Residential developers trying to ignite demand as buyers bide their time

Residential developers trying to ignite demand as buyers bide their timeImage Credit: Supplied

Call it the wait-and watch approach, limited decision-making or a general mood of uncertainty — fence-sitters are rising in big numbers in Dubai's property market this year. On one hand, low oil prices, currency fluctuations, decline in residential rents and real estate sales, political instability in some parts of the region and fear of job cuts are said to have contributed to lower transaction activity.

On the other hand, some analysts believe these are signs of a maturing market creating a safety cushion against volatility, driven by regulatory reforms and end user-friendly developments. They say the increasing complexity of payment plans and loan products on offer can be indicative of a sophisticated market that caters to various layers of demand.

The demand and supply of quality commercial real estate and resident-focused developments and global turmoil are likely to shape Dubai's real estate market, as market watchers say Dubai will continue to follow the same trend that was seen in the first half of the year.

Substantial new supply entering the market could put additional pressure on prices. ''We would expect a slow recovery of sales activity but little change in price levels over the second half of 2015,'' says Craig Plumb, Head of Research at JLL Middle East and North Africa. The constant flow of new supply is a clear sign developers find the market attractive. Government spending and announcements of new projects also boost the market. Most recently, the government's flagship urban project, Dubai World Central, was renamed Dubai South by Shaikh Ahmad Bin Saeed Al Maktoum, Chairman of Dubai Civil Aviation Authority, ahead of Cityscape Global.

While estimates put foreigners at 75-80 per cent of property buyers in the UAE, a closer look at the figures reveals that foreign residents, also called committed expats, form a sizeable chunk of that pie. With such a high proportion of foreign buyers, keeping speculators at bay is a key challenge. ''Developers have taken steps to reduce speculation,'' says Sameer Lakhani, Managing Director of Global Capital Partners (GCP). ''For instance, you cannot flip unless 50 per cent is paid up.''

Lakhani adds, ''This gives you a good idea that you're seeing more end users instead of hot money. Master developers have gauged that end user demand is rising.''

Over the medium term, the outlook for Dubai's property market is positive.

Commercial property, which has been holding up reasonably well in comparison to residential, is expected to keep the market afloat. ''We are quite bullish about where this market will go,'' says Nick Maclean, Managing Director of CBRE Middle East, speaking about the demand for commercial property, particularly premium spaces, which account for 20 per cent of the market.

Government spending is being keenly watched, especially since oil prices are not showing any signs of picking up. ''Cityscape will be very interesting since it is a platform for government sponsored schemes,'' says Maclean. ''The government is very keen to develop the infrastructure projects here. Those projects may be affected by the oil prices.'' He adds that measures such as removing fuel subsidy are positive. ''The UAE's decision to take away subsidies from petrol is the way ahead for the GCC. It shows the government's intent to protect its other infrastructure spending.''

Commercial shows way

Maclean believes there could be a shortage of high quality office units by the end of 2016 and early 2017. ''In the long term, the desire to create jobs creates demand in the commercial sector,'' he explains. ''The level of immigration and [the doubling of] the workforce will lead to strong demand for offices. We don't see demand slacking. We think it will grow.

''The UAE's advantage over other GCC countries is even greater than it was two years ago. Over 50 per cent of all corporates that enter the region come to the UAE. Factors such as strong job creation, infrastructure projects, transport facilities and now [the lifting of economic sanctions on] Iran also contribute to this.''

Adding to the sentiment are plans of the Dubai International Financial Centre (DIFC) to triple in size by 2024. DIFC aims to increase the number of active financial firms to 1,000 by 2024 compared to 362 last year, and grow the workforce from 17,860 to 50,000 over the next 10 years.

The supply of good quality office space has been limited compared to demand. ''The commercial segment has performed better on a relative basis and we expect that this trend will continue as business formation in Dubai continues to rise,'' says Lakhani.

Analysts say that whether it is offices or warehouses, investor demand is quite high and available properties are lapped up quickly. Lakhani adds that the trend is visible in rentals as well. ''Compared to January 2014, office rentals were 13 per cent higher in January 2015. In Business Bay, even when the residential rental index was down, office rentals were up 19 per cent.'' According to JLL, Dubai's office market saw the delivery of approximately 162,000 sq m of gross leasable area in the second quarter in locations such as Dubai Design District, Arenco Business Park in Dubai Investments Park and Tecom, increasing the total current supply to 7.8 million sq m. An additional 704,000 sq m is expected to enter the market in the second half. The majority of supply is in Business Bay.

Residents call the shots

According to a report by GCP, 84 per cent of expats in Dubai are renters, compared to 50.4 per cent in London and 48.8 per cent in Hong Kong. From a developer's point of view, these numbers represent sales deals waiting to happen. So whether they are offering flexible payment plans, resident-friendly communities, affordable homes or innovative mortgage products, developers are making sure the end user is the focus.

''UAE residents have invested — and will continue to invest — in the country's property market,'' says Sidharth Mehta, Partner at KPMG Lower Gulf. ''From a monetary point of view, it still makes sense to buy into the market, especially since sales prices have corrected more than rental prices, therefore making yield more attractive. However, the expatriate population is rather transitory with an average stay of around three to four years. If expats feel the market is overpriced and are able to rent a property they like, then anecdotal evidence seems to suggest they would rather rent.

''Regulatory changes designed to reduce speculation have also affected the ability of residents to buy, with larger deposits and increased transaction costs.''

One indicator of end user activity is the number of mortgage transactions, which now account for 52 per cent of total property deals.

''The home-ownership market in the country is still under penetrated,'' says Varun Sood, Chief of Home Finance at Dubai Islamic Bank. ''With a growing population, influx of younger people in employment and the consequent increase in housing needs, requirement for financing of homes is a growing need in the long run.''

Meanwhile, with more affordable housing options, investors are now handpicking options best suited to them. Maclean says, ''Residential markets are very fragmented by location and size. Studios and one-bedroom apartments in Karama are behaving very strongly, as are large six-bedroom villas in Jumeirah. [But] two- to three-bedroom villas and apartments have declined in rental terms and capital.''

Faced with a sizeable chunk of end users and government policy that is encouraging community developments, developers are setting their sights on the affordable segment. Affordability is being woven in not by bringing down prices, but by reducing the ticket size through smaller apartments or easier payment plans. Lakhani says, ''In 2013, 72 per cent of payment plans specified 10-25 per cent payments on completion. Now back ended payment plans specify as much as 50 per cent on completion.

''Developers have not reduced prices per square foot. Instead, they are giving imaginative payment incentives.''

There are various measures to ignite demand. Market watchers say the quality of community living has definitely improved and will continue to do so. ''Smart developers are looking at some of the mistakes that were made in terms of housing development,'' says Maclean. ''The best developers have learnt and we will see more innovation, better use of technology and better-quality management.''

Lakhani believes that end users will need more. ''In new Dubai the tendency has been to reduce apartment size in order to reduce the ticket size. That's a way of dancing around the problem. End users want space. That's our take. People want to move into a house that is comfortable.''

End users are more likely to commit to a development once it's closer to completion ''[They] don't want to live in a construction site,'' says Lakhani. ''They move into a community as it gets more mature. Data seems to suggest this as well. If you compare Emirates Living, which is ready, to Dubai Sports City, which is being built, you will find that the rate of mortgages is three times higher in the former.''

According to JLL, 1,200 units were handed over in the second quarter, increasing the total supply to 379,000 units. A further 16,000 are due for completion over the remainder of the year, but these could be delayed if the market declines further.

Foreign buyers

With a strengthening dollar, weakening euro, steady sterling, rouble in jeopardy and yuan fluctuating, the instability of foreign currencies is likely to affect a market dominated by foreign buyers.

''Macroeconomic uncertainty in [both developed and emerging] economies is likely to result in a wait-and watch sentiment, which, in turn, is a cause of reduced activity in the market,'' says Mehta. ''This can be further linked to the ongoing fluctuations in currency prices, which has made UAE real estate more expensive for some key [purchasing] customers, especially South Asians, Russians and perhaps even the Chinese in the short term on the back of the devaluation of the yuan.''

Iran is being justifiably looked at as a new market. Plumb says, ''The biggest macroeconomic factor to date has been the strength of the US dollar, which has made property in Dubai relatively more expensive for many investors from non dollar-denominated currencies. While the removal of sanctions from Iran will be a positive factor for the Dubai market over the longer term, this is very much a [lasting] trend and no immediate impact is likely to be experienced in 2015.

''The other important long-term macroeconomic trend will be the level of oil prices, which clearly influences the level of government revenue and, therefore, its capacity to spend on real estate projects.''

Stock market

Maclean says Iranians will be an important part of the market if sanctions are lifted in November. There is also likely to be more investment going into Iran from the UAE. He offers an interesting take on the volatility of the stock market and how it affects real estate. ''China has been important but not key,'' says Maclean. ''More interesting is the volatility in the exchanges here. Real estate is looking more attractive here. Where there's volatility in stocks, there is more certainty in real estate. Then we ought to see more allocation of funds in real estate and away from the stock market.''

He also sees institutional investors considering the region and Dubai in particular. However, there is likely to be little movement soon.

''If the Asia-Pacific funds are not looking at China, their hunger for other markets, including the Middle East, is likely to go up. Some institutional investors have decided to make no decision at the moment. Until they see what is happening to money markets and equities market, they want to keep their powder dry,'' says Maclean, predicting limited decision-making for another four to six weeks before it cautiously takes off.

Here are the dynamics of UAE freehold property

Source: Shalini Seth, Special to Property Weekly


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