Should Dubai developers ‘return to basics’?
As the real estate market nurses its wounds and property developers attempt to get back up, Kipp gets a brief insight on the real estate sector from Jones Lang LaSalle.
September 17, 2012 9:35 by M. Aldalou
The real estate market in Dubai has certainly had its share of booms and slumps and has been one of the most popular topics of discussion and investigation. It still stands as an icon of the city’s most vital sectors to salvation and analysts say that for the economy to continue booming, the real estate market must once again serve as a prominent pillar.
Now, as faith begins to seep back into the hearts of potential investors and hope rises with announcements of new projects what should property developers do differently this time around? Emaar has recently announced their first post-crisis luxury hotel, a seemingly positive indication of a stronger revenue stream and confident strategy moving ahead but will it be enough…
Craig Plumb, head of research at Jones Lang LaSalle says that the factor of transparency is crucial to any market and not uniquely pertaining to the MENA region. However, the stigma of sufficient transparency has been widely discussed and criticised here because of the Middle Eastern and North African region’s transparency with financial transactions, or lack thereof. There has been shortage of real estate transactions over the past few years, mainly sparked by weak investor sentiment and ability to make informed decisions. Opaque markets must, at the very least, move towards the path of translucence.
Plumb revealed earlier in June that as important a factor that transparency is to any market in the world, it is still being ignored in many major hubs, as the MENA region had scored the lowest index when compared with other global areas including the United States and Europe. The average transparency level is lower in the Middle East and North Africa because it is a host to 8 out of the 11 extremely opaque markets including Sudan and Nigeria.
“Dubai, on the other hand, is the second most transparent market in the Middle East region and scores relatively well in terms of regulatory framework,” said Plumb. “Dubai is also seen as a safe-haven in a relatively volatile region.”
So when compared with other cities in the Middle East, Dubai’s score doesn’t seem so bad. Nevertheless, understanding our surroundings and what mistakes property developers should avoid this time around is still a good tactic to follow. Deepak Jain, Head of Strategic Consulting, MENA at JonesLang LaSalle talks to Kipp about the state of things.
What do you think are some of the fatal mistakes that property developers in Dubai have committed?
First off, reliance on off-plan sales to fund projects, starting too many projects at the same time, not taking into consideration demand fundamentals i.e. reliance on investors vs. end users. Then there is the lack of proper client service, for large scale projects – not providing enough community facilities, lack of understanding of estate management issues and total cost of ownership and lastly, transparency on service charges.
Since the recession hit, how would you describe the investment pattern in the sector?
Currently, it is mostly the master developers that are moderately active in Dubai. In terms of investing behaviour we have observed a ‘return to basics’ by many of them whether it is a return to their core market or core asset classes. There are some developers that are looking overseas (within MENA) for strategic investment opportunities in end user driven sectors i.e. Affordable Housing, Community Retail etc.
The topic of real estate investor and tenant protection has been a hot topic in Dubai. RERA has many a time talked about strictly implementing safer laws. Do you think buyers/tenants will ever truly be protected?
The renting laws are pretty robust and we have not come across any issues around those. As for buying laws, they need to further evolve in order to strengthen the faith that buyers have in the Dubai property market. Having said that we have seen an increased interest in the Dubai property market over the last six months in the prime areas of Dubai.
What is the overall current state of the Real Estate market in your view?
On a market wide level, there will be downward pressure on average pricing due to the amount of vacant stock in non-prime locations. For prime locations, we have seen upward pressure on pricing over the last 12 months in the 5-10% range. Generally, the market is in better shape than 12 months ago.
The United Arab Emirates continues to benefit from its safe-haven status (in comparison with other cities), a stable government and according to Alan Robertson, regional chief executive at JLL, more transparency than many of its Middle Eastern counterparts. However, the issue of “oversupply” continues to persist and damages the value of many residential and commercial properties, particularly in the poorer quality sectors of the city.
“That dilemma will sort itself out in time but in the short term it is likely to have a braking effect on the rental growth that would otherwise occur.”