(Prime Research Report): 2006 was originally widely anticipated to be the first year to witness the delivery of a sizable number of residential properties in Dubai. However, the actual handover of properties remained well below both general expectations and our forecast for 2006. Deliveries during 2006 are estimated at ca. 14,000 units against our original expectation of ca. 40,000 residential units.
We continue to feel that the nature of the real estate market in Dubai justifies a scenario based analysis as opposed to the estimation of a single total for residential supply in the Emirate. Moreover, projects being directly developed by or Master Planned by Nakheel account for ca. 53% of total residential units slated for completion in 2007. Given that projects by the government owned developer have witnessed some of the biggest delays in recent years, our base case scenario assumes lower deliveries in 2007 than Nakheel has suggested will take place. This holds particularly true for the International City development and Discovery Gardens. Thus, we estimate a roll-out of ca. 37,000, 65,000 and 60,000 residential in 2007, 2008 and 2009 respectively under our base case scenario after incorporating delays of 15%, 20% and 20% respectively.
We continue to view demand as a combination of two constituents, namely pent-up demand and ongoing demand. Our estimate of a total demand of ca. 53,000 units for 2006 included a pent-up demand of 23,000 units, based on the assumption that 3% of the population in the 15-40 age bracket serves as additional demand. Given that only ca. 14,000 units were handed over in the previous year, this translates into an excess demand of ca. 38,000 units by the end of 2006, which in turn is utilized as the estimate for pent-up demand for 2007. On the other hand, in order to estimate ongoing demand, we continue to assume that 30% of the incoming expatriate population serves as the addressable market for the quality of residential units scheduled for completion during the forecast period.
Our analysis suggests annual demand of ca. 70,000 units, 36,000 units and 38,000 units in the residential sector in 2007, 2008 and 2009 respectively. Given our above-mentioned supply estimate for our base case scenario, we foresee excess demand of ca. 33,000 units in the current year, a near balancing of demand and supply in 2008 and excess supply of ca. 18,000 residential units in 2009.
For the purpose of forecasting demand, we have opted to rely on population
statistics revealed by the Ministry of Planning and the Central Bank of UAE for the year 2004, as opposed to those based on the census carried out in 2006. Our decision stems from the fact that a number of valid criticisms have been raised on how the census was conducted, brining into question the reliability of its results. That said, given that population growth serves as the primary source of our estimate for demand of residential units, we have also included a demand-supply scenario analysis based on data from the population census. Utilizing the lower population size of 1.2 million indicated by the census for 2005, we estimate annual demand of 57,000 units, 31,000 units and 34,000 units in 2007, 2008 and 2009 respectively, translating into an undersupply of ca. 20,000 units in 2007, followed by a sizable excess supply of ca. 14,000 units in 2008 and ca. 41,000 residential units in 2009. It would be pertinent to emphasize here that feel that the census results considerably underestimate the actual population size and resultantly do not expect an excess supply situation to occur in 2008.
With a number of large-scale developments underway, the most notable of which are the DIFC and Business Bay, office space in Dubai is set to expand dramatically during the coming years. Better Homes estimates that a total of over 51 million square feet of office space is scheduled for completion between 2007 and 2010.
Demand for office space is, however, even harder to reasonably quantify than that for residential units, with the type and size of new businesses attracted by Dubai acting as a key determinant of whether adequate demand is generated for the incoming supply of office space. Moreover, the factors that have been responsible for the ongoing delays in delivery of residential units, and hence the maintenance of an undersupply situation, hold relevant for the office space sector as well. Most notably, capacity constraints in the construction sector and difficulties faced by government departments in terms of timely provision of infrastructure should ensure delays in the delivery of some of the office space as well. Lastly, the oligopolistic nature of the market, whereby government related developers are responsible for master planning the major projects underway should help in ensuring that some balance is maintained in the demand and supply of office space.
The hospitality sector is also witnessing tremendous growth in Dubai, with TRI
Hospitality Consulting estimating that 40,000 rooms are schedule to be added by 2010 in the 4 and 5-star categories alone. The government's announced target of attracting 15 million hotel guests by 2010 continues to serve as the primary driver of growth in the sector. However, given the current pattern of growth in tourists in the Emirate, the aforementioned target appears ambitious. This in turn suggests that the ongoing developments in the sector could lead to an oversupply situation by as early as 2008 if the planned roll-out of hotels proceeds as scheduled.
The prevailing shortage within both the residential market and the office space
sector is likely to sustain healthy returns for investors and developers in the short to medium term. Moreover, the delays of 15%, 20% and 20% incorporated in our analysis for the residential roll-outs scheduled for 2007, 2008 and 2009 respectively stand at very conservative levels in comparison to those witnessed in recent years. This reaffirms our belief that the market is likely to continue to benefit from sound underlying demand and supply situation until 2009. That said, the rising general expectation of a severe correction has the potential to turn into a self-fulfilling prophecy, thus posing the biggest threat to the market. This risk is accentuated by the fact that the increasing number of new residential buildings that appear to be nearing completion, combined with regular announcements of new projects, continue to fuel the perception that the residential market in the Emirate is headed towards an impending oversupply situation.
