Dubai: Decreasing real estate prices and rental rates are likely to "adversely affect" Dubai's nominal GDP growth rates in the real estate and construction sectors in 2009 and "possibly beyond", but green shoots of recovery are beginning to sprout in the sector, the emirate's Department of Finance said in a supplementary prospectus on a new bond issue, filed to the London Stock Exchange.
The Dubai Government has moved decisively to counteract a softening of the property and construction sectors since the middle of 2008, when the aftermath of the global financial crisis created negative sentiment in the UAE.
Since that time, a number of real estate projects in Dubai have been cancelled or delayed, principally reflecting liquidity shortages for developers, decreasing headline real estate prices and rental rates and increasing market uncertainty and negative sentiment.
Of the 980 projects in Dubai registered with the Real Estate Regulatory Agency (Rera), 46 projects have been completed and another 307 are expected to be completed. As many as 495 registered projects have either been cancelled by RERA or are in the process of being cancelled.
Reflecting the global financial crisis and sharp falls in international oil and gas prices in 2008 and 2009, there have been significant declines in real estate sales prices and rental rates, resulting in a slowdown in construction activity on some announced projects in the UAE.
"These factors are likely to adversely impact GDP in 2009 and potentially in subsequent years," the document says.
Colliers International reported that rental rates in the Dubai residential market declined by 25 per cent between the second quarter of 2009 and the first quarter of 2010, although the report states that rental rates in Dubai have since stabilised in selected developments and, in certain instances, have staged a marginal recovery.
With respect to sales of residential property, in the second quarter of 2010 the Colliers House Price Index (HPI) registered a 7 per cent growth over average sale prices for the second quarter of 2009.
During the second quarter of 2010, the HPI registered a decline of 4 per cent from the first quarter of 2010. The HPI, established in January 2008 by Colliers and six leading banks and financial institutions, provides statistics aimed at reflecting the average growth or decline in the rate of house prices in certain parts of Dubai.
In contrast, Jones Lang LaSalle reported that the number of residential transactions increased by 49 per cent in the second quarter of 2010 from the first quarter of 2010, with the value of such transactions increasing by 50 per cent.
"Dubai has evolved from a regional to a global city, and property is often the enabler for other sectors to emerge," said Blair Hagkull, chairman of Jones Lang LaSalle Mena.
Shift in focus
"We've moved from a construction-focused sector to one that is more oriented towards services and management. Hospitality too has over time become less about building and more about services."
The number of real estate transactions recorded by the Land Department has also dropped, from 5,916 in 2008 to 2,327 the following year.
However, a number steps taken by the Dubai Government to re-instil confidence in its property and construction sectors has resulted in signs of recovery.
For the first half of 2010, the Land Department reported 1,188 sale transactions, compared to 510 sale transactions in the second half of 2009, an increase of about 132 per cent. However, it also reported a decrease in the number of mortgage-related transactions, to 1,697 in the first half of 2010 from 1,861 in the second half of 2009.
On March 25, 2010, Nakheel announced a recapitalisation plan pursuant to which the Government of Dubai, acting through the Dubai Financial Support Fund, has committed to provide, subject to the approval of a restructuring plan, $8 billion of additional funds to Nakheel to fund operations and settle outstanding liabilities, including payments to Nakheel's contractors and suppliers. Nakheel has already announced the commencement of two projects — one phase of Al Furjan and Gardens View Villas.
Growth factor
One of the factors contributing to the significant growth in the real estate and the construction sectors up to 2008 is attributed to Dubai's demographics. The emirate's population has grown at an estimated average rate of 7.5 per cent per annum between 2005 and 2009, significantly increasing the demand for housing and retail facilities.
The economic expansion and population growth has also increased demand for telecommunications, electricity and water.
The majority of Dubai's population comprises expatriates from the Indian subcontinent, Europe and other Arab countries. Approximately 78 per cent of the population is estimated to be male and 22 per cent female, reflecting the large male expatriate workforce.
As at December 31, 2009, it was estimated that approximately 64 per cent of the population of Dubai was between 20 and 39 years of age, with the largest single group, constituting 19.6 per cent, being between 30 and 34 years of age. The literacy rate in Dubai for persons at or above the age of 15 was estimated at 96.3 per cent in 2008.