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UAE realty market on path to maturity

Sunday, Dec 27, 2009

Gulf News

Dubai The year 2009 has been a trying one for the UAE realty market. The property boom, which saw frenzied construction and skyrocketing prices, began easing, forcing industry players to make adjustments, sale and leasing rates to decrease and for the market to begin its process of maturing.

"In the past year, the UAE realty market has moved into real terms by way of pricing, clarity, and creditworthiness. Speculators have vanished, unscrupulous brokers have disappeared, developers with short-term vision and negative assets have moved away and genuine buyers with credit worthiness have developed. Banks and financial institutions have evolved to meet the changed scenario," says Sudhir Kumar, partner and managing director of Realtors International.

The year began with an increasing number of developers reporting losses and with more and more projects being put on hold.

"We may argue that the cancellation and stalling of projects is a good and/or bad thing for the market. The reduction in supply of property tends to be negative but it also means prices and values will stabilise assuming demand remains stable," says Bruno Martorano, Managing Director of Leo Sterling.

In January, developers were forced to adapt to the market changes by streamlining their company sizes and costs. Developers such as Mizin , the Tatweer real estate development subsidiary, Nakheel , Damac , Tameer , and Omniyat were among the developers that announced mass cuts. "The downturn in the job market also meant a reduction in value of properties," Martorano added.

Sale and rental rates in both the residential and commercial sectors suffered falling more than 40 per cent in the first half of the year. Investors were left with properties they couldn't sell, developers were affected by clients defaulting on their payments, brokers were affected from the lack of transactions.

Lower housing prices sparked a movement of relocation from expensive accommodation to more affordable units and allowed individuals who were sharing accommodation to rent their own units. It also offered investors and buyers with cash an opportunity to buy properties at affordable prices. Commercial property became more affordable, making the region an attractive option for setting up business.

The third quarter of the year began to show some stabilisation. According to Colliers International, house prices rose by 7 per cent in the third quarter compared to the previous quarter, but prices were 47 per cent lower in the same period in 2008. The opening of the Dubai Metro and expansion of public infrastructure reinforced property prices in certain areas. This stabilisation was slightly trumped by the announcement in November that Dubai World was looking to restructure its debt repayments of $26 billion (Dh95.42 billion), most of which came from its property arms Nakheel and Limitless .

Strains in the industry began to show as an increasing number of contractors complained about late payments and investors complained about late deliveries. Many developers offered their investors alternative options such as consolidations in other ready projects. Nakheel introduced a policy of unit swapping between unfinished and completed projects. Deyaar offered reduced prices and full refunds on some of its projects.

Sovereign bond

Help was made available in the form of the $20 billion sovereign bond announced in February that was used to help government related companies meet financial obligations.

The Real Estate Regulatory Agency ( Rera ) played an important role in regulating the industry by announcing tougher rules and actions against wayward developers. " Rera 's work in putting in laws and regulations and weeding out the seedy players will in the long term be very beneficial to the market," said Martorano.

Strained liquidity and tighter mortgage lending affected the market considerably. The number of sale transactions eased, affecting developers who had to fund developments based on sale. End-user demand has fluctuated mainly due to changes in financing policies, availability and affordability of mortgages removing most of the buyers from the market.

"Limited mortgage activity severely constrained the market in terms of volumes and pricing. The real estate market is positively correlated with mortgage market and we will not see a significant or sustainable recovery until mortgage lending activity increases and interest rates come down," said Jesse Downs, director of research and advisory services at Landmark Advisory.

Where speculation drove the market during Dubai's property boom, 2009 saw the stagnation of the off-plan market. "Investors and end-users are now focused on purchasing properties that are complete or nearing completion. No one is ready to buy off-plan and then wait several years for a developer to build a project before they can move in or rent the property, and that's the way it should be in a mature market," said Dr Rasim Kaan, group executive director at Tanmiyat.

Mergers

Mergers and consolidations between government backed developers became more frequent. Dubai Holdings announced in February that it would merge the operations of three of its real estate entities, Dubai Properties Group, Sama Dubai and Mizin (a member of Tatweer ) under one consolidated operation. However, in December, Emaar Properties announced it would not be merging with Tatweer , Dubai Properties and Sama Dubai .

"The year 2009 has seen the end of the investor lead, off-plan, property buying environment that had been perpetuated by the availability of inexpensive liquidity, continual launch of inventory that was sold through highly leveraged schemes and a fluid regulatory environment. The Dubai realty landscape now consists of aspiring homeowners who are buying homes to live in and home sellers who are either downgrading or upgrading their homes or selling to invest in their home countries [where there are abundant opportunities as well] or leaving Dubai for good. It also consists of a graveyard of speculators, large and small, caught out by the sudden end of an incredible price boom, who, for one reason or another, thought that it would never end," says Omer Gani, CEO of Fine and Country.

Industry officials believe that while the past year has been tough the outcome is good for the market in the long term. "Each phase impacted the market in its own way, but I think what we're seeing now is a maturing of the real estate sector. Many of the unsustainable practices and price gouging have been eliminated from the equation leaving behind a more sustainable model." said Kaan.

By Aya Lowe

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