Focus: Real Estate

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Jan. 12, 2015

Despite a relative slowdown compared to 2013, property prices in Dubai continued to increase in 2014. As residential prices are set to soon reach pre-2009 peak levels, authorities have taken measures to avoid a new market crisis.

Asteco real estate advisers estimated that sales prices for villas and apartments in 1Q2014 increased by 6% and 3%, respectively, while apartment and villa rental rates rose by 5% and 3%, respectively. Prime real estate in Dubai costs an estimated $6,200 to $7,500 per square meter.

Asteco warned that further rent increases would likely be unsustainable and could result in tenants moving to more affordable accommodation in other emirates. The areas that performed best in terms of rental growth were International City, Jumeirah Lake Towers, and Dubai Marina.

The Dubai Land Department in August 2014 reported that the total sum of GCC investment in the Dubai real estate market during 1H2014 exceeded $5 billion, $3.4 billion of which stemmed from Emirati investors.

The main market drivers are Dubai's population growth of some 5% annually. The Emirate reached a population of nearly 2.3 million by mid-August 2014, compared to 1.3 million in 2005. The Dubai Urban Plan 2020 envisions the population to reach some 2.8 million to 3.2 million by 2020. In addition, the Emirate recorded economic growth of some 4.5% in 2013, the highest since 2009. The IMF foresees a similar growth for 2014. Finally, Dubai, in 2013, won the right to host the World Expo 2020, which is set to significantly increase tourist numbers, as some 25 million people are expected to attend the six-month event. The visitors will mainly boost the hospitality and retail sector, yet some among them may also be tempted to buy property. At least 20,000 new homes are likely to be completed in 2014, according to JLL.

MEGAPROJECTS & PROTECTIVE MEASURES

In June 2014, it was reported that plans for real estate projects worth over $50 billion had been announced since the start of 2013, although it remains unclear how many will be built and how fast. Some of the most prestigious mixed-use projects currently under construction are Dubailand and Mohammed Bin Rashid City, both of which include major residential components. First announced in 2003, the $55 billion Dubailand project covers an area of 278 square kilometers. It is a collection of dozens of theme parks with some residential elements, which was put on hold following the 2008 financial crisis, yet re-launched in 2013. The first phase of the $5.7 billion Mohammed Bin Rashid City includes the construction of some 1,500 villas, while Dubai Holding and Emaar Properties will jointly develop The Lagoons, a waterfront city dominated by the Dubai Twin Towers. However, many financial experts, including the IMF, have warned that the rapid introduction of megaprojects and unregulated growth could lead to a repeat of the 2009 crisis. It is widely believed that a lack of regulation and transparency was one its main causes.

“There are two important lessons to be learnt from the difficulties suffered in 2008," said Nicholas Maclean, Managing Director of CBRE Middle East. “First, Dubai's property market is cyclical and subject to the fundamental forces of supply and demand. Second, Dubai's real estate market is not unique and has been affected in ways similar to many other global markets. Although painful at the time, the experiences will help the development and investor markets in the UAE mature. The experiences have also led the government to introduce various forms of legislation to protect investors and control some components of speculation, which became excessive by 2007." The authorities, by mid-2014, had announced a number of measures to regulate and effectively cool down the market. The UAE central bank, for example, imposed a cap on mortgage loans, while Dubai doubled the transaction fees on property deals and imposed a higher cash requirement for purchasing properties.

OFFICE SPACE

Demand for commercial space has gathered pace as well. In line with Dubai's improved economic performance, new companies have opened their doors in the Emirate, while existing businesses have employed more staff. A 2014 report by global real estate consultants Knight Frank estimated that Dubai, in 2008, boasted a total of nearly 4 million sqm of office space, which is set to double by 2016.

The overall vacancy rate remained high at some 50%. However, the vacancy rate for prime office space stood at but 16%. Rental rates varied from a minimum of some $220 to $270 per square meter in areas like Tecom C, Bur Dubai, and Deira to a maximum of some $400 at Emaar Square and $700 at the Dubai International Financial Centre (DIFC).

Knight Frank estimates that, due to the rising demand from both SMEs and big corporations in combination with the low supply of good quality office space in prime locations, commercial rents in Dubai are projected to see annual increases of some 20% and 10% in 2014 and 2015, respectively. One obstacle facing the commercial market remains the non-availability of mortgages for commercial properties. The Cluttons Dubai Spring 2014 Commercial Market Outlook report confirmed the upward trend and furthermore signaled an increase in demand for warehouse and industrial space. Average prices vary from some $8 to $13 per square foot.

RETAIL SPACE

Retail expansion has slowed down significantly since the 2009 crisis. By the end of 2013, Dubai had an estimated 2.8 million sqm of mall-based shopping space, up from 2.6 million square meters in 2010. However, in line with the general economic recovery, JTL estimated that some 371,000 sqm of new retail space will be added by 2015, while more mall developments are expected to be announced in the second half of the decade.

Part of Mohammed Bin Rashid City, the most spectacular retail development on the books is the Mall of the World, which is set to become the world's largest, although no construction date has been set yet. The $6.8 billion mall will measure 6 million sqm and will take a decade to construct. When finished, it will essentially be a climate-controlled indoor city, complete with a series of waterfalls and its very own Broadway.

According to JTL, average retail rents for prime malls in Dubai amounted to $1,355 per square meter by mid-2013, compared to $1,279 per square meter by the end of 2012. Rents in Dubai's secondary malls fell by 7.5% from some $506 to $468 per square meter. Following the 2009 market collapse, all real estate indicators seem up again and, given the new regulations are met, Dubai seems well on its way to fulfilling HH Sheikh Mohammed Bin Rashid Al Maktoum's dream of transforming the Emirate into a “cultural, tourist, and economic hub for the 2 billion people living around us."

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