The UAE's prolific property market

More and more developments are taking shape in Dubai and Abu Dhabi as well as in Ajman and Ras Al Khaimah.

Strong economic growth, progressive housing laws and easy investment opportunities are the key drivers for the country's booming real estate business.

Figures in the UAE property market speak more loudly than words. Research conducted by Colliers International, in the second quarter, in Dubai and Abu Dhabi highlight the following — in the Dubai residential sector, almost 160,000 new units are expected to be delivered by 2010; the total office supply in Dubai is expected to increase to 4.9 million square metres by 2010.

Also the number of hotels and hotel apartments is expected to cross 50,000 units by 2010; in Abu Dhabi an additional 100,000 residential units will be required by 2010 to absorb excess demand and as many as 140,000 additional units are expected between 2011 and 2013, assuming developments are completed on time. The shopping mall Gross Leasable Area (GLA) in Abu Dhabi is set to increase from 820,000 square metres to 1.4 million square metres by 2010.

It is indeed boom time for the UAE property market, with an increasing number of developments taking shape not only in Dubai and Abu Dhabi, but also in Ajman and Ras Al Khaimah. According to Mohammad K. Dahmash, Partner and Middle East Leader, Ernst and Young, "The UAE property market, particularly in Dubai, has witnessed unprecedented growth over the past five years. A substantial part of that was driven by speculative investors. Also the introduction of real estate laws to safeguard property investments has resulted in greater confidence and more end-users entering the market.

"Every market witnesses a cycle of peaks and troughs. So even if Dubai may witness a slower sales pace and lower price appreciation in the future, the underlying fundamentals still remain strong in the long run."

Ian Albert, Regional Director, Colliers International, says that there are some legitimate concerns in the Dubai property market, such as the 'bandwagon' development activity intensifying the risk of a glut in the high-end residential segment in particular and speculative investment activity in off-plan products resulting in negative investor sentiment. "Despite these concerns we remain bullish on Dubai's real estate market and still see ample opportunities for growth," says Albert.

According to Albert, "As the market moves towards demand-supply equilibrium, certain developments will outperform others. We anticipate that real estate values will reflect this pattern, with the stabilisation and hardening of values in well-planned developments enjoying strong demand, and value depreciations in poorly designed developments that have thus far enjoyed price appreciation due to market undersupply rather than quality of product. The introduction of housing price indexes by Colliers International and Mazaya, and the expected establishment of RERA's residential rental index will further galvanise this process."

The optimistic outlook, according to Colliers, is underlined by three key factors:

Supply: the ability of Dubai's master-planners to 'phase' the delivery of stock on the supply-side, supported by continued development delays caused by shortages of labour and raw materials, and infrastructure constraints, reducing the risk of market-wide glut.

Demand: strong fundamentals driven by continued economic growth, supported by the ability of workers currently commuting from neighbouring emirates to absorb any secondary tier developments that suffer price depreciations, maintaining high occupancy rates.

Regulatory: continued progress by RERA in curbing speculative investment activity (evidenced by the introduction of Law 13 in August requiring investors to register their properties with the Dubai Land Department, reducing the pace at which investors can 'flip' their product on the secondary market) marginalising the role of speculative developers seeking to maximise profit at the expense of investor satisfaction (the establishment of a dedicated Property Court handling disputes and expected measures tying off-plan repayments to construction progress will assist), and the continued introduction of legislation aimed at regulating the market.

Strong market demands in Dubai and market undersupply in Abu Dhabi have been the main factors driving the real estate growth in the two emirates. "However, the real catalyst has been the regulatory reforms in Dubai (2003) and Abu Dhabi (2005), opening certain locations to foreign investments," says Albert. "Although Dubai has enjoyed a clear first mover advantage in attracting investment, off-plan real estate values in Abu Dhabi have caught up quickly due to strong investor demand. The concentration of investment activity in the UAE capital has been in a limited pool of available stock, in Al Raha Beach and Al Reem Island primarily."

According to Arif Amiri, Senior Director, Investor Relations, Business Development and Corporate Governance, Emaar Properties, "The property sector in the UAE has gained momentum from the regulations and policies introduced by government authorities such as the RERA. Also the introduction of the Escrow Account and Strata Law have strengthened the property sector, enhancing international investor trust in the UAE's realty market."

With an increasing number of international companies looking to enter the UAE, there is also a strong demand for office space in both Dubai and Abu Dhabi. According to Colliers, Dubai has approximately the same amount of office space under construction as Shanghai (with a population of 20 million) and Moscow (population of 10.4 million).

Dahmash says, "Commercial office rental yields in Dubai are among the highest in the developed world. With substantial influx of supply, these yields could compress in the near future. Nonetheless, the demand fundamentals remain strong backed by healthy economic growth and high liquidity. Consequently, the commercial office markets in Dubai and Abu Dhabi could gradually show signs of maturing with yields being at par with developed global markets."

Besides Dubai and Abu Dhabi, the northern emirates of Ras Al Khaimah and Ajman are also taking significant steps to encourage investment in the real estate sector. There are plans to turn Ras Al Khaimah into a high-end tourism destination in the Gulf. Domestic trade activity has also increased in RAK with the Ras Al Khaimah Free Trade Zone now open for business. Massive infrastructural developments are being undertaken in Ajman with the launch of multimillion dirham waterfront ventures, high-end commercial projects and budget residential houses.

According to Dahmash, "The northern emirates are less developed and, therefore, have the potential for future growth. With the governments of Ajman and RAK formulating policies to attract investment, the real estate markets in these emirates are poised for considerable growth."

The northern emirates, according to Albert, have two defined markets in terms of real estate development — products serving low-and middle-income groups in the immediate catchment area, and high-end mixed-use developments. "The key competitive advantage the northern emirates offer is the cost effectiveness of property vis-à-vis Dubai and even Sharjah. If this relationship is maintained then we envisage a well-performing market," says Albert.

The Gateway City in RAK, located along Emirates Road, has been unveiled recently by master developer Rakeen and will form the entrance to this bustling northern emirate. Rakeen is also set to start work on its flagship development, Bab Al Bahr, the gateway to the 2.7 million square metre Al Marjan Island. The Bab Al Bahr is expected to be a key instrument in attracting greater interest in the Al Marjan island and rest of the ground-breaking projects in RAK.

The concept of well-panned community developments has also catalysed the growth of the real estate market in Dubai, and have been replicated in other MENA markets. According to Albert, "Well-planned community developments that offer supporting retail and leisure amenities have consistently enjoyed a higher proportion of owner-occupier demand, than standalone developments that do not offer the advantage of convenience. Upper-middle and high-income home owners from the Middle East, Iran and the Indian Subcontinent have demonstrated a clear preference for community developments in Dubai such as The Springs, the Green Community and the Arabian Ranches, which provide a welcome contrast from high-density urban living that they may have been accustomed to in their home countries. Such developments have also been the de facto locations of choice for Western expatriate families."

Community living has also expanded into high-density urban locations such as Downtown Burj Dubai and Al Raha Beach in Abu Dhabi. "These major developments not only incorporate significant office components and civic amenities that develop the concept of a 'neighbourhood' where people can work and live in the same area, but they are also envisaged to act as destinations in their own right attracting workers, shoppers and visitors from other locations," says Albert. "This is expected to develop further with the current emphasis on sustainable development, embodied by the Plan in Abu Dhabi, and the proposed redevelopment of Satwa and the Creek in Dubai."