Why Dubai is getting too crowded for comfort

Clare Aggarwal is a “professional landlord and investor”, according to The Mail on Sunday. Her latest purchase was a £174,000 two-bedroom flat in Dubai – “my first venture abroad”. The flat doesn’t actually exist yet – it’s just one of 504 apartments being built in The Torch, a 74-storey building on Dubai Marina, and is due for completion in March 2008. Nonetheless, according to Aggarwal, Dubai’s increasingly foreigner-friendly property laws – foreigners can buy freeholds, although only in special zones – have “added another 15% to the apartment’s value and it will hopefully have doubled when it’s all done and dusted”. “I am told the rental income is between 12% and 15% per annum,” she says.

Readers who are on the ball may be starting to wonder a little – how can someone be so sure of rental income for a flat that won’t actually be inhabitable until more than a year from now? Perhaps they won’t then be surprised to learn about how Ms Aggarwal found the property – “I saw an advert in the paper, looked into it and put my money down”. She has, of course, actually been to Dubai, “on family holidays six or seven times”.
But not in the past two years – “I couldn’t afford the flights”.

Ms Aggarwal is far from being the only Briton staking vast sums of money on a building site she can’t even afford to visit. Despite Dubai’s “congested, half-finished roads” and the frequent hazy smogs produced by a “combination of pollution, sand and building dust”, the country has proved popular with other amateur landlords. According to Adam Price of Dubai Select, the UK firm selling sites in The Torch as well as two other huge developments, 75% of buyers are middle-aged British people.

And more developments are being built all the time. It seems the entire city is a building site – “there are more than 250 towers in the Jumeirah Beach and Dubai Marina area alone”, says The Mail on Sunday’s Sarah Hartley, while “billions” are being spent on hundreds of “residential supertowers” in the same mould as The Torch.

It’s perhaps no surprise that property speculators have been attracted to Dubai – figures from Asian banking group Standard Chartered suggest that prices doubled in the three years to the end of 2005. But the bad news for Ms Aggarwal and her fellow investors is that the bank believes “we are getting close to a peak in residential property prices”. In fact, it seems that prices may be falling already. The group’s residential property market index reports that prices have risen by nearly 19% in the year to October.
But that masks huge volatility in the data as well as regional variations.
In five of the last eight months, the index suggested that prices had actually fallen. And in the New Dubai area, which includes the much-vaunted palm-shaped Jumeirah Beach development, prices were down 5% in the year to September.

It’s unlikely to stop here. “Supply is set to grow rapidly in 2007, outstripping demand growth,” says Standard Chartered, quoting data from Egyptian investment bank Prime Group. “Taking into account delays in the delivery of properties, 52,000 and 63,000 properties will be delivered in 2007 and 2008 respectively.”

The bank continues: “Given a reasonable assumption of 7% population growth for the emirate, it suggests this will lead to an excess supply of around 6,000 units in 2007 and 33,000 units in 2008.”

The bank reckons that prices will fall by 20% to 30% over the next two to three years – but that could well be optimistic. Dubai has already seen what can happen when asset prices get wildly over-inflated by rampant speculation – earlier this year the country’s stockmarket dived by 65%. Speculators scrambled for the exits as stockmarkets across the world were rattled by US inflation fears and the threat of falling global liquidity.

It seems more than likely that the same could happen in its real-estate market.When Ms Aggarwal and her fellow overseas investors realise that their off-plan high-rise in the sun could well be worth less than they paid for it by the time it’s actually been built, there will be a rush to offload. As Sarah Hartley puts it, “With a fledgling resale market, it remains to be seen whether demand will ever meet this enormous supply.” We think we know the answer already.

Omniyat CEO dismisses Dubai property ‘bubble’

Omniyat Holdings CEO Mehdi Amjad has dismissed recent speculation regarding the bursting of the Dubai real estate ‘bubble'.


"There is no bubble and I don't believe markets will see a sharp bust. We keep hearing that the supply and demand will be realised in 2008 or 2009, but while I believe that demand will become less extreme, it will continue to outweigh supply."

Amjad believes that a lessening in demand will be healthy for sustainability in the long-term.

"If Dubai has one or two years of inflation, then that's okay. But a decade of inflation is unhealthy. Long-term sustainability is the key for Dubai and the government is addressing this issue successfully."

Amjad said the Dubai market is continuing to absorb new launches, despite projects being delivered. This was displayed with the recent delivery of the International City and Jumeirah Beach Residence projects, he said.

"People were predicting that the release of JBR and the International City would lead to a decrease in demand, but the more than 25,000 units in JBR have been absorbed into the market without causing even a small drop in demand."

Amjad said Dubai is aggressively targeting population growth, which will also lead to growth in demand for real estate.

"The government is building a city for five million people whereas today we have fewer than two. This means that whatever is supplied now will not be enough," he noted.

"Markets are at a maturing stage. Rents are up and there are many people who are currently renting but who intend to purchase homes. This includes people who are on lower to middle incomes who are lower risk takers, and have been waiting to purchase properties.

"Finance and mortgages are increasingly available to these people, so more demand is being created there. There is a shortage in terms of products in this area of the market which we are addressing."

As a result of this new trend, the developer is looking for opportunities in the residential sector, and Omniyat will unveil a new 1.5 million sq ft residential waterfront development at the Cityscape exhibition in October, he said.

While few details are being released, Amjad described the project as a unique and surprising product, offering a combination of residential and retail space.

Amjad believes both institutional and private investors are also driving property demand in Dubai.

"Dubai is now seen as an international hub and foreign investors are being attracted to investing here. The new trust law is also helping these investors to have trust in the transparency of regulations here. Although we are yet to see the law in operation, I think its existence adds a professional structure to Dubai's real estate markets."

The majority of foreign investment is coming from the UK and Europe, but institutional money from the US and Asia is also increasing, he notes.

Amjad has his own development plans for international expansion, beginning with Saudi Arabia, and Abu Dhabi. He intends Omniyat to become an international company by 2008.

Rents and property prices to surge in 2008

This is a question that tenants and potential home buyers are asking all the time. But with talk about the rent cap not being renewed for 2008 and an explosion of investment banking growth in Dubai, combined with inflationary local salary rises, it is a matter of how much, and not whether rents and prices rise.
It is arguable that the UAE is living in its own new era. Oil prices and oil revenues are at an all-time high. The government is proactively expanding the local economy through private sector led investment. And the cushion of oil surplus reserves is there to fuel this boom whatever happens in the global economy.

At the same time, the focus of expansion in Dubai for 2008 will be the financial sector. Deutsche Bank's regional chairman Dr. Henry Azzam recently said 2008 would be a 'bonanza' for investment bankers in the UAE with a large number of high value IPOs coming up both at home and in neighboring states.

These are the guys with the fattest pay packets who can pay the highest rents. As they roll into town these new residents will gradually displace less highly paid residents in the best areas; this phenomenon has already happened but it is going to become even more noteworthy.

New perspectives

Some new banking residents will quickly spot just what good value Dubai property is compared to where they came from, and buy immediately. Meanwhile, other existing residents will be frightened by rising rentals and decide to take the plunge and buy themselves.

Unfortunately the supply of property in Dubai has been slower in coming on stream than expected. Therefore, although 2008 will see many new buildings being completed this is still unlikely to be enough to satisfy demand.

Another factor likely to be driving prices upward in 2008 will be the falling cost of mortgage finance. The UAE currency peg means that if the US cuts its interest rates next year - as seems inevitable with the US financial crisis now in progress and markets point to 3.5 per cent - then home finance costs will fall in the UAE at a time of rising rents.

No-brainer

Indeed, with UAE inflation in 2008 almost certain to top the current rate of 10-15 per cent, depending on who you talk to, then real interest rates will continue to be negative. This means that inflation is eroding the real value of your debt and that borrowing money to buy real estate is a no-brainer.

Those Dubai residents who fear a housing crash should search back on Google to find articles written in the late 1990s about an imminent crash in UK house prices. In fact, UK house prices went on to double or even triple and have barely started to show signs of weakness this autumn, despite the credit crunch.

In Dubai it definitely looks as though the real estate boom is set for at least another year, and the prospect is that the good times may roll on for a lot longer than that as markets usually overshoot on the upside. So how much will rents and prices rise? 10-20 per cent looks on the conservative side.