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.

Dubai Overview

Dubai is located in the north east of the United Arab Emirates and is the country’s principal commercial center, chief port and the capital of the state of Dubai. The city has a population of approximately 970,000 people, a large proportion of which are expatriates and, according to the Dubai Development and Investment Authority; the population is expected to reach 1.4 million by 2010.

Economy:
Dubai’s economy was built on the back of the oil industry, which developed rapidly after oil was first struck in the mid 1960s. Since then Dubai has developed a diverse economy and by 2000 the oil sector accounted for just 10 percent of Dubai’s GDP. The city now has thriving manufacturing, finance, information technology and tourism sectors and is home to numerous multinational companies such as AT&T, General Motors, Heinz, IBM, Shell, and Sony. Figures published by the Dubai Development and Investment Authority show that Dubai’s GDP totaled $16.4 billion US in 2000.

The manufacturing sector in Dubai is very healthy with some of the most important industries including beverages, chemicals, paper, pharmaceuticals and rubber. The financial services industry grew by a remarkable 12 percent per annum during the 1990s and this trend seems set to continue. All the major international accountancy firms have offices in Dubai and the city is also home to dozens of national and locally incorporated international banks. Furthermore, the banking sector will be completely opened up to foreign banks by 2005. In March 2000, the UAE’s first stock exchange, the Dubai Financial Market was opened.

To encourage the development of the technology sector the Dubai Internet City was established. This information technology and telecommunications centre has been set up inside a free trade zone and allows 100 percent foreign ownership and sales, while company earnings and private income are exempt from any form of taxation. The site is already home to hundreds of companies including Arabia, Cisco, Compaq, Hewlett Packard, IBM, Microsoft and Oracle.

The tourist industry is the fastest growing sector within Dubai’s economy. The number of tourists visiting Dubai has increased dramatically over the last 10 years, especially with regards to visitors from Western Europe, and the government hopes to attract 10 million tourists a year by 2010. With this in mind, huge investment is being made to develop the city’s hotel, leisure and recreational infrastructure.

Local Infrastructure:
Dubai International Airport is the busiest in the Middle East and, according to the Airports Council International (ACI), is one of the fastest growing airports in the world. It catered for approximately 16 million passengers in 2002, an increase of some 18 percent on the previous year, and is expected to cater for 30 million passengers a year by 2010. The airport has benefited from considerable investment and, in 2000, the first stage of expansion was completed with the opening of a new terminal. This brought the airports capacity up to 22 million passengers a year. The next stage of expansion work is currently underway and is due to be completed in 2006. By 2018 the airport plans to have a total passenger handling capacity of 45 million.

Dubai also benefits from extensive port facilities with terminals at Jebel Ali Port and Port Rashid. In 2001, the Dubai Ports Authority (DPA) catered for well over 11,000 ships carrying a total of 47 million tons of cargo. The ports are capable of handling a large variety of cargo and are among the best in the Middle East. The (DPA) was recently awarded the ‘Best Seaport in the Middle East’ award for the 9th consecutive year, at the Asian Freight & Supply Chain Industry Awards.

Local Workforce:
According to figures from the Ministry of Planning, Dubai had an employed workforce of more than 522,000 people in 2000. The trade sector was the biggest employer, accounting for 25 per cent of employment, followed by manufacturing, construction and services. Government services were responsible for employing 9 percent of the workforce.

Standard of Living:
Dubai is a truly cosmopolitan city with a lively and modern environment that offers a fantastic quality of life. The city benefits from excellent schools, modern medical facilities and great shopping and entertainment opportunities. Dubai also plays host to a fantastic horse racing track and the ATP tennis tour and there is an annual shopping festival, which is gaining an international reputation.

The city has a sub-tropical climate with mild temperate winters and very hot summers. There is very little rainfall, even in the winter months.

Business Costs:
Office occupancy costs in Dubai are extremely competitive. Figures from a report published by Richard Ellis Global Research & Consulting in 2002 put the total occupancy cost of offices in Dubai at $24.10 US per square foot per annum.