Is Dubai's current market different from 2008? An anatomy of a market

August 30 2015
By Lookup.Ae Sales

In this edition we explore the Dubai freehold residential market in terms of historic, current and future supply. We study the market conditions in 2008 and compare them to 2015. We analyze the consequences of a large amount of supply entering the market in 2016 and its potential impact on Dubai in the midst of a number of concerning global economic conditions.

Before we get started: Key Statistics

Freehold Residential Units Launched & Delivered between 2001 – 2015

Note: this report discusses only freehold residential units (apartments, villas & townhouses). This report does not include statistics of non-freehold or freehold residential plots.

There has been a lot of talk about the number of units launched in the past three years and its impact on future supply. This chart shows the actual number of freehold units launched in Dubai since foreign ownership laws were passed in 2001:

Freehold Units Launched: 2001 - 2015

Project launches happen once a real estate developer has acquired a land parcel, implemented a design & feasibility and then officially announces the development. In most cases, the developer begins selling the units in the project off-plan and on a payment-plan.

Between 2001 and 2003, the first freehold projects in Dubai were announced by Nakheel & Emaar (both companies affiliated with the Government). Emaar launched projects such as the Dubai Marina master-development and Emirates Living while Nakheel was responsible for the development of the Palm Jumeirah. As these were the first freehold projects ever launched in Dubai, they were sold at low, competitive prices and the investor response was very positive. One of the driving factors of overseas investments was the uncertain period following the 9/11 Terrorist attacks. During this time, a large amount of capital flowed from the West towards emerging economies in Asia.

Based on the initial sales successes of these projects, starting in 2004 a large number of master-planned developments were announced including Downtown Dubai, Business Bay, Jumeirah Beach Residence, the Palm Jebel Ali and Dubai Land. Each of these developments helped define Dubai's ambitions and attracted investors by large-scale offerings backed by incredible marketing efforts.

The largest number of project announcements took place in 2004 when a total of 70,411 units were launched into the market mainly by Government backed entities like Emaar, Nakheel, Dubai Properties, Mizan, Tatweer, DIFC etc. While many of these projects were announced in 2004, the sales of these projects took place in phases through 2005. These projects continued to sell out rapidly.

Following large amount of freehold launches between 2003 and 2004, we saw for the first time a large amount of supply entering the market in 2006 (approximately 30,000 units). At this point, back in 2005 & 2006 there was caution in the market. But these units were quickly absorbed as occupancy rates and rental returns were abnormally high and the city's population was growing rapidly. Once the fleeting caution dissipated, the market remained buoyant and then we witnessed a lot of activity that led to the excesses of 2007 and 2008.

During this two year period, the total number of additional freehold residential units launched was approximately 115,000 units. As per research, more than half of this supply was subsequently cancelled or put definitively on-hold. Much of the cancelled supply were in areas such as the Dubai Waterfront, Palm Jebel Ali, The World, Palm Deira, The Lagoons, Business Bay, Jumeirah Village and Bawadi.

Between 2007 & 2008, much of the new supply was launched by private developers. Launching real estate projects in Dubai during 2005 – 2008 was much easier than it is now. With a lack of regulation as well as checks and balances that are now in place, developers could acquire land and rapidly bring their project to the market. A lot of investors who purchased during 2007 & 2008 lost money when developments were subsequently cancelled or in a few high-profile cases, some developers simply ran away with investors' money.

When the crash happened, a lot of construction along SZR road and Mohammad bin Zayed Road had already reached advanced stages. In 2009 and 2010, a total of 76,000 units entered the market. The market which had already declined significantly in early 2009 remained stagnant through 2011. The additional supply continued to put pressures on capital and rental prices. Prices reached their all-time low in late 2010 to mid-2011.

End-users and investors that purchased property between 2009 and mid-2012 witnessed another property boom which commenced with the Arab spring. On average property prices increased between 30 – 45% between mid-2012 and late 2013.

Between 2009 and mid-2012 we witnessed a period of consolidation. No new real estate projects were launched, many developers cancelled projects and compensated investors by moving them to projects which would be delivered and a lot of unfeasible developments were put-on hold or shelved. This changed when Emaar launched Panorama in The Views which sold out rapidly. In the following weeks, Emaar launched the Address BLVD in Downtown Dubai. This luxury, serviced apartment project sold out within hours and in the following days was trading at a premium.

Once the signs were evident of a renewed market, the Government backed developers launched new projects. Once the market recovery was cemented by early 2013 and on the back of excitement over a strong Expo 2020 bid, many mid-large investment houses began injecting capital to revive stalled projects. In addition, small & medium sized developers were able to mobilize quite rapidly and launched many projects starting in late 2013, 2014, and 2015. During these three years, a total of 48,000 new units were launched. As of Q3 2015, a total of 66,000 freehold residential units are under-construction.

Supply entering market

Three Important Reasons why 2015 is different from 2008

1. Future supply as a % of Current Supply

The first thing to consider when comparing Dubai of 2015 to the real estate market of 2008 is a simple calculation which determines future supply as a percentage of current supply. In 2008, with the freehold market about 7 years old, future supply as a percentage of the existing supply in the market was a whopping 332%. This translates to 64,811 ready freehold units vs. a proposed / under-construction supply of 214,851 units.

In 2015, when the same ratio is applied, future supply is just 35% of current supply. There are approximately 185,986 ready freehold residential units in Dubai. Approximately 65,000 units are under-construction.

When 2009 & 2010 supply entered the market, supply increased by 117% in 24 months. When remaining 2015 & 2016 supply is delivered over the next 18 months, total supply will increase by 19.8%.

Under-construction Freehold Units as a % of Ready Units

2. Panic set in in 2008 for a variety of reason, but an important factor was that so much of Dubai was under-construction

This map below tells an important story. Everything marked in red is what was still under-construction in Dubai as of late 2008 as the market started to decline.

Status of Freehold Developments in Dubai - September 2008

Markets are driven by sentiment as much as fundamentals; in 2008 both sentiment and fundamentals turned negative for the following reasons:

  • In 2008, Dubai didn't have the credibility it has earned today. This is not to say that mistakes weren't made during the boom market of 2007 – 2008. The market suffered from a lack of regulations and investor protection. But in terms of credibility, if we look back at 2008, only a small portion of what had been announced had been delivered.
  • In 2008, the threat of significant oversupply was well founded. As the previous section noted, under-construction units comprised of 332% of ready units. By 2009, 48,000 units entered the market and approximately 60,000 units had been cancelled. This balanced the ratio of off-plan vs. ready and that ratio has continuously declined ever since.

3. Investors are not heavily leveraged in 2015

In late 2013, the Government of Dubai introduced much publicized legislation to cool down the market and prevent speculation. These measures included:

  • Increasing transfer fees and Title registration fees
  • Instructing developers (Government and private) to prevent buyers from transferring off-plan property until at least 30 – 40% of the purchase price had been paid.
  • Introducing larger transfer fees on Power of Attorney Transfers
  • Mortgage Cap

The consequence of these actions was that investor activity slowed down drastically starting in early 2014. But unlike in 2008 & 2009 when the market came toppling down rapidly, what we have seen in the past 18 months is a steady correction where prices typically for all residential types have declined an average of 2 – 3% per quarter. From their peaks of 2014, prices have declined between 7 – 12% on average.

This has given many over-leveraged investors time to dispose of assets and take actions to respond to slower market conditions. As of August 2015, in general, the average investor has very little significant exposure in this market.

In addition, investor activity in most new project launches since late 2014 has been limited. Most of the purchasers of off-plan property are end-users or investors taking a long term view of the market.

2016: large amounts of supply entering the market in uncertain times

For the first time since 2009, a large amount of supply will enter the market place in 2016. In normal times, the fact that close to 30,000 units could potentially be delivered in 2016 would have already put downward pressures on capital values and rents. In 2015, with a number of external events around the world, this supply may have an even more adverse impact. Below are some positives and negatives that we foresee in the coming 12 – 15 months:

  • Weak oil prices. Government revenues have halved since last year. While the UAE is better equipped then most oil producing nations because of its years of investments and diversification, the impact is still being felt. This is why residents of the UAE have over the past few weeks been receiving a stream of news and rumors of impending taxation measures. An example of this pullback is the gradual discontinuation of petrol subsidies. The negative consequence is that Dubai becomes even more expensive for the average family and business. The positive is that the Government is wisely positioning itself to new global realities & challenges and this is where we believe that the UAE continues to have an edge over its regional competitors.
  • Weak oil prices end up impacting the oil industry which has several follow-on effects including potential layoffs, downsizing and pull-back on investments. Governments around the GCC will spend less and this impacts the many Multinational corporations set up in Dubai that cater to the larger region. This follow-on will then have its impact on the housing market which coupled with large amounts of new supply will put even more pressure on capital and rental prices.
  • Investments from overseas are slowing for a number of reasons. The economies of China, Russia, India and most of Asia are seeing a significant slow-down. New capital controls being implemented in India and Pakistan (two of the largest sources of overseas investments) make it harder for the common investor to purchase in Dubai.
  • In all likelihood, a large amount of supply scheduled for 2016 completion will be pushed back through to 2017 balancing out the impact of large amount of supply entering the market over a short period of time. Construction delays in Dubai are common. A lot of supply scheduled for 2015 delivery has already been pushed through to 2016.
  • We will probably now witness a scale back of new project launches. Developers (especially private developers) will most likely not launch new projects for the time being. This is positive because the continuous launch of new product is first of all not required and secondly contributes towards perceptions in the market that Dubai is headed towards a period of excess.
  • Large amounts of supply will make Dubai more affordable. One of the biggest threats this economy has is the fact that it is becoming very expensive to live and do business in Dubai. With prices and rents correcting and stabilizing over the next 18 – 24 months, Dubai will become a more competitive hub.
  • Time and again, this Government has demonstrated that it does not operate on a short term basis. A number of major infrastructure & tourism initiatives are well underway to diversify the city's economy, beautify it and improve its vision and competitiveness over the mid to long term. Read 5 initiatives by the Government of Dubai to propel the city forward.
  • While there are a number of global factors which will play a significant part, we believe that once 2016 supply has been absorbed and its impact has settled into the market (in terms of new capital and rental realities) Dubai will emerge with more positives then negatives. The large amount of infrastructure & tourism projects that will be delivered in the next 3 years will help Dubai's economy expand and be more competitive. Any potential global slow-down may last another 12 - 24 months. Therefore, starting in 2017 and through 2020 Dubai will most likely see renewed growth. This means that buyers / investors of Dubai property should capitalize by seeking value, and should focus on an investment strategy which is mid-long term.
  • It's also important that the Government take steps to put the market in perspective. From the report above it is clear that one of the reasons fear and uncertainty enter the market place is because of a lack of concrete information. Once investors and stakeholders can have a better perspective of Dubai's real estate market in 2015 versus 2008 – talks of an imminent market crash seem well overblown.

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