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News Article - The Wisdom of Hindsight
News Article - The Wisdom of Hindsight
apartments in projects it restarted in 2010 and 2011, and this year moderately increased its pipeline of new residential developments on The Palm Jumeirah. The
ambitious company, which had been battered more than others during the 2008-09 downturn, needed an $8.6 billion cash injection via the Dubai Financial
Support Fund (DFSF) in 2010. Part of its $10.5 billion debt restructuring is lately emphasizing the completion of The Palm Jumeirah, with both homes and
commercial projects, the most flamboyant being The Pointe, a major retail and hospitality strip. The developer has been busy talking to banks about raising the
more than $80 billion it will need to make it happen since January this year, claiming indicative positive responses.
Hospitality is big on the mind of Damac, which claims to be the largest private sector developer of luxury real estate in the Middle East. Among 10,000 units in its
current project pipeline and a new swathe of projects to be announced in the near future, the company plans for 4,000 serviced apartments, General Manager Ziad
el-Chaar tells Executive.
Emaar's focus is Downtown Burj Khalifa where it is expanding Dubai Mall and has just announced another project, 'The Address BLVD' -- a hotel conjoined with
serviced residences that will stand 340 meters tall. The enthusiasm to snap these residences up, though, smelt of an unhealthy return to speculation, judging by
reports of queues forming days before they went on sale. Back in May the developer boasted of selling all 224 units in a mid-rise apartment development,
Panorama at The Views, "within hours" of its launch. Another project, the Alma 2 community within the Arabian Ranches development, has also met resonance with
buyers.
Based on market indications and marketing incentives offered by developers who want to rapidly sign buyers for projects like Panorama, Executive calculates that
sales prices fetched by developers of well-positioned apartments and villas these days would be about equal to where prices stood in late 2007, signifying a
substantial recovery from the depth of the trough, at least for residential projects with good infrastructure and a good reputation.
"Clearly there is improved sentiment in the market and that is portrayed by a return of off-plan sales launches," remarks BRE Middle East's Green. "However, there is
a note of caution to sound, with investor focus still firmly on completed and income-generating assets. Whilst some interest has been evident for newly launched
products, this appears to be speculative rather than from end-users or long-term investors."
Despite some off-plan selling being successful, which was not the case a year ago, the real drivers of real estate development these days should be economic
fundamentals, for which JLL cites growth outlooks for both Abu Dhabi and Dubai. In the case of Dubai, gross domestic product growth prospects of four to five
percent are mainly based upon its healthy tourism and trade sectors, while Abu Dhabi continues to diversify and cut its reliance on oil.
What the market needs
"What we really need to see is a more sustainable model of development being established in Dubai. Something that is built on true end-user demand and solid
fundamentals rather than simply relying on speculative demand to forward-fund projects," Green adds, reiterating what has become the consensus on Dubai's
evolutionary real estate needs.
The office sector, though, appears to be suffering from oversupply as vacancies of 80 percent in Business Bay speak loudly, while Dubai's offices in general are half
full. Single ownership offices, representing 60 percent of Dubai's supply, would be the ones to fill up first, but the remaining ones are strata, or multi-owner, titles
and perceived as a headache by potential occupants, according to JLL.
"There is definitely not enough new demand to fill up all the empty space in locations like BB [Business Bay]. Expect strata space to be more difficult to lease than
that in single ownership," comments Plumb, adding that free zones still attract an, albeit subdued, premium when compared with onshore offices.
"The only type of development we really need right now is for pre-committed tenants -- there are a number of new industrial projects being built for identified
tenants and there are also some major office requirements that are looking at having premises purpose built for them rather than leasing spec built space," he says.
JLL's second-quarter Dubai market overview states that, according to developers, 24,000 residential units should be handed over in the second half of 2012, but
Plumb doesn't expect all of them will be. "Although they cannot be delayed forever, as most of these are pretty much finished and just require the contractors to
be paid and the power to be connected," he explains.
CBRE's Green meanwhile believes the number of units to be delivered during 2012 hovers around 14,000, which he says is significantly down on historic annual
supply figures. Of those, 3,000 are villas, which Green reckons could lead to inflationary pressures being felt on rents of well-positioned and good-quality villa
products.
What is clear is that the new buzz in the market has had its effect on prices, sales and leasing, and the impact is mostly positive for developers, as buyers ability
over the last few years to influence prices their way is decreasing. However, what one may call a 'great divide' continues to rule Dubai's real estate market:
established areas -- such as Emaar's success with its Panorama and Alma 2 projects suggests -- win.
"In established areas we have already seen the market move from stabilization into increase in rents," says Plumb. "In the less established locations owners are
increasing asking prices more out of enthusiasm than reality. I suspect these areas will continue to see rentals decline for the next 12 months. There is a huge
amount of new stock just waiting to come on-line, such as in Sports City."
The majority of the future supply pipeline lies in the emerging secondary locations such as Jumeirah Village and Dubailand, home to Sports City. "This may result
in growing vacancy rates and further availability of landlord incentives in those areas that are most impacted by oversupply," Green explains.
Across the Emirates
Casting a quick eye across nearby northern emirates Sharjah and Ajman, occupancies and rental incomes are looking up but also with softer spots mixed in.
According to the April 2012 property update by Cluttons, Sharjah's Al Majaz Waterfront is offering a new flair to the emirate and is likely to see higher occupancies,
but Asteco's second quarter report on the Northern Emirates highlights dropping rents in Sharjah. In Ajman, resurging building activity in developments alongside
Emirates Road has made some of the residential towers rise in height but it is not clear when Ajman's Emirates City will become a liveable place.
Taking a drive in the opposite direction to Abu Dhabi and the immediate visual impression is of new towers which seem to have sprung up over the last two years,
such as Etihad Towers and Sowwah Square. According to Cluttons, Abu Dhabi has seen occupancy levels in the Grade A spaces improve in these office
developments, as well as in Aldar's HQ tower and in Grade B office spaces available on Reem Island.
The capital of the UAE is not suffering from oversupply in residences and residential rents in Abu Dhabi are still 15 to 20 percent higher than in Dubai, despite
recent handovers of Reem Island, Al Reef, Al Raha Gardens and of Saadiyat Island. Rent-to-own schemes are working well in the capital, according to Cluttons.
"A large number of projects have either been put on ice or, where started, the projects have been stopped or delayed," says Richard Paul, Associate Director at
Cluttons. "This put upward pressure on any available premium property and in consequence rents have either held or are even increasing."
CBRE's Green, however, believes that Abu Dhabi is reaching the peak of its development cycle and that is reflected in the continued deflationary pressures on rents.
"Looking forward we see further downside for rents in Abu Dhabi over the next six months," he says. "This is particularly true given the large number of units set to
be delivered in the capital over the next two years."
Executive 2012