How can Dubai avoid another real estate crash?
Over the past few months newswires have been flooded with stories painting a pretty picture of the real estate market. From high-ticket projects to crowds fighting each other to book coveted apartments, from prices rising on a daily basis to estate agents raking in the moolah, this sector seems to be on a roll.
The seed for this was planted back in September 2011 with the announcement of fallen giant Dubai World’s $25 billion debt restructuring plan. This led to a small growth in investor confidence which then snow-balled when property companies like Nakheel and Emaar came out with a slew of new project announcements, whetting consumer appetite. This was, of course, commensurate with rising interest rates.
The trend has been further cemented this year as demand for high-quality, branded residential developments in markets like Dubai and Abu Dhabi has risen. A recent report by Knight Frank showed that projects in Dubai associated with luxury brands are demanding nearly 60 per cent more value than non-branded projects in the same area.
Global luxury brands like Fendi are taking a bite of this lucrative pie with tie-ups with regional real estate players like Dubai-based luxury real estate developer, DAMAC Properties. Since the start of 2013, DAMAC has announced ventures with other high-end brands like Paramount Pictures, Versace and The Trump Organisation.
Ziad El Chaar, managing director, DAMAC Properties said, “We’ve announced three major partnerships in the last quarter, so we will now focus on delivering these.”
In fact, DAMAC Properties is allegedly considering listing its shares on the stock market and has approached banks with proposals for advisory roles as it bets on a sustrained recovery in the emirate’s real estate market.
In Dubai itself this kind of optimism has translated into immediate price upticks. For example, the most desired villa address, The Meadows, has seen a jump of 10 per cent in Q1 of 2013. Villas at Jumeirah Park have gained almost 30 per cent. That said apartment prices have actually been going up faster than villas.
“Dubai’s prime property is cheap by global standards and is overdue for a re-rating to a level suitable for such a global hub city on the edge of rising Asia,” said Peter Cooper, editor of Arabianmoney.net.
This impetus in real estate has given a shot in the arm for construction companies as well, like the recent contract award for Arabtec Construction from Emaar Properties.
El Chaar is optimistic about growth and demand in the UAE property market.
“Dubai is an important location for real estate development especially for the tourism, entertainment and business sectors. KSA and Qatar are also growing year-on-year.”
Initially there was a spurt in growth, with real estate prices posting 10 per cent annual jumps from 2000-08. But this led to property projects sprouting up haphazardly, along with the unparalleled rise of dangerous speculative capital.
“Seeking to capitalise on its prime location and to leverage the business-friendly environment it had created, the UAE needed to provide a sufficient volume of high-quality real estate,” said Ramy Sfeir, principal with management consulting firm Booz & Company.
“This was required to support emerging industries such as finance, communications, and tourism. Real estate companies therefore built their businesses and operating models around the promise of creating, selling operating large-scale developments.”
This, in turn, translated into increased exposure to market flaws and volatile revenue streams, as demonstrated with the manner in which developers burnt their fingers in the ensuing crash.
Fundamental structural deficiencies proved fatalistic not only to the real estate sector, but also to the economy at large. The danger of this recurring cannot be underestimated.
The property market in this region is still maturing. It is crucial for developers not to blindly imitate the business models that developers in more developed and markets adopt. It will help developers to narrow their segment and market coverage by concentrating on what they know and how well they know it.
According to Booz & Company, real estate developers can prepare for the next property cycle by narrowing their focus.
Building key commercial capabilities and reconfiguring their market-facing approach can help, in some way at least, to attain this.
Developers can begin by following these steps:
■ Decide what kind of developer you want to be
■ Master your chosen market
■ Manage exposure to market risk
■ Develop a set of core capabilities
■ Determine a unique identity
With a few value-creating strategies such as these, developers stand to benefit greatly from the boom that is taking place in the real estate sector across most of the region.
With uncertainty in gold and oil, real estate has once again come to the forefront as a preferred investment vehicle for investors.
It is, of course, a cyclical industry and will go through its boom and bust.
What developers need to bear in mind is to develop their core capabilities and a focused strategy to tide above market vagrancies and remain in the black.
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