QUALITY DOES COUNT

UAE, Dubai 2012 | REAL ESTATE & CONSTRUCTION | REVIEW: REAL ESTATE

Dubai's real estate sector continues to grow, although it has yet to return to pre-2008 levels. Demand for space from multinationals is set to keep the sector purring.

The impressive strides made in diversifying the UAE's economy have successfully reduced the country's dependence on oil revenues, and for a significant period of time there was nowhere that this was more evident than in the growth of Dubai's real estate sector. During the height of the development period, skyscrapers along the Emirate's Sheikh Zayed Road mushroomed with such ferocity that within as little as half a decade the aerial view had changed beyond recognition. Climbing to such dizzying heights of success invariably resulted in the Emirate feeling the impact of the global financial crisis with intensified fervor, and since mid-2008, real estate prices have fallen by 50%.

The Emirate remains one the most popular regional investment destinations, with real estate consultants like CBRE reporting that 60% of its regional business enquiries ultimately settle in Dubai. During 2011, signs of recovery within the sector could be seen, with property experts throughout the Emirate consistently referring to “selective market stabilization." A growing population and booming tourism sector has helped to dampen the continued reverberations of the crisis. Several rounds of successful debt restructuring by Dubai government-related entities (GREs), the Emirate's large debt burden, and the banks' exposure to the still-struggling property sector continue to restrain growth predictions. There has, however, been a spring back of the earnings and share prices of some local real estate developers, suggesting that the worst is over, although a fully fledged recovery has been contained by cautious purchasers. Emaar reported a 44% rise in first-quarter profits at the beginning of 2012, and the company's shares stand 23% higher than their level at the end of 2011, compared to an 18% gain for Dubai's main market index. Thanks in large part to the handover of a substantial number of projects, developer Nakheel posted revenue growth of 159% in 1Q2012 and is moving forward to complete a number of projects throughout the year.

The wider UAE economy grew 4.9% in 2011, and non-hydrocarbon growth during 2012 is predicted to reach 3.5%. While recovery in the logistics trade and tourism sectors has been more concrete than in the real estate sector, demand for well-designed residential and commercial property in the right location is once again strong. According to a second quarter report released by property experts Jones Lang LaSalle, increased evidence of investor confidence was evident from the outset in 2012, with a number of high-profile property deals completed early in the year. These included the sale of Building 6 in Gate Village, Dubai International Financial Centre (DIFC), and a debt to equity swap of residential and office space in Index Tower and Limestone House in the DIFC by Emirates NBD and Union Properties.

International investors and residents of Dubai have enjoyed relatively unrestricted property ownership rights since 2006 when the government introduced foreign freehold ownership legislation. The introduction of the regulations allowed foreigners to own freehold property in certain areas designated by the Ruler of Dubai. Prior to this, foreign ownership was restricted to leasehold titles, and in non-designated areas, foreign ownership remains restricted in this way. Despite continued efforts by the Dubai government to create an investor-friendly environment through meticulous legislative introduction, challenges remain. Owning a property in Dubai does not simultaneously grant residency to a foreign owner, which for some time created legal complications for owner-occupiers. The Real Estate Regulatory Authority (RERA), established in 2007, is tasked with the development of various real estate laws aimed at providing regulation and clarity within sector. Under RERA, procedures have been improved, and levels of transparency have increased. In 2011 it was announced that three-year visas would be granted to owners of freehold property valued at over AED1 million. The new real estate Investor Protection Law is also projected to be finalized in 2012, offering further protection to all parties involved in Dubai real estate transactions.

According to Dubai Land, there was a 12% increase in mortgages in 2011, with total mortgage transactions amounting to 3,315, worth AED69 billion. However, on a general level, access to property finance remains stringent. Mid-way into 2011 the DIFC announced plans to establish a new UAE mortgage bond market, based on Denmark's property market. Nasser Saidi, Chief Economist at the DIFC, believes the development of an active mortgage market through mortgage securitization would provide liquidity relief to commercial banks while providing long-term investment opportunities to institutional investors. The implementation of a system based on the Danish model is designed to prevent the replication of some of the drawbacks of the US mortgage market model.

The DIFC's regulatory body, the Dubai Financial Services Authority (DFSA), introduced the Collective Investments Funds regime in 2010, regulating the use of the DIFC REIT. A closed-ended domestic property fund, the DIFC REIT is structured as an investment company and investment trust, and is aimed primarily at investment in income-generating real estate that must be listed and traded either on NASDAQ Dubai or an exchange established in a jurisdiction recognized by the DFSA as having an equivalent level of regulation to that in the DIFC.

All positive indicators within the Dubai real estate sector will continue to be subject to uncertainty surrounding the global economy and regional geo-political developments, according to a 2012 IMF study. Dubai GREs will remain vulnerable to the fates of the global financial sector, with any worsening in conditions making it increasingly difficult to roll over debt and raise borrowing costs. While global exposure at all angles raises precarious possibilities for Dubai, it also presents opportunities. The shifting regional political landscape has once again shone a light on Dubai as a safe haven for investors, and the real estate sector stands to benefit from an influx of wealth from surrounding countries.

RESIDENTIAL

The start of 2012 saw the Dubai residential sales market showing signs of improvement from the outset, attributed in part to a maturation of the market, with end users beginning to buy homes to live in rather than purely for investment. The REIDIN residential sales indices indicate that the market has bottomed out, with values all but returned to 2008 levels. The leasing market has similarly improved as tenants are finding more affordable housing at competitive rates. Recent trends in the residential market, however, have been defined predominantly by the emergence of an ever-widening gap between properties in prime locations and those in tertiary areas. A persistent influx of new stock to the market is also serving to restrict price growth. The sophistication of the average purchaser has climbed steadily, and in the years since the impact of the global liquidity crisis, property location, finish, and community infrastructure have become paramount concerns. According to Jones Lang LaSalle, 3,000 new residential units were added to the market in the first quarter of 2012, bringing total residential stock to 341,000 units. Almost 90% of completed units in 2011 were apartments. It is anticipated that up to 28,000 new units will be completed in 2012 and a total of 43,000 units by the end of 2014.

COMMERCIAL

The Dubai commercial real estate market is to some extent plagued by a peculiar problem. The office vacancy rate stands at more than 40%, with total citywide stock standing at 5.8 million sqm at the end of 2011. The post-crisis vacancy levels of older office stock in established locations such as Deira and Bur Dubai are rising, as tenants in stronger positions are now able to secure more affordable space in previously unattainable locations in the Central Business District (CBD). However, in spite of the large amount of empty stock, large multinational organizations have been struggling to find suitable contiguous space. A great deal of the local property is based on strata management ownership, which means that a large office space in one building might be owned by numerous landlords. During the property boom, large swathes of developments were sold off plan to multiple investors, meaning that every floor in a tower block could be owned by a different landlord. Some 22% of Dubai's 61 million square feet of commercial space is held by multiple owners under strata title ownership. With effective facilities management becoming increasingly important to the long-term sustainability of building stock city wide, strata ownership continues to create difficulties for tenants who find it challenging to deal with numerous landlords with different interests. Finding suitable, international Grade-A space is therefore not straightforward. Evidence of this was seen in 2011 by Standard Chartered's decision to build its own office space at a cost of $140 million, due to be completed sometime in 2012. Standard Chartered will itself lease 60% of the office space within the 252,000 square-foot tower.

Approximately 57% of the office stock is located in onshore locations, making it suitable only for those companies licensed by the Department of Economic Development. Only 20% of the stock is located within the CBD in downtown Dubai, with the majority of available space located in Tecom, JLT, and Business Bay. An additional 12 million square feet of space is due to come on to the market in 2012, but in common with the current space available, this will largely be strata space, suitable for SMEs. Rental levels vary from AED2,500 per sqm for prime property located in the DIFC, to AED1,500 per sqm for general citywide locations. New supply coming onto the market is expected to push rates down further, with market demand on a general level being driven by upgrades and consolidation, rather than new entrants on to the market. Major developments coming on to the market in 2012 include Central Park The Buildings by Daman in DIFC; Iris Bay and Regal Tower in Business Bay; Amesco and Platinum Towers in JLT; and SIT Tower in Silicon Oasis.

RETAIL

The retail market is dominated by prime space in super centers, which makes up 65% of the mall-based space available. There has been clear evidence of the emergence of a two-tier market, with space in new malls being in high demand, and older malls steadily decreasing in popularity. Evidence of the demand for prime space can be seen by the recent announcement by Emaar Properties of its intention to expand Dubai Mall by a further 1 million square feet, bringing the total space in the mega shopping center to 13 million square feet. Nakheel Properties also announced the development of The Pointe on Palm Jumeirah, as well as a 158,000-sqm extension to the Dragon Mart Mall, due to be delivered in 2014.

Prime rents have been steadily increasing, with levels currently between AED4,200 and AED5,500 per sqm according to the most recent report released by Jones Lang LaSalle. Property rates in the secondary tier market average AED3,000 per sqm. Occupancy levels in the most popular locations, including Mall of the Emirates and Deira City Center, are at almost 100%, and with little new stock coming on to the market in 2012, this is unlikely to change.

INDUSTRIAL

Dubai's strength as a regional trading hub has been consistently reinforced post-crisis, and large international industrial and logistics companies continue to choose the Emirate as a base for their regional trading headquarters. Demand from courier and petrochemical industrial companies has driven the strong performance of the industrial and warehousing sectors, with prime space in Jafza and DAFZ experiencing healthy demand. Rental levels vary from AED30 per square foot to AED17 per square foot depending on the location and quality of the plots. Cluttons report that there is a shortage of large high-quality space over 50,000 sqm, contrasted by an oversupply of smaller units. Large plots over 100,000 sqm are extremely difficult to come by, and this has created issues with both pricing and quality, resulting in some large multinationals choosing to build their own units located outside the free zones.