Property companies in the UAE are not altering their marketing strategies despite a slowdown in world economy. However, expanding their international presence is now on their charts.
Emirates Business spoke to a cross section of developers, such as Gurjit Singh, Chief Property Development Officer for Sorouh Real Estate Company; Zaid Ghoul, Chief Financial Officer of Union Properties; Rashid Abdul Wahab Galadari, Chairman and Chief Executive of Galadari Investment Office (GIO); Robin Lohmann, Managing Director of ACI Real Estate; Santhosh Joseph, President and Chief Executive of Pearl Dubai and Saeed Currimjee, Managing Partner of Al Jaber Real Estate Co, who unanimously urged the government to ease lending as speculators continue to exit the market and current property prices become unaffordable for end-users.
They believe that the broad property sector is seeing a measure of consolidation and property prices will return to healthy levels.
Give us details on the sales prices on your projects since the beginning of this year compared to last year. Have prices on your projects increased or remained stable?
Zaid Ghoul: Our Green Community MotorCity project sold fast and we did not increase the prices much on this development. With respect to Uptown MotorCity, we have phased out the sales programme considering the large size of the project and have increased the prices in response to market price increase. The sales price increase on Uptown MotorCity since the project's launch has reached 60 per cent. On Index and Limestone in DIFC, we started selling residential units at an average price of approximately Dh1,750 per square feet and the price reached Dh4,000 per sqft today. This was supported by the price escalation in the DIFC as well.
Gurjit Singh: Since the beginning of 2008 the sales prices on our developments have seen a steady increase in line with the market trends compared to 2007. In the past couple of months there has been a shift in the markets. The global economic downturn actually began as part of an economic cycle as early as third quarter of 2007. But the broad property sector here showed resilience and managed to see healthy returns. Now with the global credit squeeze tightening its grip, the broad property sector is seeing a measure of consolidation and this will see property prices returning to healthy levels.
Rashid Abdul Wahab Galadari: Our prices have definitely increased since last year. Although our property is definitely worth every penny, we realised that we should have just stuck to our original plan of a more gradual and realistic increase instead of taking it up in such a drastic way and getting caught in the "price increase" spiral. The effect on GIO Developments was minimal but with our standards of doing things even the slightest change or slowdown gets taken into consideration. After we realised the effect of our new prices we decided that the best and most realistic decision was to bring the prices to a much more stable level. So now we are back on track and we are following our disciplined policy of a fixed profit rate above our costs.
Prices have also naturally come down due to the drop in construction prices. We had stabilised our prices before the obvious downturn took place and have kept it the same since then.
Robin Lohmann: Our pricing strategy today has remained as it was since day one - value for money to ensure sustainable gains. The biggest impact on prices for the past two years has of course been construction prices which have now come tumbling down due to high stock supplies, and this has been captured in our entry price-points, and the advantage passed on to the buyer.
In August 2008, we launched Marine Legends - and have subsequently seen the typical increases, despite falling prices around us. On our Marine Legends Project, we sold it for Dh2,000 per sqft when others were selling for Dh2,700 a sqft in Dubai Waterfront. In October, we launched the Boris Becker Beach Resort and Tennis Academy, and again our prices have only gone up since then as we priced the project sensibly in the first place.
Our pricing strategy is guided by sustainability and based on both local and international signals using our own ACI market indices. This means not just credit rates but also construction costs. Also we are interested in long-term yield so we come to market at a sustainable price-point. A credit crunch may impact mortgages loans here, but also we will see a natural fall in prices as more supplies are expected to enter the Dubai market in the next six to eight months.
Demand will be boosted by capital flight funds chasing higher yields - so domestically we will find a new equilibrium that thins developer profits but will more accurately reflect sustainable economics. We will see short-term and cyclical shifts, led largely by domestic dynamics, not painful structural adjustments seen in other parts of the globe. No doubt yields will change, and pace of growth will dip, but the upward trend will not. The real issue here is expectations.
Santhosh Joseph: Dubai Pearl publicly launched its commercial tower offices at Dh2,200 per sqft in December 2007 and the residential tower apartments at Dh2,700 per sqft in March 2008. Currently the commercial offices are priced at Dh3,750 per sqft and the residential apartments are priced Dh4,200 per sqft. Our exclusive Baccarat Residences are selling at over Dh6,000 per sqft. Our prices have remained stable, in line with our sales strategy.
Saeed Currimjee: For our project in Ajman, prices since last year are still higher if we compare it to 12 months ago. However the premiums have dropped in the past six months. Prices on the projects are the same.
Are there particular properties which have been most affected in terms of prices? Are the prices on completed projects faring better than those of off-plan?
Ghoul: We have not seen a drop in primary market prices. Looking at the overall market and the expected supply and assuming a correction in prices will take place, we will mostly see the luxury high-rise apartments to be most affected.
Because we are approaching hand-over, the market is now an end-user market, not an investor market. Normally end-users rely heavily on mortgages and should banks slow down on mortgage lending, sales will slow down across the board. Once lending gets back to normal, demand is expected to surge.
Singh: The consolidation cuts across all asset classes, however, in Abu Dhabi supply lags far behind demand, this coupled with a small but steady physical supply of rental assets has created an active rental market which will see itself outpacing the consolidation thus offering healthy rental returns.
Galadari: I would not like to judge but property sales are not what it used to be. I guess people are looking for a certain level of quality and life in the properties they purchase nowadays. I believe the properties that have been put in the market only for cashing out purposes are the ones that are getting affected the most.
In regards to off plan and completed projects I believe each category has its own advantages. The built property is obviously offering you something that is ready and the off plan offers you something, which you can purchase with a payment plan.
Lohmann: The simple answer is that those properties, which were simply overpriced by some developers, to begin with, will be the hardest hit. Our pricing strategy has always been to seek sustainability, and for this we continue to see sound yields.
Typically, when there is a downturn, the luxury end of the market remains strong, while the mid and lower tiers soften. Given the supply situation here at the moment, I think it is very likely that some developers may see a dip in their mid-level residential segment. I do not think we will see any sharp drop in the demand for commercial property as fiscal policies here are encouraging, but this is where business confidence is critical.
Additionally I see demand for holiday homes properties will stay strong, driven by cash-laden European and American buyers. As such we are confident our portfolio of offerings will continue to hold value.
It is commonly expected that off-plan prices are cheaper. If the off-plan prices reflected real economics of demand and supply to begin with, they should do well, if not, real economics will now catch up with the reseller market.
Joseph: Developments where some form of construction work has not commenced will be affected, and we have found a definite move in the market towards end users and long-term investors rather than speculators. This would imply that completed projects and those under construction will fare better.
Currimjee: In Ajman, some of the very high-end projects have been hit more than the mid-end projects and I would prefer not to mention any specifics. Completed projects are fairing better then off plan.
Sales cycles have slowed down considerably, would you be altering any of your sales strategies to pump up sales?
Ghoul: It is not the question of altering our sales strategies. We eased the payment terms on some of our developments. For our Index and Limestone House developments, for example, we are altering the payment terms as we do not expect someone to walk in with the full 65 per cent required before hand over in today's market conditions. We are therefore planning to distribute this 65 per cent over two or three payments.
We have the capacity to rent properties. If market will soften and properties will stop selling, we will rent what remained.
Singh: The consolidation offers opportunities to create real estate products that cater to the discerning end-user occupier market. The key strategy will be to match the product with liquidity and that entails developers improving their product-mortgage positioning with financial institutions.
Galadari: Altering our sales strategy would definitely be a major sign of weakness and my personal belief is to fund my projects from my own pocket than to offer gimmicks or plans out of desperation. It is survival of the fittest, if you can't cope then get out.
Lohmann: All businesses must remain alert to changing phases in this globalised economy - by not only measuring the impact after it happens, but reading signals early on. We are not at this stage shifting our sales strategies. In fact, due to growing international demand, we are accelerating original plans to branch-out globally and currently on the look out for franchises in India, Europe, Russia, the United States and Asia Pacific.
Joseph: As our development is positioned in a very exclusive market sector, our marketing and sales strategies have always been different to most developers. We will continue as we have done in the past, as it has been very successful for us.
Currimjee: We have increased our marketing budget and we believe it's going to pick up soon. We have a major launch planned in the coming weeks.
Should the government take further steps to ease lending in the market like introducing interest rate cuts?
Ghoul: The government has availed about Dh100 billion in emergency funds and direct deposits into the financial sector. The majority of the emergency facilities have not been used which confirms the fact that banks are liquid but cautious to lend.
The government did not respond to the latest rate cut made on the US Fed rate, which we believe is the right move to keep controlling inflation pressures that started to ease recently. Cutting the rate would not have helped anyway as the basis of lending is the inter bank rate, which has gone in a totally different direction than the Fed rate, reflecting the slow down of inter bank lending and accordingly the rise in the cost of funds.
Singh: The government is taking numerous positive steps to create liquidity in the market. We have full confidence in their efforts. Financial institutions now need to reciprocate by releasing confidence back into the market by providing this liquidity. There are many genuine end-user buyers that need financing as well.
Lohmann: The UAE has pursued valid diversification policies and earned itself conceptually robust economic fundamentals. We will not be insulated from the global dynamic, but the impact here will, in my opinion be short-lived, and marginal. Expectations, however, will need to adjust.
There is a need for further confidence boosting not only to shore up capital markets but also to boost free market policies so we can effectively compete with South Eastern and Asia Pacific markets which are responding aggressively to compete for capital flight funds.
Recent regulatory changes inspired by Nakheel at the landbank will cool things off for new projects and the industry will lose out on capturing gains from the current low construction prices. This I believe is not ideal as it keeps prices from a market-determined equilibrium.
Joseph: We believe that the government has done an outstanding job with managing the current global financial crisis, with guaranteeing banking deposits, ensuring liquidity in the banking fraternity etc, and that Dubai will continue to be a preferred investment location in the world.
Currimjee: I believe the government should increase the loan-to-value from current 60 to 80 per cent to 85 to 95 per cent.
By Anjana Kumar
© Emirates Business 24/7 2008
