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01 March 2024

Providing value and affordability will be critical success factors

The Dubai real estate sector is considered the most transparent in the region. (PATRICK CASTILLO)

By Anjana Kumar

Real estate developers in the region will need to focus more than ever on end-user requirements, according to a major advisory firm.

"Providing properties with value and affordability, and ensuring potential for capital appreciation of these properties in the long term will be critical success factors for the real estate sector," said Paul Arnold, Director of Business Advisory Solutions – Real Estate, Hospitality & Leisure, Ernst & Young.

According to Mohammad Dahmash, Partner, Real Estate, Hospitality and Leisure Advisory and Transaction Services, Ernst & Young, real estate developers whose capital structure does not match the financial and operational needs of the business need to review and renegotiate covenants as well as develop an appropriate financial platform that meets cash requirements.

In an interview with Emirates Business, the two members of Ernst & Young's advisory team said the property market will see a change for the positive once a measure of confidence is restored in the market. Excerpts

What is your assessment of the current market situation?

Dahmash: The property sector had started to fall in the last quarter of 2008 and we are not surprised to see the correction in the market. This year will be a good time for companies to revisit their plans. It will be, in general, a period of transition, re-assessment and re-structuring. What we have seen in the market in terms of growth should be seen as a sign of maturity in the long run.

Is the future looking bleak for the real estate market in the UAE?

Arnold: On the contrary, large fiscal surpluses are the silver lining that will help ride out the storm quickly. Investments in regional infrastructure will continue, which bodes well for the long-term vision of the UAE and the rest of the region. In the mid to long term, the future is bright for the UAE. The underlying fundamentals of the UAE, and the region overall, are strong if we go "back to basics" in terms of understanding the key drivers for the real estate sector's success. Demographics are favourable, considering more than 60 per cent of the population within the GCC is under the age of 30 years. The increase in the working-age population in the coming years will result in greater domestic consumption and investment. The growth in tourism in the region over the next 10 years is projected to outpace the rest of the world and remain on par with the Asia-Pacific. Property laws are becoming more established and the UAE government itself is being well regarded for its pro-business mindset. It has allowed foreign ownership of companies and promoted economic diversification. Dubai is a great example of the creation of a knowledge-based economy in the Middle East.

Dahmash: We have seen significant growth in the real estate market in Dubai and the GCC. In the last quarter of 2008, we also witnessed a fall in the property sector and the stock market. The current global financial crisis has led to forced de-leveraging of Western financial institutions and resulted in the flight of foreign capital, negatively impacting the region in the short term. However, the skies are not completely dark and ominous for the region in the mid to long term. We are also of the belief that there is definitely good potential in the UAE and the GCC. The region has been able to accumulate a lot of cash and wealth in the past few years from not just oil but also its diversification into different industries, such as tourism.

Are we going to see a high level of mergers and acquisition activity in the region?

Arnold: On the near horizon, there will be a creation of opportunity funds to acquire assets at attractive rates. The government has achieved remarkable progress in investing in the nation's infrastructure in such a short period of time, improving the overall quality of life for its inhabitants. Infrastructural funds will increasingly enter this market.

Dahmash: We are already seeing the government merging some of its big companies, which is a positive step. What we have seen is the consolidation of the big companies as part of the government's efforts to take positive measures for extending credit facilities. These actions will help build greater confidence in the property sector and also between banks.

Do you believe banks are limiting home mortgages?

Dahmash: The government has taken positive measures by extending credit facilities to banks and has also guaranteed deposits. There has also been consolidation in the mortgage sector recently. These actions will build greater confidence in the property sector and also between banks, thus assisting in easing lending practices in the long run.

Institutions were very relaxed in their lending practices even in the more mature economies. They have definitely become more restrictive. There is less lending at the moment, but that will help in the long run because they are going to give this money to the credit worthy companies.

Bailouts – are they a good option for the regional property sector?

Dahmash: Today, cash is king and the region is sitting on the throne. There are accumulated surpluses to fund government spending and capital investment. Many sovereign wealth funds in the region still have substantial wealth at their disposal and the capacity to fund shortfalls, which puts this region in a unique position. Provided they have the desire to do so, this will hopefully minimise the overall depth and duration of the present downturn.

Are the measures being taken to check speculation and corruption in the market enough?

Dahmash: We must keep in mind that the Dubai real estate sector is still in its infancy, relative to more established markets around the world. Within the region, however, it is considered the most transparent. The Real Estate Regulatory Agency (Rera) has made significant progress in a relatively short period of time by establishing legislation that protects buyers. In times of economic changes, they will need to do more to restore confidence in the sector for the long term. The property market will see a change once there is a considerable amount of confidence restored. We will even see the stock market bouncing back. A lot of real estate companies are trading way below their book value. If liquidity is there in the market, confidence will be restored and the stock market will bounce back.

The classification of real estate developers under proper criteria is a step in the right direction and will mitigate the confusion in the market. Payment plans that are tied directly to construction schedules (as compared to a general timeline previously), and graver consequences for those developers who do not deliver according to plan, will restore confidence among buyers. We are also looking forward to the implementation of the Strata Law, which will help bring more clarity for owners of completed properties.

Is Rera taking all the right steps?

Dahmash: Rera is doing things in the right way. It has only been established recently and so far they have helped in regulating the market. The bottom line is that Rera is helping make the market more transparent, which would definitely help in restoring confidence in the market.

What strategies do developers need to adopt in the current market scenario?

Arnold: Developers will need to focus more than ever on end-user requirements. Providing value and affordability along with the potential for capital appreciation in the long term will be critical success factors. For those real estate developers whose capital structure does not match the financial and operational needs of the business, now is the time to review and renegotiate covenants as well as develop an appropriate financial platform that meets the cash requirements.

How is the GCC common currency going to impact the real estate sector?

Dahmash: This will only be positive for the real estate sector in the GCC. The UAE has established itself as a brand and Dubai has led the way in terms of development with Abu Dhabi now moving in that direction, too. Abu Dhabi and Dubai will eventually compete as centres of both tourism and corporate business. Dubai, as you know, has been the service centre for the GCC. The common currency will definitely ease cross-border movement for investors.

Where are the real estate funds essentially coming from?

Dahmash: The real estate funds that we see are essentially coming from the GCC, Europe and some even from America. There is good amount of cash available in the market and people are sitting and just waiting for the situation to improve. The bottom line: what we see now is a limited interest in the development side of real estate and a greater interest in the acquisition of completed properties.

What is your thought on the UAE rental market?

Dahmash: The rental market is undergoing some adjustments currently. Supported by the housing shortage in Abu Dhabi, we have a lot more people living in Dubai and commuting to Abu Dhabi. Over the medium-term, we could see more adjustments in the sector. If we go back to the main fundamentals, they are all good. Even foreign institutions and foreign funds are coming back.