| 06 Oct 2008 |
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Mena property upbeat despite global crisis
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The demand-supply dynamic remains positive across the Middle East and North Africa (Mena) real estate sector against the backdrop of the global credit crisis with regional investor sentiment leaning towards a more cautious approach, according to a report.
Demand for housing and office space in the Mena region has been driven by job opportunities with respect to an economic growth in the region with increased spending power and diversification of the economy into varied sectors such as tourism retail and hospitality, Colliers International said in the fourth quarter report.
Further, improvements in the regional regulatory framework of the real estate sector has led to the conversion of benign macroeconomic conditions into investment opportunities. Development of economic free zones and property ownership laws have further propelled the real estate sector in the region. The partial diversion of petrodollar liquidity into real estate markets is making the real estate sector in the region a de facto investment asset class, said the report titled Mena Real Estate Overview.
Emergence of mixed-use community development concepts as an alternative to dense, poorly planned residential and business areas common in many regional markets have propelled the real estate sector in the region. Decreasing average household sizes have further triggered real estate demand. Demand for Class A office space has increased as domestic economies moved away from a historic legacy dominated by state-owned enterprises and regulatory barriers to doing business.
The popularity of the shopping mall concept boosted by the increasing entry of consumer products has propelled a region-wide boom in real estate development.
According to the report, the region-wide 'boom' in real estate has taken a total value of projects under construction in the GCC alone estimated at $2.4 trillion (Dh8.08 trn).
Generally, most Mena real estate markets have seen economic progress and demographic growth met with a shortage of suitable real estate products - be it primary grade office space, shopping malls, middle-income housing or five-star hotels.
Unsatisfied demand has inflated real estate product performance, which has in turn generated bullish investor sentiment and extensive development activity. While Mena markets differ in progress within the real estate cycle, a number of risks have emerged due to common themes in real estate development and investment activity.
A nucleus of investor activity comprised of market speculators rather than end-users, intensifying the risks of market oversupply upon completion of major projects. The role of speculative investment as a primary capital value driver, and an asymmetrical market structure of high-net worth individuals controlling large proportions of real estate stock coupled with 'retail' investors prone to panic buying and selling.
Dubai has been and remains the core of real estate development and investment activity in the Middle East. The total value of real estate projects in Dubai over the next ten years is estimated at over $230 billion, while the total value of transactions last year was registered at over $125bn.
"We do not expect the demand-supply dynamic in Dubai to shift from a position of excess demand to one of excess supply until 2010 at the earliest due to development delays and measures by the Dubai Government to prevent cohabiting," said Rami Tawfiq, Research Manager at Colliers International.
"We expect increasingly jittery investor sentiment in the interim, which may slow the rate of capital value growth due to a downturn in transaction activity," said Tawfiq.
"While we have still seen strong investor appetite for 'ultra- premium' developments such as Burj Dubai and the Palm's Trump Tower, there are concerns that the sentiment amongst high-net worth individuals and institutional investors is also becoming increasingly negative," said Ian Albert, Regional Director for Colliers International.
The impact of the "credit crunch" on major US financial investment institutions has already induced more conservative exposure to UAE equity markets, coupled with a gradual 'drying-up' of liquidity allocated to real estate assets.
Introduction of measures aimed at regulating the market will help improve investor confidence. Dubai's Real Estate Regulatory Authority (Rera)Real Estate Regulatory Authority (Rera)
has been a key actor in this respect. The role of less-scrupulous developers seeking to maximise profit at the expense of investor satisfaction should also be marginalised by tentative measures aimed at tying off-plan repayments to the progress of construction, and the inauguration of a dedicated Property Court in 2009.Prominent Dubai developers such as Emaar and Nakheel have also sought to offset the risks of investor default by raising minimum repayment amounts and ownership periods before reselling.
The Mena region remains an area of strong potential for real estate investment comparative to other global markets," said the report. Common risks in the real estate sector include a focus on premium products, an increasing scope for a supply glut caused by copy-cat developments, inflated market speculation and barriers to end-user participation which include entry level prices and access to finance.
"Across the regional property markets we've seen a case of 'bandwagon investment' where secondary tier developers seek to replicate the success of first movers by building similar products. The product differentiation is the key. We expect developers that establish themselves as strong brands to outperform their competitors," said Albert.
Abu Dhabi is expected to become an important influence on regional real estate trends. The concept of sustainable development continue to define success in 'green building'.
Colliers expects Dubai's retail rents to potentially soften in 2010, highlighting the importance of development diversification. While in Damascus and Cairo, Colliers anticipates strong retail development demand and growth.
By Anjana Kumar
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