From 2004 to 2008 the world witnessed a real estate boom of unprecedented scale in Dubai. The result has led to Dubai becoming one of the most high-profile international destinations in the world and the premier city in the Middle East and North Africa (Mena) region.
The rapid growth was primarily facilitated by easy accessibility to fin-ancing coupled with increasing speculation and a growing population. This led to peak transaction volumes and sky-rocketing property sales and rental rates, which finally climaxed in October 2008.
As we all know today, the gloom of the global financial crisis permeated its way to Dubai and led to the beginning of the downturn for the real estate market. This has triggered the sharp correction that had been anticipated by experts even before the global credit crunch took place.
Corporate downsizing and lack of liquidity soon followed, which resulted in a decrease in demand and eventually a decline in sale and rental prices. Sales prices for off-plan developments have dropped almost 50 per cent in some areas, while many developments under construction have been halted or scaled back.
However, while the short to mid-term outlook on Dubai's real estate market may seem a bit ominous, the same is unlikely to hold true in the long-term. Dubai's relentless ambition and development prowess over the last 10 years has cemented its status globally as a world-class destination to both live and work. The calibre of residential developments and Grade A office buildings far surpasses any other city in the Mena region in terms of attracting expats and serving as a major commercial and financial regional hub.
Indeed, it would not be far-fetched to claim that Dubai is the only city in the region as of now with the infrastructure capacity to serve as a global business metropolis, meaning that international corporations, banks and firms interested in tapping into this very important emerging market would prefer to establish a foothold in Dubai.
Powerful synergies
In turn, these factors create powerful synergies for the residential and office sectors, particularly when it is considered that most professionals in the region would choose to reside in Dubai rather than be relocated to another city in Mena. This clearly highlights the strength and appeal of the Dubai brand.
Thus, on these fundamental reasons, it is apparent that Dubai has healthy long-term prospects.
As for the current market conditions, positive occurrences should also be highlighted from this recent downturn in the real estate market, as it has essentially cleared the market of speculators who drove real estate prices to artificially high levels.
Furthermore, the declining price level is progressively making it more affordable for prospective buyers to enter the market and people living in other emirates to relocate to Dubai, thus positively affecting the demand. The situation has also led to the development of concise and precise real estate statutes and regulations that have improved the transparency of the Dubai market, giving prospective investors and real estate developers an augmented sense of confidence and security. Therefore, the current downturn will have various beneficial effects on the real estate market in the long-term as it paves the way for a more sustainable future growth that is based on fundamental attributes.
Outlook
The market is anticipated to achieve equilibrium in 2012 and start recovering by 2013. The following points describe the anticipated situation in the short term:
- Demand-supply gap is widening in a few areas. Higher vacancy rates anticipated in Jumeirah Lake Towers and Dubai Marina with around 10,200 units being released in next two years while other areas such as Bur Dubai, Satwa and Jumeirah remain under supplied;
- Rental rates may experience further downward pressure while the market is heading towards more affordable residential units;
- However, arrival of distressed asset funds could be a signal that the market is starting to stabilise or is in the final stage of its decline. This is supported by recent stabilisation in the sales prices of completed developments.
- Lifestyle communities with good infrastructure and easy access to retail, education, leisure and entertainment will generate more interest compared to other properties. These include developments such as Palm Jumeirah, Downtown Burj Khalifa, Dubai Marina, Jumeirah Beach Residence.
Office market short to medium term outlook
- Demand is anticipated to remain low in 2010 as businesses are hesitant to make long-term commitments in an unpredictable economic environment;
- Office space per worker is anticipated to reach approximately 158 square feet, which is higher than the global standard of 145 square feet.
- This increasing office space per worker does not necessarily mean that the actual space used is increasing, but that the vacancy rate is increasing while actual space a worker gets remaining constant.
- Rental rates and occupancy levels are anticipated to decline further in the short to medium term considering the expected amount of upcoming supply entering the market at times of decreased demand.
- Developments with completed infrastructure in a well connected location will continue to generate interest.
Conclusion
The short-term outlook for the real estate market is evidently unclear, with no likely signs of recovery anticipated until at least 2012. However, decreasing sales and rental prices are causing fundamental and long-term beneficial shifts as speculators have been driven out and more end-users are entering the market, undoubtedly adding substance and real growth in the future. Improved regulatory frameworks have also been developed and implemented, showing signs of a more matured market.
It is also important to emphasise that despite the current disequilibrium between demand and supply, a significant amount of asset creation has resulted from the boom period.
Physical assets created during the boom prove useful later on as seen in the examples of Britain's "railway boom" in the 1840s and Florida's land boom in the early 1920s.
Dubai also started from a much lower base of infrastructure and it would not have developed the infrastructure so rapidly if not for the boom. Although the crisis has left a significant oversupply at present, a balance will inevitably be reached when the current global recession has passed.
This will prove useful for many years to come. Most importantly, the boom has established Dubai as a tourist destination on the world map and this image will not be erased as a result of the current downturn. All these factors will help Dubai regain momentum and become a mature market.
(Yousef Wahbah is the Middle East leader for real estate at Ernst & Young and Heta Kheni is the senior consultant for transaction real estate advisory services at the same firm)
