Land prices still remain strong

The comment has been made on many occasions that land prices in Dubai will never drop. It is not clear why this is sometimes believed, as basic experience with supply and demand should refute this.

Therefore as the real estate market in Dubai showed signs of softening it seemed natural that this would be the result. However when discussing prices with brokers, we find that land prices have continued to remain steady and in most cases have risen.

This may be a result of the low interest rates that encourage investment in property as opposed to leaving money in the bank.

Another contributing factor may be due to owners holding on to land, refusing to sell at lower prices and instead preferring to wait and see where the market will be in the months ahead.

Holding on to land of course is very different from refusing to reduce rents on existing property. In the case of properties, the banks are often involved and obligations will not allow unlimited time to second guess the market. Therefore we have seen rent reductions in many areas, particularly commercial, while land prices continue to remain fairly strong.

For example, it is difficult to find a piece of land in Jumeriah under Dh100 per square feet and prices can range from Dh100-200 per square feet. It is also important to be aware of the fact that there are very limited amounts of undeveloped land in the Jumeriah area making it a precious commodity, unlike other areas such as Barsha that in the past has seen land prices drop as much as 25-30 per cent due to lack of confidence in the area.

However with the anticipation of Souk Al Nakeel, land in Barsha once again is appreciating in value. Land on the Sheikh Zayed Road has held steady for many years and there are only occasional bargains.

Land prices continue to make it unappealing for an investor to build a property when the land cost represents close to 50 per cent of the investment. The average piece of land in Umm Suqeem is between Dh90 and Dh150 per square feet.

The land is generally zoned for a minimum of 5,000 square feet per villa. To build eight villas, an investor would need to buy 40,000 square feet or more if a common pool is planned.

The land cost then represents a minimum of Dh4,000,000. With an approximate cost of construction at Dh6,000,000 for eight villas totalling Dh10,000,000. The cost of the land inhibits many nationals from considering such an investment when they know that the past rental rates will not be achievable. On the other hand they are often reluctant to look at other areas of investment unfamiliar to them.

Many years ago residential projects or apartment buildings were paid off in 3-5 years. However, recently the return is more likely to take in excess of 10 years. With increased supply, reduction in rents and expensive land, investors must look at longer pay back periods.

Times have changed, and with land prices still strong it is difficult to keep the average investor inspired.