Dubai Real Estate Recovery ‘Backed By Fundamentals’

Dubai’s real estate recovery is in line with the emirate’s wider economic recovery and is well supported by economic fundamentals, according to a study by Citi Research.

However, the study cautioned against early signs of exuberance, such as the re-emergence of off plan sales and the risks of excessive supply given some of the recently announced projects. Such exuberance could undermine not only the sustainability of the real estate recovery but lead to dislocations in the wider economy as well, it said.

According to Citi Research, there are early signs that the recovery in the real estate market may herald a new construction boom in Dubai

After the property crash, most of Dubai’s real estate developers shelved or cancelled ambitious projects due to the general collapse in demand and the apparent over-supply in the market that would take years to correct.

This left parcels of prime real estate undeveloped, much of which has since been written down on the developers’ balance sheets at the insistence of their auditors, said the report.

With the sudden surge in demand in the prime real estate segment in the past 12 months, these developers have begun to dust off some of the old plans and put them to tender. They have also announced a slew of new projects, it added.

It said Dubai’s recovery from the global economic downturn is going from strength to strength. Over the past couple of years, economic data have pointed to robust growth in the core economy: transport, tourism, logistics and trade, said the report.

Investor confidence has returned, with Dubai-related risk assets rallying strongly. And now, the feel good factor appears to be spreading to the property sector: the volume of property transactions is on the rise, and valuations are climbing sharply, said the report.

In October’s Cityscape, the key real estate event of the year, the announcement of bold real estate projects such as the Taj Arabia, a luxury hotel replica of the Taj Mahal (only 5 times bigger), left little room for doubt: Dubai’s property market is launching a comeback.

Confounding concerns about the magnitude of the supply overhang from the previous boom, property prices have responded strongly to the increased demand.

Data from Cluttons, the international real estate company, show that mid-range property (both apartments and villas) has risen in price by some 20 per cent in the past twelve months.

This is below the 30 to 40 per cent annual gain in property prices during the pre-2009 boom but, according to CBRE, represents one of the sharpest gains in the property sector anywhere globally this year.

Citi Research pointed out that the strengthening of demand in the property sector was correlated to the wider economic recovery.

“Focusing on the housing market, we estimate historical housing demand and supply in Dubai based on our population. According to these, rapid population growth pre-2009 led to a relative tightening in the housing market as demand out-paced supply.”

“In 2009/2010, a retrenchment in demand growth and rising completions on the supply side saw vacancy rates climb rapidly. This coincided with a tumble in property prices. In the past two years, the situation has begun to reverse yet again: a slow down in completions and a rise in population growth is reducing vacancy rates, a trend we expect to continue.”

The picture in the commercial real estate market is more mixed. The extent of oversupply in the office market during the boom was greater than that in the residential market.

The vacancy rates remain high – Jones Lang Lasalle estimates vacancy rates in the Central Business District of Dubai at 31 per cent in the third quarter,  while Cluttons puts the number for the whole of Dubai at 40 per cent.

However, both companies have reported an increase in demand, particularly for prime office space, and expect to see strengthening in the market in the near future. Overall, office rental rates remain flat, having bottomed out in the fourth quarter of 2010.

Citi Research pointed out that the global economic downturn had pulled the rug from under Dubai’s overheated real estate market in 2009, and exposed some of the highly-leveraged local conglomerates to substantial refinancing risk.

Problems in these areas appeared structural, requiring years to correct. By contrast, however, the downturn in the core economy – trade, tourism, transportation, logistics – was a cyclical phenomenon, it noted.

Having spent most of the previous 50 years establishing itself as a regional hub for trade and commerce, Dubai’s economic fortunes had become in many respects linked to the ebb and flow of regional and global trade and commerce, and remain so, the report stated.

According to Citi Research, there are early signs that the recovery in the real estate market may herald a new construction boom in Dubai.

After the property crash, most of Dubai’s real estate developers shelved or cancelled ambitious projects due to the general collapse in demand and the apparent over-supply in the market that would take years to correct.

This left parcels of prime real estate undeveloped, much of which has since been written down on the developers’ balance sheets at the insistence of their auditors, said the report.

With the sudden surge in demand in the prime real estate segment in the past 12 months, these developers have begun to dust off some of the old plans and put them to tender. They have also announced a slew of new projects, it added.

TradeArabi