'With the present price levels, it makes more sense for people to rent rather than buy'

Even die-hard optimists know Dubai’s real estate marketplace will never realise the highs it took for granted until September 2008. That, however, should not preclude anyone from mapping out a strategy for a turnaround in market fortunes.

And that could well be happening right now, however infinitesimal it may seem. There have been marked gains in property values at select freehold developments and, just as important, these are holding up. Transaction levels are far from reaching normalcy, but the point to be made on this score is that limited activity is indeed taking place.

But there is only so much a buyer and seller can do. To stoke volumes over and above current levels, the authorities need to lend some much-needed support. Clarity on the issue of visas for expatriate property owners is vital, and this is the most important point that the market is focused on. Will the authorities play ball and create a measure of transparency on the residency requirements for property buyers? The coming weeks will be heavy with expectation, even those that have no grounding with reality.

To get a feel for the trends that one should watch out for, Property speaks to Sana Kapadia, vice-president of equity research at investment bank EFG Hermes. Here is her take on where the market — and its investors — is headed.

Going forward, will leasing transactions take precedence over sales transactions in the medium-term?
With the present price levels, and in light of relatively lower levels of confidence, it makes more sense for people to rent rather than buy. Such a process will also help absorb some of the stock coming onto the market.

But, does it mean that buying activity will recommence only with higher levels of support coming from mortgage lenders? And at rates that are deemed affordable enough?
There are some reports suggesting that it has. If you have a completed property in mind, the banks are lending a bit more. Mortgage rates have gone up in line with higher base interest rates.
Lending is likely to strengthen so as to facilitate a transition towards an end-user driven market.
Hopefully mortgage rates would ultimately be maintained at a level that is not overly prohibitive to encourage participation, while also capturing the associated risk of lending.

Several local firms, and leading developers among them, were planning to issue IPOs (Initial Public Offering) last year. Has this been completely taken off their agenda?
I believe some real estate firms would be interested in venturing into the market once overall market conditions improve.

In general, there is still some appetite for IPOs.
But perhaps investors are in need of greater diversity, such that non-real estate sectors would likely perform better, given the underlying levels of risk aversion.

Would this be a good time for real estate investment trusts (REITs) to show up?

Many developers have expressed medium- to long-term interests to set up REITs.
In general, this is still in its infancy, as most companies are in the process of building their assets, which would eventually be put up in investment funds.

Do you see the creation of more distress funds similar to the one created by Deyaar?
Other than Deyaar’s, another foreign fund was set up recently. People are waiting to see how this one fares before coming up with a bigger one. There are some funds waiting on the sidelines to be deployed later in the year. Right now, it’s more of a phase of testing the waters and seeing how things shape up.

A possible marriage of interests between Deyaar and Union Properties — do you see value coming from such an alliance?
One of the drivers behind such a merger would be for sector consolidation and could ensue as a result of a government-led initiative or if Union Properties’ (UP) liquidity position deteriorates significantly.
It could create synergies as both players are Dubai-focused and since Deyaar still has a large property portfolio to execute over the next four to five years. Also UP is set to complete all its projects by 2010, so this would be a natural add-on for its pipeline beyond 2010.
Also, merging the entities and creating a larger-scale player would give the new entity a larger asset base to generate greater rental income and, perhaps, easier access to funding as well.

As part of the merger, if UP were able to divest certain non-core assets such as Emicool, Thermo and other business segments that don’t naturally fall under its property development umbrella, it may be the best way to tighten UP’s strategy.

Finally, Deyaar’s operations are carried out under Sharia-compliant principles, which could broaden the interest generated from the investor community.

A handful of local developers recently announced plans to diversify into the Mena territory. How would you cherry-pick the markets with the highest potential?
I believe the best approach would involve assessing the markets and identifying those with the greatest fundamental long-term potential.

Saudi Arabia and Egypt are markets where demand will continue to rise. Both these markets are underpinned by rapid population growth and a need for housing.

Moreover, in some markets, such as Egypt for instance, a real estate downturn is not uncharted territory. Hence, buyers are more willing to hold onto property even if its value has dropped by 20 per cent, knowing that things will improve in the longer term.

In contrast other regional markets, where population growth is underpinned by immigrant population growth (for example Dubai), the short-term implications are less supportive.

How would you rate prospects in Saudi Arabia and Qatar?
Saudi Arabia is a fundamentally solid market with  a rising youth population and a need for housing. It is underpinned by long-term demand.

With respect to Qatar, energy plays an integral role. They are developing a range of industries focused on energy, and hence there will be a need to provide adequate numbers of residential units, retail and office space as well.