TASWEEK Real Estate Marketing & Development study outlines future drivers for UAE property market

TASWEEK Real Estate Marketing & Development study outlines future drivers for UAE property market

Location, quality, amenities, infrastructure with competitive financing solutions among key factors

March 16, 2010

Tasweek Real Estate Marketing & Development, a property adviser and solutions provider in the Middle East, recently used its own operational model to analyze current trends, conditions and future industry drivers within the UAE real estate market as 2010 unfolds, with particular focus on Abu Dhabi and Dubai. Tasweek based its study on the core criteria of Trust / Transparency, Affordability, and Return on Investment with Operating Cash Flows. The results are as follows:

Abu Dhabi

Abu Dhabi is expected to record strong growth in both GDP and population, with leading local, regional and global companies to scramble for growth opportunities by shifting capacity to the Capital. This is also echoed by many reports that with the gradual improvement in economic conditions, new blue chip companies entering the market, with its newly-completed high standard office stock, will help lift the prices of truly Grade A office and residential stock.

On one hand, supply-demand statistics favor Abu Dhabi. This is owing to the greater availability of mortgage financing and a short to medium term supply-demand mismatch, coupled with a structured pace of development and a move towards greater economic liberalization which will lead to economic growth and an increase in its population.

On the other hand, though, Abu Dhabi needs progressive transparency and regulation in the property market, which will be instrumental to its success in certain developments.

Tasweek believes investments in Real Estate should be made in Abu Dhabi for the longer term as it offers very low risk and steady returns for the future.

Residential

There is no doubt that there is an undersupply in housing in Abu Dhabi. Figures from Tasweek research show a fluctuation of as low as 22,000 to as high as 32,000 units. There is also a discrepancy as to how many units will be delivered over the next two years as they start at 15,500 units and end at 23,000 units.

Transactional activity remained very weak in 2009 as expected in Abu Dhabi and there is very low demand for off-plan properties. It is extremely clear that substantial activity in the future will be made via private equity groups and large institutional investors looking for conservative but higher than usual yields.

Average apartment price also retreated by 40% to 50% from their peak. Average rents for new leases have further lost an estimated 20% from their highs in 2008 to the end of 2009.

Commercial

The next two years are expected to see 6.2million sqft of net leasable area of grade A commercial offices reaching the Abu Dhabi market. The current stock of offices remains not purpose-built; there is, for example, a need more parking facilities and adequate services. Supply of new office space in the capital remained limited during 2009, with occupancy rates staying in the 95-98% range. Nevertheless both rental rates on new leases and asset values retreated 15-20% and 35-40% respectively, as the market made a relative adjustment to neighboring Dubai.

Dubai

Dubai’s growth is underpinned by its very large infrastructure investment and the city’s positioning, which makes it accessible to neighboring economies. The silver lining is the relocation of expatriates working within the UAE and the slight growth in the mortgage activity as more end-users arrive in the market.
The drop in the UAE’s interbank borrowing benchmark rate has so far done little to spur mortgage financing that banks offer to their customers for home loans. When this passes on to consumers or investors then a change in the market can be expected. The passing of stability and transparency in the maintenance costs to end-users and investors significantly affect their mortgage or their rental yield.
Tasweek believes real estate investments should be made in Dubai for the few who clearly understand the market and are in a position to carry out rigorous due diligence and securitize their capital and future income. This provides a platform for reaping great rewards in 3-5 years down the line when transparency returns to the market.
The economic recovery does paint a cautious picture for Dubai’s residential market in the near to medium term when rising supply, if uncontrolled, may hamper price recovery.

Residential

The projections on supply and demand that went to print during the start and at the end of the 3rd quarter in 2009 were in the range of 22,400 to 32,000 coming to the market by the end of 2009. These numbers were further revised in 2010 to approximately 17,000 units that were completed in 2009, bringing the total residential stock to around 273,000. A further 24,000 units are expected to be completed in 2010. It is interesting that the detailed analysis of Dubai's projects, construction progress, and handover activity revealed that 2010 could perhaps see an even greater number of deliveries than 2009, rendering deliveries for the year among the highest since the construction boom.
There will be more transactional activity where completed projects have adequate infrastructure with facilities such as road networks, retail, school and medical facilities. Mortgage facilities, registration of owners’ association, and REITs entering the market are expected to further fuel transactional activity in the coming years.
There were signs of price stabilization in Q409 which could be the beginning of a price floor. However, this is highly dependent on macroeconomic, financial, regulatory, and industry policies and trends.

Commercial

It is estimated that 2010 will see the delivery of another 6.8 million sq ft of office space. Despite project delays and cancellations, there seems to be a further 2.8 million sqft slated for 2011 delivery. To absorb the supply delivered in 2009, Dubai’s economy must generate 85,000-90,000 new office jobs. Based on the office-consuming share of total employment and the rate of expatriate economic activity, this rate of office sector job creation will require a full increase in population and employment at different sectors.

Conclusion

Abu Dhabi and Dubai’s futures have been more intertwined as of late; this has had a price-stabilizing effect in Dubai and has reduced average rent prices in Abu Dhabi. The rent differential between the two has resulted in a significant proportion of cross-emirate migration. If this trend continues then it will exert further downward pressure on prices and rents in Abu Dhabi, at least narrowing the difference between the two in the medium term.

The key drivers for apartment, office and retail prices in the UAE for the future will be location, quality of construction, community facilities, completed infrastructure, and availability of competitive financing solutions. Critical elements for more transactional activity, on the other hand, include affordability, return on investment, and trust-worthy exchange partners.
Prices seem to be stabilizing and even increasing in selected areas where lifestyle communities are offered along with easy access to retail, leisure, education and entertainment. All in all, 2010 is expected to play out as a crucial period for determining the real estate industry’s direction as the world pursues post-crisis recovery.

Off-plan property sales model unsustainable; return to traditional buying methods evident says leading UAE developer

Traditional property sales move UAE market

Off-plan property sales model unsustainable; return to traditional buying methods evident says leading UAE developer

Traditional business models that market new properties are gaining in popularity and beginning to generate more sales than off-plan projects, according to a leading United Arab Emirates property developer in UAE.

“Off-plan property sales have proved to be unsustainable,” said Mohammed Nimer, CEO of MAG Group Property Development, which is involved in AED3 billion of developments in the UAE.

“With so many projects heading toward completion and with little difference between the prices of completed and off-plan properties, why would a bank or an owner-occupier take any sort of risk, a completed property is tactile and ready to move in.”

“Sales enquiries for off-plan property have been stagnant now since the third quarter of 2008 – completed properties are however starting to show signs of life,” Nimer added. “Buyers now have the ‘luxury’ of inspecting the actual villa or apartment that they are considering purchasing - no longer are investors risking capital on the basis of an artist’s impression and a salesman’s promise.”

“It’s also interesting that unfinished property prices have fallen further than those for completed apartments and villas,” added Nimer.

“Everyone in the property business today is going through challenging times,” Nimer said. “Prices, targets and ambitions have dramatically altered. But overall the market will benefit from a more rational approach to real estate investment as opposed to the speculative market model of 2007 and 2008.”

The collapse of the off-plan property model affected not only the UAE but other more developed property markets such as the UK and Spain. Those markets moved away from their traditional property buying methods and have seen similar declines with small investors often left holding property with negative equity.
“Mature property markets have turned away from the off-plan model and returned to the traditional buying methods. This means a property development is fully financed by a combination of sophisticated private equity investors prepared to take the risk and the banks. The end-user, or owner-occupier, does not become part of the transaction until the very near completion of the building.

“This means that the risk of a development being abandoned in a tough selling environment is reduced as both the developer, the private equity investor and the banks are too exposed to do anything other than complete and handover the property.

‘In the boom years, we saw small investors take the place of professional private equity investors and, in many cases even the banks, to finance property development with the results we see today. With banks now having little appetite for high risk investments, off-plan is an unsustainable business model - the future is the traditional, completed property transaction.”


Photo caption: “Off-plan is an unsustainable business model - the future is the traditional, completed property transaction,” says Mohammed Nimer, CEO of MAG Group Property Development.


About the MAG Group
The Dubai-based Moafaq Al Gaddah Group of Companies (the MAG Group) was established in 1978 and has grown into a multinational organisation with 18 offices in eight countries throughout Europe, the Middle East and Asia.

In the last five years the MAG Group Properties has invested in 12 properties at various stages of development across the residential, commercial and industrial sectors. The company focuses on projects that provide long-term benefits to investors and customers.

In total MAG has a property portfolio in excess of AED3 billion and was one of the first developers to create Escrow accounts for all of its projects, long before the Dubai Government introduced Law number 8. In October last year, MAG Property Development was awarded ISO 9001 certification by risk management company Det Norske Veritas (DNV). MAG still remains one of the few developers in the region to be accredited to that standard.

Expert calls for coordinated package of measures to kick-start UAE property market

Expert calls for coordinated package of measures to kick-start UAE property market

Government agencies, property developers, banks, insurance companies and brokers need to agree on a combined solution to support sustainable sales drive

A UAE-based real estate expert has called on industry professionals including government agencies such as RERA to help create a coordinated package of measures to kick-start the UAE property market.

According to Mohammed Nimer, CEO of mid market property development company MAG Group Properties which is involved in AED3 billion worth of projects in the UAE, developers, government agencies, investors, banks, insurance companies and even brokers, are all working to their own agendas to try to get property sales moving again.

“Each interest group is having a modicum of success, but it would be far more effective if all interested sectors worked together. From investment and development right through to the hand over, we could manage the entire spectrum of the property cycle and speak with one voice.”

Nimer, welcomed recent moves such as HSBC bank raising its loan-to-value (LTV) ratio to 75% and the decision by other banks and developers to tailor repayment packages for buyers experiencing financial difficulties. However these isolated acts, although extremely positive, are what Nimer is highlighting.

“In isolation these unilateral measures by individual organisations will have limited effect. For example, if a buyer can’t manage a 25% deposit the sale falls through. Easy payment terms are good news for existing investors, but they don’t address new sales,” explained Nimer.

He also pointed out that more developers and investment groups are taking the rent-to-buy route to keeping the house sale option open to those that might otherwise lack the confidence to commit to home ownership at the moment.

And he praised Dubai Government’s moves to guarantee job security for all government employees and to extend the work visa expiry period so that redundant expats have more time to try and find work.

“These initiatives all contribute positively in some way to encouraging property sales, but if all these effort could be coordinated and put into one package, the effect could be much more effective,” he said.

The insurance sector, too, could play their part by initiating redundancy/mortgage protection policies and by doing so help allay fears of being unable to sustain mortgage repayments should investors lose their job.

Nimer also admitted that although it may be considered too high a risk by the industry to offer such cover especially in challenging economic times, there were still many sectors where the prospects of ongoing employment were sound.

“Government workers, doctors, teachers, as well as several other areas in the public and private sectors including facilities management, legal firms, oil & gas, power generation, infrastructure projects, IT and the retail food sector, while by no means recession proof, should weather the economic downturn in tact.

“Just recently, for example, Dubai Internet City reported a 25% increase last quarter in the number of companies joining its FirstSteps@DIC Business Centre, an initiative for SMEs to ‘test’ the market before contracting permanent office space.”

There is still growth out there and I think business leaders and the UAE government can play a key role by urging banks to grant mortgages to people working in these relatively secure job sectors.”

“In summary government regulation, rent-to-buy, redundancy insurance, higher LTV ratios, relaxed lending criteria, extensions to cancelled work visas and above all total transparency will breathe confidence back into the UAE real estate sector,” concluded Nimer.