When Dubai’s dynamic real estate market is compared to the evolution of some of the others around the world, some differences start to make themselves evident. And it is these differences that need to be examined when looking for opportunities — for developers and investors alike.
It is in the scrutiny of such differences that lead to understanding some of the local dynamics at play and, equally, how investments can be allocated to capitalise on the early capture of a shift that is likely to unfold in the coming years.
A pricing analysis of markets such as San Francisco, London, Manhattan, Los Angeles and Singapore reveal that pricing per square foot typically rises as unit sizes start to increase. This underscores the dynamic of end-users starting to demand larger spaces especially as family sizes and the “wealth effect” played itself out throughout the last two decades.
In Singapore, this price curve has slowly started to slope upwards in the last decade, whereas this trend played itself out earlier in other markets such as Manhattan, London and Los Angeles. It is important to note that the upward sloping price curve asserts itself both in the mid-income and the premium space (the latter trend being far more obvious even to a casual observer).
However, in Dubai, it is interesting to note that the price-per-square foot curve actually slopes downwards; in other words the median price per square foot is actually the highest for the smallest unit (studio) and proceeds to move lower as unit sizes increase.
Predictably, most developers have responded by offering an increasing number of smaller units in newly announced developments. A sample survey of new developments in Dubai revealed that less than 25 per cent of new offerings were for two- and three-bedrooms, whereas a similar survey done in San Francisco revealed that more than 70 per cent of the upcoming supply was for two- and three-bedroom space.
What does that say for the domestic real estate market? It reveals perhaps two macro-underlying factors that have played out. The first is that thus far, investors have dominated the asset purchases in the real estate space, and end-users have thus far had a minor impact in the overall demand curve.
Given Investor preference for higher yields, demand has been highest at the small end of the unit spectrum, and supply has adjusted accordingly. The second and equally important trend has been that Dubai was predominantly a tenant market, with the majority of the population being considered transient.
This implied that size was not a primary factor amongst developers, and accordingly (barring a few exceptions in the premium space), the preference was always to supply units that were on the smaller end of the spectrum, allowing developers and investors alike to optimize revenue and rental yields.
However, this situation is already starting to change. An increasing percentage of the expatriate population already considers Dubai to be their home and they have accordingly started to invest in their homes in the last few years.
At the premium end of the market, opportunities abound for larger spaces; the same cannot be said for the mid-income space. This has consequently led to some interesting developments in the last few years.
In mid- and upper-income developments such as the Greens, larger sized three-bedroom units have actually started to trade at a premium to the smaller-sized ones on a per square foot basis. Similar trends have started to be observed in the Downtown as well.
However, for the majority of residents, there is still not enough choice available for comfortable-sized affordable developments in freehold Dubai. This has meant that even as rents have started to slide in freehold Dubai, they have actually risen in areas such as Bur Dubai, Deira, Satwa and Ghusais where larger-sized dwellings have been available.
With talk of affordable housing now dominating the real estate ecosystem, the size and space hypothesis cannot be ignored. Developers and investors that capitalise on this trend early on will be amply rewarded as the price curve in Dubai inevitably slopes upwards as end-user demand starts to assert itself.
In mature markets, it is clear that space trades at a premium and as Dubai starts to mimic the trend, a positive relationship between price and space will inevitably reap financial rewards for those that take note.
The writer is Managing Director of Global Capital Partners.