Business | Property
Property market hit by oversupply fears
Faith in the sector could also be shaken if the government goes back on its promise of giving residence visas.
- By Suzanne Fenton, Staff Reporter
- Published: 23:53 July 10, 2008
Dubai: Faith in Dubai's real estate sector could be shaken if the plethora of developments coming on to the market next year outstrips demand and if the government goes back on its promise to issue residency visas.
"I think a bigger worry would be if the government withdrew its promise to grant residency visas for freehold purchasers and their families. It is clear that a significant number of buyers in the market see Dubai as a safeguard against trouble in their home countries and this safety net would be removed if that promise was not honoured," Matthew Green, research director at Cluttons, UAE, told Gulf News.
These comments come after a report was released yesterday by ratings firm Fitch, identifying oversupply and sustaining foreign demand as the major challenges threatening Dubai's real estate sector.
"The main challenge is oversupply. Some projects coming on to the market in 2009 and 2010 will all be coming at one time," Bashar Al Natoor, author of the report, said.
Marwan Bin Galita, chief executive of Dubai's real estate regulatory authority, Rera, said there is currently around Dh6 billion in escrow accounts in over 33 banks. Around 800 developers have now registered over 1,624 projects.
The report notes that if supply does exceed demand, prices of property will fall, reducing revenues, which would then have a negative effect on developers' credit profiles.
Recent figures from Colliers International show that the average price for residential properties in the first quarter was $434 per square foot. While high for Dubai, the prices are still below those in Manhattan ($1,289) and in London ($2,093).
However, on a positive note, the prospect of falling house prices would be a glimmer of light for Dubai residents.
"There is a high probability of late delivery and even project cancellation, due to logistical constraints, which could ultimately result in a better match between supply and demand," said Al Natoor.
An analyst at EFG-Hermes in Dubai, Stefan Schurmann, said although supply is catching up with demand, he doesn't see oversupply as being a major threat to the market.
"There are two things [affecting supply] and that is delays and construction constraint. A lot of projects are coming to the market this year and next. There is some risk as supply is catching up with demand starting next year.
"We know demand is strong. There are still a lot of people coming to the UAE and those people need accommodation," Schurmann said.
"I honestly don't think oversupply is a concern at this point or over the next three years," Green said.
"If you look at the actually deliveries over the past two years, you realise that only, say, 50 per cent of expected product is delivered on time. In 2007, around 30,000 units were handed over compared to a forecast of 60,000 units the year before.
"Delays are just part of the market in Dubai and it may actually help in the long-term by drip-feeding supply instead of dumping a huge glut of new units all at once," Green said.
In terms of office space, the report says that Dubai, with its 1.4 million population, currently has approximately the same amount of office space under construction as Shanghai (population 20 million) and Moscow (population 10.4 million).
Office sector
The office sector may also "start experiencing a price correction" as massive new supply comes on to the market over the next two years, according to the report.
Dubai must continue to attract sufficient real estate demand as the emirate plays a major part in filling the $1.8 trillion worth of projects that are due to flood the GCC next year.
The top five biggest civil building projects currently under way in the GCC are all in Saudi Arabia, the UAE and Kuwait with a combined value of $349 billion.
Fitch believes that foreign demand is the "prime driver" of Dubai's property market, thanks mainly to the number of expatriates living and working here and institutional investors who have reinvented Dubai as a business hub.
Although political tensions are increasing in the region, primarily between the US and Iran, analysts do not believe this will affect the UAE's status as a stable, Middle Eastern country.
"In my opinion, the Iran situation is not going to dampen foreign demand, at least in the short-term. Historically, Iranians have been big investors in Dubai and any escalation in the region could actually fuel further demand for property," Green said.
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