Neighbourhood Watch : Investing in a state of oversupply

Perhaps the most common question we hear from private investors regarding real estate these days is what is going to happen to the rental market with all the major projects offering freehold ownership?

The question is rather difficult to answer accurately because freehold ownership is a recent phenomenon, and the rental by-product it creates has not yet properly entered the market.

Nevertheless we can assume that with the large number of freehold units currently in the pipeline, and the general indication from many purchasers of their intention to rent out their units, there will be a dramatic increase in the supply of units to the rental market. This increase in supply has the potential to deliver both positive and negative ramifications.

There is little doubt that the delivery of a large number of units into the rental market will be advantageous to tenants.

A greater choice of quality units will be available due to the fact that these units are being developed by large organisations leveraging considerable economies of scale and utilising teams comprising the world's best architects and planners.

Whether or not the core issue of rental rates is affected by the introduction of freehold units into the market will depend upon the population growth rate of middle to upper income tenants.

The concern of over-supply is a real one for many who are caught in the middle of projects where minimal feasibility study was carried out.

Some of the project returns will be affected as a result of the market's increasing supply as well as the introduction of ownership in certain properties.

This does not necessarily cause the smaller projects to fail but only to change the goal posts. If an investor projected a 15 per cent return and subsequently determines it will be seven per cent, perhaps a little more due diligence was necessary along with a more realistic investment aspiration.

There is no doubt that these projects create a tremendous amount of excitement and enthusiasm for everyone, effectively instilling confidence in the population as a whole. The generation of this kind of activity from the government and quasi-government sectors stimulates the economy and leads us to believe there is a master plan. That is a motivating factor for both small and large businesses when making a decision to invest long-term.

The market supply and quality of product has been changing steadily during the past decade and while one is not always privy to every future project, it is not difficult to see that the real estate market is dynamic and one that can no longer be treated in the same way as in the past.

No matter which way the market turns, there will be those who will gain and those who will lose.

It is a natural phenom-enon and one that should be anticipated by anyone seriously involved in investment.

SIZE COUNTS

How the tenants stand to gain
- A greater choice of quality units will be available.
- Units are being developed by large organisations leveraging considerable economies of scale.
- Utilising teams comprise the world's best architects and planners.

The writer is the UAE-based managing director of Better Homes LLC