Dubai may have earned a well-deserved place on many ‘top 10 cities’ lists worldwide but for someone forced to move to the desert city from the UK for work, the idea of leaving behind London’s old-world charm for Dubai’s ostentatious opulence may not be an exciting prospect. And there is little that can help you assuage such misgivings, unless, of course, you are blessed with an enthusiastic and accommodating spouse like 38-year-old Hootan Yazhari is. Head of frontier markets equity research at Bank of America Merrill Lynch, Yazhari had to move to the land of the seven emirates in late 2014 as his American employer wanted to take advantage of rising investor interest in the Gulf and adjoining regions. This interest is led in part by the decision of index compiler MSCI — whose indices include some widely tracked global equity benchmarks — to upgrade Qatar and the UAE to emerging markets. “My wife was very excited about our move to Dubai as she had visited the place before on work and to study and really liked the city. It has so much to offer — it is safe, truly international and multicultural, has a vibrant community, fantastic employment opportunities in the financial sector and great weather,” says Yazhari at his fifth-floor office at the Dubai International Finance Centre.
Although real-estate prices rose in 2014, the number and value of transactions dropped by nearly 30% and 14%, respectively. Given the huge supply of 25,000 additional units each year, the residential market is likely to remain subdued (see: A problem of plenty). “Near term, we have seen a slowdown in the rate of property price growth after very strong rises in 2013 and 2014; we could even see a small correction southwards,” says Yazhari, who stays in downtown Dubai, which boasts of the maximum AED 5 million+ sales last year, followed closely by Dubai Marina and Palm Jumeirah. Prices, in fact, have already started correcting. Anil Gehani, founder of Zabadani Real Estate, which caters largely to Indian HNIs and industrialists, says, “Just three months ago, a 4 BHK villa in Palm Jumeirah that was put on the block for AED 14 million sold for AED 10.5 million.” One of the big reasons for this dip is that foreign capital flows are slowing down as some economies go through the pincer.
Chandrakant Whabi, the 40-year-old founder of Acrohouse Properties, explains that due to weakening prices, buyers are unwilling to pay a premium on off-plan units launched over the past two years and investors in these projects are staring at huge losses as they look for an exit. “Investors who have bought off-plan property and made part payment, of say 30%, and want to sell, will attract the following transaction cost: the seller has to register his property with the land department and pay for oqood (fees paid to the land department to register off-plan agreements), which is 4% of the total property value. The buyer will have to pay 2% commission and 4% for registering property under his name, which is another 6%. Transaction cost is 10% of the total property value, that is, 1/3rd of the amount invested by the investor so far (that is 30%),” he explains. Simply put, off-plan speculative buyers are stuck with their investments. Even as speculative investors are fighting their demons, the bigger developers are slowly regaining control of the market as financially weaker mid-rung players bow out.
A developer today has to first pay for the land and then put 30% of the cost in an escrow"Chandrakant Whabi, founder, Acrohouse Properties Changing Game
With the new rules forcing developers to put money on the table up front, the rules of the game are no longer simple. “Now, a developer has to first pay for the land and then put 30% of the cost in an escrow, which means only financially strong developers can get into the business,” points out Whabi. Not surprising, then, that bigger developers like Damac, which went through a pincer in the aftermath of the crisis, are calling the shots. Hussain Sajwani, the 59-year-old founder of Damac, known for its luxury properties, was quoted as saying that 90% of all the property in Dubai is now owned by four major developers — his company and the government-linked trio Dubai Properties, Emaar Properties and Nakheel. “These are established companies with strong cash flows and their presence is helping the market mature,” Sajwani was quoted as saying by an international wire agency. In 2014, Damac’s revenue increased 64% to $2 billion, while profits soared 46% to $937 million.
Putting the changing real-estate equation in perspective, Whabi says, “The froth has gone out of the market as there are now just two types of developers — the big four on one side and niche developers on the other.” Dev Maitra is the CEO of one such player, Indigo Properties, which has managed to create a niche of its own. “We would call ourselves premium and not high-end premium developers; we are known for delivering high-quality units on time,” says 47-year-old Maitra. Founded by four Indians, Indigo Properties has completed construction and handed over 1.4 million sq ft of property in Dubai since its inception in 2004. While Indigo has a pipeline of 3 million sq ft to be delivered over the next three years, Damac has a development portfolio of over 38,000 units at various stages of progress and planning. But nobody is worried about a price crash yet. Sajwani was quoted as saying that Dubai’s property market will stabilise during the year and, after consolidating, would “nose up”.
We are seeing a more Mature approach, which is going to benefit the credibility of the real-estate sector"Craig Plumb, head, research, MENA, Jones Lang Lasalle Is The Worst Over?
There are a few factors that a cross-section of experts say should help the storm blow over. Yazhari believes that Dubai’s reliance on high oil prices will continue to diminish as the emirate diversifies. “The market has many under-penetrated segments and we see strong opportunities in the region. Specifically, we see attractive themes such as rising demand for healthcare, modern retail penetration, education and growth in transportation,” he says. In the short term, Expo 2020 is expected to work as a pep pill. To be held over a period of six months from October 20, 2020 to April 10, 2021, the event hopes to draw more than 25 million visitors, led by AED 25 billion in total investment in infrastructure-related projects in the city, creating 277,000 jobs. Though real-estate prices in Dubai in late 2013 and 2014 were driven by the news of Dubai winning the expo bid, developers believe that more than the expo, it is favourable economics of owning a property that will keep prices buoyant even as the expat population continues to grow. Yazhari agrees, “With the UAE likely to enjoy GDP growth of 3% and Dubai’s population projected to rise over 50% (not least because of Expo 2020), we see a strong demand growth for properties here.”
While one could argue that the long-term scenario is still a mirage, statistics show that buyers are better off buying a property in Dubai at current prices, which average between AED 700 and AED 1,200 per sq ft. According to real-estate consultancy Asteco Property Management, a 789-sq ft flat in International City today costs AED 560,190, as against AED 828,450 in 2008, a 30% drop. In fact, the price of a one-bedroom premium apartment near Burj Khalifa, too, has seen a correction from an average of AED 2,700 per sq ft in 2008 to AED 2,325 per sq ft in 2014. Incidentally, the decline in prices is outpacing rent declines, pushing yields up to 7% for apartments and marginally up for single-family homes. The Reidin rent index for January 2015 shows a y-o-y increase of 11.8% in the UAE — making it attractive to buy in the region even on a mortgage and profit from rental yields (see: Home comfort).
Not surprising, then, that developers like Damac are hard-selling the math. “It is worth noting that prime residential property in Dubai still offers better value per sq m than London, Hong Kong, Singapore or Mumbai,” says senior vice-president Niall McLoughlin. Keeping this trend in mind, even smaller players are now looking at rental plays. Whabi is constructing 12 villas in Jumeriah Village Circle and plans to sell them at around AED 2.8 million, while Gehani of Zabadani Real Estate is now looking at managing and offering furnished apartments. “HNIs from Mumbai and Delhi are looking at 1-BHK and studio apartments, as they see value vis-à-vis investing in their own cities,” quips Gehani. Apart from the lure of Dubai’s tax-free regime, investors believe they would be better off staying invested in dollar assets as the dirham continues to be pegged to the greenback. “While this is still Dubai and it’s as ambitious as ever, we are seeing a more mature and considered approach, which is only going to benefit the long-term health and credibility of the real-estate sector,” sums up Plumb of JLL. Any takers for Palm Jumeirah?
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