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A report by Bank of America Merrill Lynch in August raised concerns about Dubai’s numerous planned mega projects. Referring specifically to Dubai Holding’s July 5 announcement of the Mall of the World, the report refers to how “such ambitious projects could lead to another boom-bust real estate cycle” and the “still high leverage and refinancing challenges” facing the emirate.
Responding to the report, a spokesperson for Dubai Holding highlighted the organisation’s measured approach in rolling out the project. “We have done extensive research on the demand for such large-scale projects as we firm up planning for Mall of the World. Like many other successful mega projects in Dubai, it will be developed in phases over ten years.”
After the recent economic crisis, authorities are keen to avoid another property bubble, introducing measures such as doubling property transfer fees from 2 per cent to 4 per cent and tightening mortgage regulations to discourage speculation.
“In 2008, excessive speculative activity was exacerbated by investors flipping off-plan property,” says Carla Slim, an economist at Standard Chartered Bank. “The new regulations should help, as serial flippers will be penalized the most. One concern, however, is that long-term investors will have to pay the higher fee as well.”
With planned mega projects surpassing $212 billion (Dh778.7 billion) in Dubai alone and large developers such as Emaar, Damac and Nakheel announcing new master-plan developments, including the 6 million-sqm Lagoons project near the Dubai Creek and an ambitious Cultural District in Downtown Dubai, optimism in the property market remains high.
A new challenge
“Growth in Dubai’s economy is driven by its core sectors — tourism, trade and services,” says Slim. “The challenge now is not to generate growth, but to manage it to prevent the economy from overheating, while keeping inflation in check.”
Faisal Durrani, International Research and Business Development Manager at property consultancy Cluttons, says more government intervention is needed to reduce the risk of the property market overheating.
“This is probably an area where further regulation is required and we expect to see more regulation to come out, if the government is looking to deliver a stable property market that is attractive to overseas investors,” says Durrani.
Expanding the incentives being offered to long-term property investors in Dubai is also an important step as the market continues to evolve and improve.
“Another area that I think needs to be looked at is the issue of the property registration fees,” says Durrani. “Now we have a 4 per cent rate, but I think it would be good to look at rewarding longer-term investment. We feel there should be a sliding scale for property fees.
“For instance, if you commit to a property for more than five years, your registration fee should perhaps just be 1 per cent. We would like to see something along these lines.
Durrani believes the UAE has already made big improvements and is now the “best and most transparent [property] market in the entire region”.
Part of the current economic optimism is attributed to Dubai’s success in securing the hosting rights to the World Expo 2020. Many of the projects in the Dubai are, therefore, being linked one way or another to the global fair.
“We will continue to create iconic lifestyle destinations to support the city as it gears up to host the World Expo 2020 through strategic joint venture partnerships,” said Mohamed Alabbar, Chairman of Emaar Properties, in a recent statement, underlining the commitment of major developers to the World Expo.
The government expects the Expo to attract 25 million visitors, 70 per cent of which from overseas. However, some economists point out a potential oversupply following the event. In August, a Citibank report expressed caution, stating that “the legacy economic value of the event is highly uncertain, as the unutilised buildings from the Shanghai World Expo 2010 attest.”
A similar note of caution was raised in a recent Standard Chartered report, although it also shares Citibank’s belief that the Expo will ultimately contribute positively to Dubai’s economic growth.
“A possible downside risk that could arise in the after- math of the event is overcapacity in the hospitality sector,” the report states. “South Africa saw its hotel occupancy rate rise to 84 per cent for the 2010 Fifa World Cup, but this fell to around 55 per cent the following year because of fewer visitors and increased supply. A key focus for Dubai will be to maintain high tourist inflows post 2020, which it is aiming to achieve through its Tourism Vision 2020, with or without the Expo.
“Providing it achieves its attendance targets, the Dubai Expo could prove highly profitable. Authorities estimate the event will generate nearly $17.7 billion in added value to the UAE economy and that for every US dollar spent by Dubai, its economy should reap a six-fold return.”
Mall of the World, the most ambitious of Dubai’s mega projects, is a 48-millionsq-ft development, which will include a record-breaking 8-million-sq-ft shopping mall, temperature-controlled streets and the largest indoor theme park on the planet. Nakheel’s Deira Islands project is another major development that will add 40km to Dubai’s coastline, including 21km of beaches.
With such vast projects on the horizon, are developers concerned about saturating the market?
“Our large-scale, master-planned projects are constructed in phases over a period of time to match market demand,” says a Nakheel spokeswoman. “In many cases, land plots are sold to investors who construct their individual projects within the time frame stipulated in the sales contract. Our long-term business strategy is aligned with the core economic sectors of trade and tourism in Dubai.”
The developer has recently repaid a Dh7.9-billion bank debt almost four years earlier than the scheduled final instalment. Nakheel believes this is a reflection of the strength of Dubai’s property market, dismissing concerns about leverage.
“The early debt repayment is indicative of the strong cash flows generated by Nakheel, enabling us to fulfil our debt obligations ahead of time,” says Nakheel’s spokesperson. “There are a number of funding alternatives available to complete the large building projects; debt is one of such alternatives.
“Given the relatively quick recovery, the concerns raised by economists may well be the caution required for ensuring projects are completed without taking debt or having a sustainable level of debt.”
The spokesperson adds: “Such debt can then be serviced and repaid from the future cash flows that will be generated from some of these projects or even as a result of these projects, which are largely aimed at strengthening the core economic sectors of trade, tourism and transportation.”
This view is shared by Dubai Holding, with a spokesperson saying the company “has long been a driver and catalyst for Dubai’s economic diversification strategy and is today a major contributor to the development of its nonoil sectors”.
“The Mall of the World is a further example of this and we encourage other projects that also contribute to the emirate’s diversified growth plan,” according to the spokesperson.
Nakheel, meanwhile, is also taking proactive steps to help prevent a repeat of the previous property bubble.
“Nakheel itself has introduced measures to ensure that only serious investors —who are in many cases end users — buy our properties,” the Nakheel spokesperson says. “These include demanding a sizeable deposit and taking post-dated cheques.”
Gregory Lewis, Residential Senior Negotiator at Frank Knight, says Dubai’s planned megaprojects are an auspicious sign of the strong economic growth potential of the emirate.
“It is important to consider the time span of these mega projects and the fact that they would be developed in phases spanning more than ten years,” says Lewis. “Taking into consideration likely delays, the risk of oversupply will be mitigated to an extent. Moreover, shopping is one of the key drivers for tourism in Dubai.
“Looking at Emirates airlines’ aggressive expansion strategy, we feel that developments such as Mall of the World will provide a unique shopping experience than can coexist alongside other retail and entertainment destinations such as Mall of the Emirates and The Dubai Mall.”
Source: Peter Feely, Special to Property Weekly