Real estate - 40 years on

Dubai has been one of the fastest growing cities in the world over the past 40 years, with a real estate landscape that is quite unrecognisable from that on the eve of the country’s independence in December 1971.

The importance of real estate to the national economy was well understood by the UAE’s founding fathers, who recognised that the role of this sector goes far beyond building shopping malls, hotels or office buildings, to one of ‘nation building’. During the recent construction boom of the late 2000s, it is estimated that the real estate sector accounted for as much as 25 per cent of the total economic activity of Dubai. Jones Lang LaSalle’s World Winning Cities project identified Dubai, along with Dublin and Las Vegas, as one of the world’s fastest growing cities between 1991 and 2001. During this period, Dubai moved rapidly onto the radar of global real estate investors, and this trend has continued over the past decade.

The emphasis on the sector succeeded in creating many of the truly iconic, world class developments, including the world’s first six-star hotel, the tallest tower in the world and one of the world’s largest retail malls. The downside of the ‘build it and they will come’ mentality that dominated the market from 2006 onwards is that Dubai is now also setting records of a less positive nature, for example as one of the world’s most over supplied and poorest performing office markets between 2008 and 2011.

Major trends in the market
But enough of the past, let’s now turn to look at what the next 40 years may hold for the Dubai real estate market. Just as no one in 1971 would have predicted what would be achieved over the first 40 years of the UAE, no one today can say with any certainty what the real estate landscape of Dubai will look like in 2051. Forty years is a long time in any real estate market and is little short of an eternity for a market as young and dynamic as Dubai. There are, however, five major trends that we can predict with some degree of confidence.

Firstly it is important to remember that all real estate markets are cyclical in nature, experiencing periods of excess demand followed by periods of excess supply. Dubai has certainly been no exception, having witnessed a period of dramatic undersupply between 2006 and 2008, followed by the current period of excess supply, with over 40 per cent of all the modern purpose built office space in Dubai currently vacant. This oversupply situation may extend for the next two or three years, but is unlikely to remain over the longer term across the entire city. We cannot be certain how many cycles the Dubai market will experience over the next 40 years, but international experience suggests a typical cycle lasts between five and ten years from peak to peak, so we should not be surprised if the Dubai market has passed through between four and eight cycles by 2051. Another lesson we can draw from overseas markets is that the amplitude of real estate cycles goes down as markets mature.

Prices and rentals in Dubai went up by as much as 100 per cent between 2006 and 2008 and have declined by 50 per cent to 60 per cent from their peak. We can expect that the magnitude of price changes will be somewhat less in future cycles, due to the larger size of the market and the greater stability that comes with a more mature market.
It is safe to assume that the Dubai market will witness a slower pace of change as it evolves. This is not only due to the laws of statistics, but we can also assume that the experience gained from previous cycles will temper some of the more grandiose projects responsible for the unsustainable levels of growth seen in the first market upswing.

Financial sustainability
A third likely trend is an increased importance placed upon the issue of sustainability, not just within the real estate market but within UAE society generally. The UAE now has one of the highest levels of carbon formation per capita in the world, and some of the least efficient buildings. It is notable that the Abu Dhabi government is already taking steps towards a more sustainable future through Green building codes such as Estidama and also by scaling back some of the more ambitious projects. This even applies to the UAE’s showcase green city (Masdar), the pace of which has been reduced to ensure it is not only technically but also financially sustainable. The announcement that Dubai is looking at generating more power from solar energy, is an early indication of progress.

A fourth factor that will continue to influence the Dubai real estate market over the next 40 years are flows in international trade and passengers. One of the primary reasons for Dubai’s growth over the past 40 years, is its strategic location at the crossroads of Europe, Africa and Asia. Time will only enhance the importance of this strategic advantage as China, India and Russia continue to grow more rapidly than the mature economies of Western Europe and the US. Emirates airlines recent decision to invest more than $18 billion (about Dh66.1 billion) to buy a further 50 Boeing 777-300 aircraft is a reflection that the Dubai leadership recognises the importance of continuing to exploit its strategic location over the next 40 years.

Fifth and finally, we are likely to see a more regulated market in the future, operating within a planned urban framework. While Dubai is considered market leader within the Middle East in terms of real estate regulations, the adoption of an urban planning framework has lagged behind that of Abu Dhabi and other cities in the region. The Executive Council has, however, recently approved the Dubai Urban Development Masterplan, which provides a strategic framework for the development of the city out to 2020 and beyond. The adoption of this plan should assist the market to develop in a more orderly and co-ordinated manner, improving the urban environment and the quality of life for residents of the city.

— The writer is Head of Research, MENA, Jones Lang LaSalle