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- A view on Dubai freehold residential real estate
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- Buy land. They ain’t making any more of the stuff
- Will Rogers, American Humorist
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- Main developers & their focus
- Market prices and yields
- Key growth drivers
- Downsides
- Upside potential
- A few investment rules
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- Set up in 1997 as a listed company. 32% owned by Govt of Dubai. Headed
by Mohammed Ali Alabbar.
- Started with developed land sales (2000). First to deliver apartments
(2002). Plan to deliver 13,000 units
by end 2005.
- Group comprises of Emrill
(property mgt), Amlak Finance (mortgage finance) & Dubai Bank.
- Main projects: Dubai Marina, Meadows, Springs, Greens, Arabian Ranches
and Burj Dubai.
- Reported revenue and net profit in 2004 of AED 5.2 billion and AED 1.7
billion respectively. Increase in revenue & net profit by 41% and
105%.
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- Set up in 2002 as a FZ company wholly owned by Govt of Dubai. Headed by
Mohammed Gergawi.
- Started with a massive apartment project. Projects are still in
progress. No handovers yet.
- Part of the Dubai Holding group that comprises of Dubai Holding (recent buyer of stakes
in Diamler Chrysler & Tussauds), Jumeirah Beach Residence (JBR),
DDIA, Dubai Health Care City, Dubai Internet & Media Cities and
Idama (property management).
- Main real estate projects: Jumeirah Beach Residence, Business Bay, Dubai
Land.
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- Set up in 2002 as a LLC entity & wholly owned by Govt of Dubai.
Headed by Sultan Bin Sulayem.
- Part of the Ports, Customs & Free Zone Group that includes Jebel Ali
Free Zone, Dubai Ports Authority, Tejari.com and Tamweel (mortgage
finance).
- Main projects: Palm Jumeirah, Palm Jebel Ali, Palm Deira, International
City, Discovery Gardens, Jumeirah Village, Jumeirah Islands, Ibn Battuta
Shopping Mall, Dubai Waterfront.
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- Emaar: First off the block, first to offer integrated services (property
sale +mortgage + facility management). Current focus on joint ventures (
India, Saudi Arabia). Limited land bank & hence future revenue more
from rental income and joint ventures.
- Dubai Properties: Leisure & entertainment projects e.g. Dubai Land.
Mix of leasehold and freehold projects.
- Nakheel: First to introduce freehold sale concept, large scale projects,
many offshore projects, wide product range of up market properties and
affordable units.
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- High proportion of speculators. Few end users.
- Prices so far not a correct reflection of real estate fundamentals.
- Glut of properties, especially apartments.
- Fall in secondary market prices over last 6 months.
- Reduced opportunities for short term trading.
- Decrease in rental yields.
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- Business
- Geographical proximity to Asia and Europe.
- Well connected: 105 airlines flying to 140 cities.
- Skilled labor: Strong work ethic, cheap work pool.
- World class free zones (JAFZA, Dubai Media & Internet City)
- Liberal laws: No taxes, 100% ownership.
- Strong foreign trade: third largest reexport center globally.
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- Leisure
- Fast-growing tourist destination: 6.5 million visitors in 2004. 31 Five
star hotels. Tourism is 12% of Dubai’s GDP. Second largest share of ME
tourism market (16%) after Egypt.
- Top notch events: Dubai Desert Classic, Dubai Tennis Open, Dubai World
Cup, Dubai Shopping Festival
- Living
- Ranks high in safety, quality of infrastructure.
- Cosmopolitan demographics: 185 nationalities.
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- Landmark survey: in 2002 by Jones Lang Lasalle , a highly respected
Chicago based real estate consultancy.
- Results: Survey ranked Dubai as the best city. Dublin and Las Vegas
were second & third
respectively.
- Significance: Many Dubai property buyers are either expats looking to
live long term or are foreigners buying a second home. Quality of life
and cost of living are hence basic factors.
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- Demographics: Dubai population
growth of 5.5% in 2003. CAGR of
4.5% between 1998 and 2003.
- Freehold ownership: Started in 2002. Added large new demand from
segments such as expats in UAE, foreigners.
- Mortgage finance: From Amlak, Tamweel, HSBC, Mashreqbank etc. Enabled
both end users & speculators to enter the market.
- Low rates: Record low interest rates due to the AED peg to the US
Dollar.
- High liquidity: Repatriation of funds from US/Europe post Sept 11 plus
the record high oil prices.
- Lack of alternatives: Small, shallow equity markets
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- Tightening monetary policy: Greater impact due to less cash & more
mortgage finance.
- Opaque market: lack of reliable data on volume of sales, future unit
deliveries etc.
- Mismatch : Segment specific demand/supply mismatch e.g. many luxury
villas targeted at few wealthy buyers.
- Off plan: Most units are sold before construction starts. Risks that
developers deliver below expectations.
- Unaffordability: Rising prices + stagnant wages= small, slow growth
market. Small buyers get priced out.
- Legalities: Basis for selling freehold to non UAE nationals still a huge
grey area.
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- Higher cost of living: Recent UBS survey ranks Dubai at No 42, costlier
than Shanghai, JoBurg or Mumbai. Could deter companies and tourists.
Qatar, Oman may benefit.
- Declining premium: Developers priced properties close to market prices and even set new highs
(e.g. Burj Dubai). Hence, limited
scope for profit.
- Political risk: Neighborhood volatility becomes contagious. Recent
adverse events in Kuwait, Saudi Arabia, Oman, Doha.
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- Cost of funds: slow rise in interest rates. Based on US macroeconomic
factors & US Fed rates. Mild rate hikes so far.
- Real laws: Possible finalization of freehold law.
- Black gold effect: Oil prices expected to remain high. Goldman Sachs
forecast on 31 March 2005 of NYMEX crude at $ 50 and $ 55 in 2005 and
2006 respectively with ‘spikes’ of $ 105. Hence more liquidity.
- Paucity of choices: Continued lack of investment avenues.
- Rising head count: Growing population , mainly expats on the back of
rising economic growth.
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- More white collars: Larger % of new expats may be high income earners,
working in new specialized clusters like DIFC, Dubai Land, Dubai Health
Care City, Silicon Oasis etc.
- Tourism growth: Target of 15 million visitors by 2010. Projects like the
Palms will add 520 kms of beachfront.
- The Rent vs Buy argument: Fast rising rents makes buying more sensible,
resulting in a tangible, valuable asset.
- Globally cheap: Dubai prices are still a third of UK prices & half
of US prices.
- Big buyers: Institutions have mostly stayed away so far. Clarification
of freehold law = estate funds + even foreign institutions ( e.g. the
massive pension funds).
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- Eight Rules of Real Estate Investing
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- As an asset class, Real Estate (‘RE’) is dissimilar to financial market
instruments such a stocks & bonds.
- RE markets are less liquid
- In Dubai, market data is mostly anecdotal & unreliable.
- RE markets are inefficient with major info gaps between buyer and seller
- RE cycles have longer peaks and troughs
- RE market is less regulated. Malpractices by brokers etc
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- Be clear & realistic on your objective: Speculation, renting out or
own use?
- Strategies and property type depend on the objective.
- Speculation: chief criteria are low investment, sufficient time till the
next installment, possibility of appreciation, any restrictions on
resale by the developer, transfer fees.
- Rental: Holding power is a must, especially or off plan units. Property
management is a later issue.
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- Focus on the property type: residential, commercial. Within residential,
apartments or villas.
- Apartments features: Pluses: more easily leasable. Negatives: high
maintenance cost, Glut in market, credibility of private developers.
- Villa features: Pluses: Limited supply & hence price collapse less
severe. Negatives: Not easy to rent out ( expensive).
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- Observe price trends. Advertised prices may not be the final prices.
- Talk to developers,both private & public.
- Check out the private developers. Examine progress & reputation.
- Talk to current tenants of the community. Issues like traffic
congestion, facility maintenance etc.
- Ask for property management: responsibility & charges.
- Resale restrictions, costs?
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- Reduce investment risk.
- Avoid excessive premiums for features of little tangible value.
- Focus on low priced units e.g. Studio & 1 room apartments in
International City @ AED 250-AED 370K each.These are likely to suffer
during a slump. Also, large future demand for such units.
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- Look not just at residential real estate but at commercial /retail
property also.
- Quality office space in great demand in Dubai. Occupancy is nearly 100%
and Class A space near Interchange 5 on Sheikh Zayed road averages AED
200/sq ft/yr.
- Several private developers have launched freehold office projects.
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- High launch prices + oversupply in certain segments ( e.g. apartments) =
limited profit opportunities.
- The days of quick, easy money may
be over.
- If a speculator, try not to expect obscene returns.
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- Never listen to brokers, consultants, friends, bankers or developers !.
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Notes
