowledge that if all the announced projects proceed, the market is likely to be oversupplied and prices will be negatively impacted.
With new supply coming from numerous developers, managing new deliveries will be a decision each developer has to make. Given that developers are facing similar circumstances, history would suggest that they will tend to come to the same conclusion, hence the discussion of a herd mentality in many real estate markets, Plumb says.
As the market matures and developers target multiple buyer profiles, the demand drivers are also becoming diverse. Azizi says, Dubai continues to attract growing interest from developers who are creating adequate supply to meet the current market demand. The existing demand is being driven by a growing number of expatriates, big-ticket events like Expo 2020 and an improved regulatory environment.
The effect of delays
Over the years, the property market has seen several reasons for construction delays. Factors that can affect delivery schedules include municipality and utility approvals, access road approval from the Roads and Transport Authority and construction delays.Ensuring that the developer sticks to the timelines announced is important for buyers, especially when the demand is tilted towards off-plan units. Plumb says that almost 70 per cent of the sales recorded by the Dubai Land Department (DLD) over the first five months of the year were from around 12,000 off-plan transactions, compared with 5,400 transactions for completed projects.
Nobody doubts the long-term growth potential of the Dubai property market, which has shown strong signs of stabilisation, underpinned by increasing sales activity mainly led by off-plan property launches in the past couple of years, says Azizi. Further growth depends on the successful delivery of these projects, which already look like they are well on track. International investors from the GCC, India, Pakistan and China continue to show a healthy interest in off-plan property, so we expect that it will positively impact the market in the medium term.
According to a Core report, off-plan sales already impact secondary sales in some apartment districts. As existing owners try to attract the same pool of investors and attempt to sell their ready properties, they contend with highly competitive and attractive payment plans offered by master developers, for instance in Downtown Dubai, the Core report states. With a wider variety of products to offer, they can exercise a higher level of price control on the area and retain their edge over individual landlords, hence affecting a portion of the secondary market.
Meanwhile, Plumb believes the market will ultimately fix its deficiencies. With Dubai becoming a more established and mature market over the long term, we would expect demand from owner-occupiers to increase, relative to that from investors, says Plumb. By definition, most owner-occupiers will be seeking completed or nearly completed projects and the percentage of off-plan sales is therefore likely to decline over time.
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