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Dubai’s maturing real estate prepares to roll out sale-by-auction

Dubai’s maturing real estate prepares to roll out sale-by-auction

Property auctions may be an indulgence of the rich, but they’re also a growing trend in the Dubai real estate market, one that can’t be ignored.

August 12, 2008 8:42 by

If number plates, horses and camels can go under the hammer, why can’t plots, apartments and villas? In a happening market such as Dubai, high-net-worth individuals are increasingly willing to bid the highest for products of their choice – be it a piece of prime land, a room with a view or an ideal office space. They’re all being dished out by property owners who use the auction to extract the maximum price.

There’s nothing surprising about the rising trend of property auctions. But it sets them apart from the other category of investors, which is either putting hard-earned money into property to save rent, or flipping them to make some fast bucks.

Regardless of the fact that even the largest of auctions do not involve more than a few hundred bidders, the idea of property auctions occasionally stir up an already buoyant market. Most tier-2 developers in Dubai are acquiring prime plots from master developers through “closed-door” auctions. It’s an extension of the demand that is driving the industry, and the trend is here to stay. After all, if a car number plate can fetch five million dirhams ($1.36 million) then one can imagine what some would be willing to pay for a perfect plot to house a mixed-use development.

Despite greater interest and widening options, however, the exclusivity factor is set to keep auctions an elitist activity. Since rich buyers openly bid in a charged environment, auctions also inflate sales prices, which may have a spiraling effect on the cost of property.

Dubai is no stranger to the auction phenomenon. In June 2005, Dubai Properties – which is part of Dubai Holdings – set up Mazad, the country’s first private property auction house. The idea was to cater to a growing number of high-net-worth investors looking for viable real estate financial opportunities with optimum returns on investment. Since then, Mazad has raised more than 2 billion dirhams ($544m) in sales. On the sidelines of Cityscape 2006, during its third public sale, Mazad raised over $68m for 11 select Dubai Properties lots.

Recently, Mazad, which now operates under Salwan, a subsidiary of Dubai Properties Group, also fetched nearly $68 million from an exclusive private auction. Most of what stands at the Business Bay today is the result of plots auctioned off by Mazad in the winter of 2005, which it collected $272.3m from. The biggest plot went for $58.3m and the lowest for $12.3m.

ELITE PLAY. Auctions are always a rich man’s party. They gather either by “invitation-only” or through a very carefully scrutinized pre-assessment process. The focus is on offering the “elite clientele a professionally managed platform to bid for prime property,” as Saeed Bushalat, the CEO of Salwan puts it.

“Auctions allow purchasers to make smart investments, … eliminating long and tedious negotiation processes,” he says. Bushalat also stresses market performance. “The success of the auction highlights the confidence that international investors have in the sustainability of the Dubai property market.”

Auctions, however, are by no means a Dubai-only phenomenon. A recent winning bid of 3.78 billion Saudi riyals ($1 billion) for 20 million square meters of land in Ardh Al-Bondoqiyah, Saudi Arabia, has taken auctions in the region to another level. The bid was for a piece of land 40 kilometers south of Jeddah, which has six kilometers of waterfront on the Red Sea and a seawater lake. Potential buyers and real estate investors formed alliances to win the bid, and logged in via satellite links from Kuwait, Dubai and Riyadh. A Saudi group ultimately won. On a similar note, in Doha an auction was held last year for beachfront villas belonging to a $2.4 billion leisure and residential project in Muscat, Oman.

A typical auction involves between 200 and 400 prospective buyers, but only around 10 to 20 percent end up buying. Auctions benefit only a handful of investors and they’re mostly unknown to the general public. The world doesn’t get to know about auctioned plots unless they go to a developer who plans to immediately launch a development on the land won at auction.

On May 24, Emaar Properties held an auction of premium plots and villas in its established master-planned communities. Little is known about the total value of the auction apart from the usual “overwhelming response” claimed by the company. There were unconfirmed reports that Emirates Hills lands were sold at $408 per square foot, 15 times the price at which they were sold five years ago. The plots that were auctioned offer direct views of The Montgomerie and the Dubai golf course, with buyers having the option of designing and building their villas in the plot.

Asked what prompted Emaar to auction the designated land, a company spokesperson said: “Certain properties in Dubai have a significant demand in the market as these are not only prime properties but also provide an exclusive lifestyle environment. Only a limited number of units were offered for sale – only six plots in Emirates Hills and 12 Golf Homes.” Emaar had conducted a similar auction of Emirates Hills plots in 2006 and, according to the company, “the response was overwhelming.”

For Emaar, auctions are “a good option to sell prime, yet limited, property” but it is also important to have a truly differentiated product. “Each market and development will have to be assessed separately and decisions on auction will be taken,” says the spokesperson.

From elite to everyday. Andrew Chambers, the managing director of Asteco Properties, says the progress of auction has been slow because properties have sold quickly off-plan.

“As the laws got transparent and stronger on ownership and titles and in 3 to 5 years, when sales have steadied a bit, auctions will become more important,” says Chambers. He anticipates a secondary auction market as well.

“The reason they are seen as a gimmick today is because there are so few of them. But I think auctions will eventually come to individual villas and apartments because there is a market for that.” Chambers’ optimism comes from the markets that have had decades of maturity. “Auction has been [confined to] an exclusive club here but in countries such as UK, Australia and New Zealand, it is one of 2 or 3 ways of selling. You have got a tender process, you have got auction and you have got the traditional open market.”

If Emaar does something in Dubai, Nakheel won’t be far behind. The master developer in charge of various waterfront projects in Dubai may not be directly auctioning, but it’s not saying it won’t either. Four of its properties that went on the auction block recently were part of a group of 10 buildings that comprise The Palm Golden Mile – a 250,000 square foot joint venture between IFA Hotel & Resorts and Nakheel. The 150 potential buyers had to sign an agreement and pay a $27,200 deposit, which was returned in the event they didn’t win the bid. This was not Nakheel’s first auction. In 2005, it raised $43.6 million for 850,000 square feet of land in Jumeirah Golf Estates, setting a record for a sales price at the time.

Even though developers have to occasionally acquire plots of land through auction, however, not all of them have become hooked on the idea. Zaid Ghoul, the chief financial officer of Union Properties, says his company is not in the business of auctioning rental properties. “Sale activity takes place as approved by the board of directors and comes as part of an overall strategy for restructuring the portfolio of rental properties,” he says.

Others such as Amir Giga, the managing director of Goldcrest Properties, say people don’t mind paying huge sums simply because there is a lot of demand and a developer has the wherewithal for it. “Emirates Hills community is the best in the UAE at the moment, and Emaar can afford to do such a thing because their brand is established,” says Giga.

With an eye on the pie, auction firms and auctioneers are also trickling in to the region. South Africa-based Auction Alliance and US-based DoveBid came together in 2006 to launch their services in Dubai, which, they felt, had all the right ingredients to roll out such services. If things go the way they have been in recent months, renowned auctioneers such as John McGrath and John Canavan will become household names, at least in the multi-millionaire club.

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