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|30 October, 2018

INTERVIEW: UAE real estate market to soften over next two years, says MD of Perkins+Will

Dubai story will continue to be built around hospitality, retail and increasingly, wellbeing

Image used for illustrative purpose. Aerial view of Dubai Marina in the evening.

Image used for illustrative purpose. Aerial view of Dubai Marina in the evening.

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The real estate market in the United Arab Emirates could soften in the next one to two years as a growing number of expatriates leave the country, according to the Middle East head of second largest architectural firm in the world.

“There is a drift away from the region by professional expats, which has been well-documented,” said Roger Wilson, Managing Director, Perkins+Will during a telephone interview with Thomson Reuters Projects. “There are fewer jobs and the cost of living is rising so expatriates are moving away. I expect the number of expats leaving will continue to grow and I think the market will soften.”

Expatriates account for more than 80 percent of the UAE’s population and over 90 percent of the country’s workforce, according to various reports.

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But this softening is neither a vertical decline nor a recession, he clarified.

“I think it’s just a gentle softening that will continue until the liquidity comes back into the market and that’s probably not going to happen until 2020 – 2021, which is when it may start picking up again.”

Wilson observed that the construction, real estate and design sectors have borne the brunt of this liquidity challenge from getting paid at all to getting paid on time or nearly on time.

While he ruled out the generally proffered excuse of low oil prices for the poor liquidity, noting that oil price “has been creeping up gradually and is certainly way above the $25 a barrel [registered in early 2016],” Wilson mentioned that the blame could not even be laid at the door of a “globally inspired situation.”

Last month, the average oil prices touched a four-year high of $81 a barrel.

“In this part of the world, there has always been a challenge around payments and the lack of liquidity is compounding this,” he said. These issues, he said, “are particular to this part of the world” but didn’t elaborate further, other than pointing out that the situation makes clients and service providers “nervous.”

He said softening of real estate market has hit the residential sector the most.

“I think there is a surplus of supply and although there has been a slight increase in off-plan buying, a number of these off-plan projects haven’t come to fruition because of the existing supply. Rental levels are dropping and they are going to continue to drop,” he said.

On the other hand, “there are parts of the healthcare sector that are fairly robust,” he added.

“We are looking at a couple of new opportunities and have just signed a contract for a new hospital,” he disclosed.

Cost-cutting tendency

A dearth of liquidity means clients are trying to squeeze out costs while architectural firms like Perkins+Will are becoming picky about clients they want to work with.

Wilson pointed out that a weak market environment hasn’t resulted in a reduction in the number of RFPs [Request for Proposals].

“We have seen a lot of RFPs that we know are either price-checking, or not necessarily spurious but out there to keep a little bit of interest in certain schemes that we know, for a fact, are not going to come online for a good while yet,” he said.

He also noted that his firm is professionally selective in the kind of RFPs it wants to respond to, and has a design go/no-go process that is being further refined.

“We are always looking to expand our client base, but we have a duty of care and a responsibility to run the business in as a professional way as possible, and part of this is completing thorough due-diligence on new clients,” he said.

The firm, he continued, wants to targets its sweet spot “both in terms of types of projects and the clients that we work with,”

“I think this is an entirely appropriate and professional approach. There are projects that are quite obviously too small for us to do and we wouldn’t pursue them because it makes no commercial sense. Equally, there are projects we know are perhaps outside our level of experience.” 

And while clients may be justified in wanting to minimise capital expenditure, they fail to “appreciate the significance of the difference between cost and value,” according to the Perkins+Will chief.

He elaborated: “Clients essentially want more for less.....but, at the same time, what we can provide is actually a value-add. I think that sometimes it is a little bit like the baby that’s thrown out with the bath water.”

He said if the firm is brought into a project at the early stage, it can work with other consultants, and help “create an appraisal to provide a cost-value analysis to adjust the [design] brief where necessary.”

Roger Wilson, Managing Director, Perkins+Will

Best procurement practices

Wilson underlined that appraisals, while not commonly promoted in this part of the world, is a critical step in ensuring and understanding ROI (Return on Investment) on the project.

“In this region, appraisals are not regularly part of the pre-concept process,” he said. “Projects have to make profits but it’s sometimes about making sure you get the right project, the right product and the right quantum and mix. Then you can take a much more targeted view to the proposition and tailor a brief and project budget accordingly.”

Appraisals are also useful in situations where budgets were not “scientifically” put together, and “you have to design to a cost rather than agreeing the appropriate budget at the outset and trying to improve on that,” according to Wilson.

He also noted that a more collaborative approach throughout the procurement process could benefit the region.

“For whatever reason, there seems to be a reluctance to look at some of the good examples from the US, the UK and other parts of the world where the procurement methodologies are very well developed.”

He said many professionals working in the region are “well versed in these procurement methodologies and understand the benefits.”

Wilson also urged a course correction with regard to the region’s interpretation of design-build procurement methodology, noting that it “means something entirely different out here.”

“It’s not just about shedding risk as soon as you can,” he elaborated. “It’s actually about bringing the wider development team, including the contractor, into the project earlier so that you can value engineer as you go along, through properly considered design that is related to a brief and standard that the client wants to achieve.”

Design-Build procurement as opposed to separate design and construction mandates could help avoid cases where “the client may decide he cannot afford all of the features and then goes through a whole situation of taking out a lot of the elements that he perceives as wasteful.”

In the interim, the split between designer’s scope and the contractor’s scope” needs to be dealt with more equitably.”

“We have our fair share of appointments that have a very practical split and there are times we have appointments for which we have to push back,” he said. 

Prospects beyond 2020

Asked to put on his forecasting hat for post-Expo 2020 years, Wilson said the Dubai story would continue to be built around hospitality, retail and increasingly, wellbeing.

“We are becoming obsessed with health and that’s providing a different sort of offer in terms of real estate. We will start to see increased cross-pollination between hospitals and hotels, with features of hotels making their way into hospitals,” he said.

He pointed out that retail, hospitality and experience are blurring into one thing with retail not about shops anymore but more about a customer proposition around both physical and digital offers.

“We will see a greater emphasis on place-making and blurring of the boundaries between living, working, playing, and these concepts could be taken to a new level in terms of the type of mixed-use schemes that come forward,” he said.

The region’s developers, he noted, are looking at some of the bigger mixed-use developments happening in Western Europe as part of regeneration schemes, noting that there is scope for such regeneration projects in Dubai as well.

“While the emirate is a fairly new city, it is continuously  expanding. There is an argument perhaps for looking at a more holistic approach to densification and also the type of community-based mixed-use schemes that could be developed or redeveloped as part of older parts of city.”

While the departure of expat professionals, who have underpinned UAE’s economic growth and have been a mainstay of its real estate boom, is a cause for concern, the new visa and property ownership regimes announced by the UAE are important steps that would help retain expats.

He said: “Both the Abu Dhabi and Dubai governments are looking at incentives to ensure that they retain their attractiveness to expats from around the world, whether that’s by the introduction of 10-year visas or the ability to purchase property outright. But my sense is that those initiatives are only of nibbling at the edges. I do think there needs to be more structural changes or improvements that could be implemented to the industry that I am part of.”

(Reporting by Anoop Menon; Editing by Mily Chakrabarty)

(anoop.menon@refinitiv.com)


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