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Dubai property pain

While Dubai's economic environment is improving rapidly, the real estate sector is likely to go through more pain and fall by a further 15-20% before bottoming out, says Rasmala.
While Dubai's economic environment is improving rapidly, the real estate sector is likely to go through more pain and fall by a further 15-20% before bottoming out, says Dubai-based Rasmala.

"We believe the Dubai residential market may see delivery of 30,000-35,000 units of apartments and villas combined in 2H11-2013, upon an existing supply base of roughly 322,000 units," said Rasmala analysts in a note. "This translates into roughly 10% incremental supply, which we believe would further depress real state asset values."

The investment bank believes that Dubai residential sales may fall from their current levels of AED750 per square feet to AED600-650 - or 15-20%.

However, not all real estate units are created equal. The more sought-after localities such as Palm Jumeirah, Jumeirah Beach Residence, Arabian Ranches, Emirates Hills and DIFC, are expected to show resilience compared to other areas. Other areas that increasingly in demand are those close to the metro - rents around those units have risen by 10% since September 2009.

SOME STABILITY
Dubai saw some stability in the real estate sector last year as the emirate benefited from the regional turmoil. While hotels and retail sectors prospered during the period, the real estate sector at least saw an arrest in decline.

A UAE federal real estate visa was also extended from six months to three years, meanwhile, mortgage rates continued to fall and banks were more liquid, notes a Bank Audi report.

"The overall effect of all these internal and external factors that was property prices in some areas stagnated and stopped falling. The high-end residential sector seemed to be benefiting from ongoing capital shifts in the region as a result of the regional turmoil," notes Bank Audi.

Still there is a long way, before Dubai properties can scale the lofty heights of the pre-global crisis.

"Dubai is littered with both half-finished and barely started schemes that were ambitious, overblown and frankly mystifying, all conceived during the heady days of 2007 and 2008. This has created the negative press seen in Europe," says Christian Swaab, of real estate consultants Knight Frank Abu Dhabi.

For property brokers such as Mr. Swaab, who primarily focus on the western expatriate community, the UAE real estate market remains an enigma wrapped in a riddle.

"Dubai is one of the world's most volatile residential property markets and desperately craves credibility," says Mr. Swaab. "The fact that neither Abu Dhabi nor Dubai has a residential postal system is a further stumbling block."

While postal systems may have to wait, the government's other moves are slowly working their way into the system and will help the beleaguered sector over time.

Jones Lang La Salle points to the 220 project cancellations announced by the Dubai Real Estate Regulatory Authority (RERA), which could clear the deck and cut the excessive supply continuously bleeding into the market.

While JLL expects sales of single units to pick up, high networth individuals and private companies will continue to remain the biggest investors, buying up parcels of lands with a preferred deal size of AED30 million to AED70 million.

JLL expects most of the investments coming from the 'backyard', i.e. from within the UAE, the Gulf and the wider MENA region. It will also be important to see Iranian investors behaviour given the crippling sanctions being imposed on that country.

Meanwhile, institutional investment will remain limited in 2012 due to shortage of suitable investment grade stock, with ICD (Investment Corporation of Dubai), Brookfields likely to be the exception, says JLL.

BANKING ON BANKS
UAE banks, key drivers of the growth have also righted themselves admirably after facing the winds of the global financial crisis. Still, they carry significant real estate exposure.

Risks in the real estate sector stemming from additional supply of new units in Abu Dhabi and Dubai, unrealised losses on property portfolios, low cash flows for real estate companies and high leverage, both at consumer and corporate levels, have taken the shine off of UAE banks' operating profits.

Overall, both Rasmala and JLL's prognosis suggest that the sector is at least close to a bottom.

Risks galore in Dubai' neighbourhood, though. The cloud of an Israel-Iran war hanging over the Strait of Hormuz could upset any regional or global economic revival.

In addition, Dubai's sovereign- and government-related debt, which must be either rolled over or restructured, will remain an issue unless they are paid off or resolved. While the emirate's fiscal situation has improved, debt obligations due in 2012 remain high, equivalent to about 13% of its GDP.

These fears are being offset by rising oil prices and Abu Dhabi pumping crude at record levels and resurgent activity in other parts of the domestic and regional economies.

In addition, Dubai gained in confidence last year after the retail, tourism and transportation sectors fared well in an extremely volatile 2011.

"However, this is not yet reflected in credit growth, and we expect the real estate and construction sectors to remain challenging given the amount of new supply coming into the market and the slowdown in construction activity," notes Rasmala.

© alifarabia.com 2012