Tasweek Real Estate Marketing & Development, a property adviser and solutions provider in the Middle East, recently used its own operational model to analyze current trends, conditions and future industry drivers within the UAE real estate market as 2010 unfolds, with particular focus on Abu Dhabi and Dubai. Tasweek based its study on the core criteria of Trust / Transparency, Affordability, and Return on Investment with Operating Cash Flows. The results are as follows:
Abu Dhabi is expected to record strong growth in both GDP and population, with leading local, regional and global companies to scramble for growth opportunities by shifting capacity to the Capital. This is also echoed by many reports that with the gradual improvement in economic conditions, new blue chip companies entering the market, with its newly-completed high standard office stock, will help lift the prices of truly Grade A office and residential stock.
On one hand, supply-demand statistics favor Abu Dhabi. This is owing to the greater availability of mortgage financing and a short to medium term supply-demand mismatch, coupled with a structured pace of development and a move towards greater economic liberalization which will lead to economic growth and an increase in its population.
On the other hand, though, Abu Dhabi needs progressive transparency and regulation in the property market, which will be instrumental to its success in certain developments.
Tasweek believes investments in Real Estate should be made in Abu Dhabi for the longer term as it offers very low risk and steady returns for the future.
There is no doubt that there is an undersupply in housing in Abu Dhabi. Figures from Tasweek research show a fluctuation of as low as 22,000 to as high as 32,000 units. There is also a discrepancy as to how many units will be delivered over the next two years as they start at 15,500 units and end at 23,000 units.
Transactional activity remained very weak in 2009 as expected in Abu Dhabi and there is very low demand for off-plan properties. It is extremely clear that substantial activity in the future will be made via private equity groups and large institutional investors looking for conservative but higher than usual yields.
Average apartment price also retreated by 40% to 50% from their peak. Average rents for new leases have further lost an estimated 20% from their highs in 2008 to the end of 2009.
The next two years are expected to see 6.2million sqft of net leasable area of grade A commercial offices reaching the Abu Dhabi market. The current stock of offices remains not purpose-built; there is, for example, a need more parking facilities and adequate services. Supply of new office space in the capital remained limited during 2009, with occupancy rates staying in the 95-98% range. Nevertheless both rental rates on new leases and asset values retreated 15-20% and 35-40% respectively, as the market made a relative adjustment to neighboring Dubai.
Dubai’s growth is underpinned by its very large infrastructure investment and the city’s positioning, which makes it accessible to neighboring economies. The silver lining is the relocation of expatriates working within the UAE and the slight growth in the mortgage activity as more end-users arrive in the market.
The drop in the UAE’s interbank borrowing benchmark rate has so far done little to spur mortgage financing that banks offer to their customers for home loans. When this passes on to consumers or investors then a change in the market can be expected. The passing of stability and transparency in the maintenance costs to end-users and investors significantly affect their mortgage or their rental yield.
Tasweek believes real estate investments should be made in Dubai for the few who clearly understand the market and are in a position to carry out rigorous due diligence and securitize their capital and future income. This provides a platform for reaping great rewards in 3-5 years down the line when transparency returns to the market.
The economic recovery does paint a cautious picture for Dubai’s residential market in the near to medium term when rising supply, if uncontrolled, may hamper price recovery.
The projections on supply and demand that went to print during the start and at the end of the 3rd quarter in 2009 were in the range of 22,400 to 32,000 coming to the market by the end of 2009. These numbers were further revised in 2010 to approximately 17,000 units that were completed in 2009, bringing the total residential stock to around 273,000. A further 24,000 units are expected to be completed in 2010. It is interesting that the detailed analysis of Dubai's projects, construction progress, and handover activity revealed that 2010 could perhaps see an even greater number of deliveries than 2009, rendering deliveries for the year among the highest since the construction boom.
There will be more transactional activity where completed projects have adequate infrastructure with facilities such as road networks, retail, school and medical facilities. Mortgage facilities, registration of owners’ association, and REITs entering the market are expected to further fuel transactional activity in the coming years.
There were signs of price stabilization in Q409 which could be the beginning of a price floor. However, this is highly dependent on macroeconomic, financial, regulatory, and industry policies and trends.
It is estimated that 2010 will see the delivery of another 6.8 million sq ft of office space. Despite project delays and cancellations, there seems to be a further 2.8 million sqft slated for 2011 delivery. To absorb the supply delivered in 2009, Dubai’s economy must generate 85,000-90,000 new office jobs. Based on the office-consuming share of total employment and the rate of expatriate economic activity, this rate of office sector job creation will require a full increase in population and employment at different sectors.
Abu Dhabi and Dubai’s futures have been more intertwined as of late; this has had a price-stabilizing effect in Dubai and has reduced average rent prices in Abu Dhabi. The rent differential between the two has resulted in a significant proportion of cross-emirate migration. If this trend continues then it will exert further downward pressure on prices and rents in Abu Dhabi, at least narrowing the difference between the two in the medium term.
The key drivers for apartment, office and retail prices in the UAE for the future will be location, quality of construction, community facilities, completed infrastructure, and availability of competitive financing solutions. Critical elements for more transactional activity, on the other hand, include affordability, return on investment, and trust-worthy exchange partners.
Prices seem to be stabilizing and even increasing in selected areas where lifestyle communities are offered along with easy access to retail, leisure, education and entertainment. All in all, 2010 is expected to play out as a crucial period for determining the real estate industry’s direction as the world pursues post-crisis recovery.
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