Higher prices and more delays in tight market

(XAVIER WILSON)   


 

UAE investors and residents can expect more delays in property delivery and higher prices this year as tight market conditions fail to subside.

 

Delays in the completion and handing over of residential property projects as well as skyrocketing prices will continue to be seen due to a shortage of completed residential units, said recent reports by property consultant Asteco and investment bank EFG Hermes.

 

But “deliberate” factors can also drive up prices, according to Kuwait’s Global Investment House (GIH).

 

“Dubai’s property developers have to face tough deadlines. Some observers believe they are capable of slowing the release of property on to the market if prices start coming under serious pressure,” said the GIH report.

 

The increase in rent rates was mainly due to the shortage of completed residential units, industry experts felt, adding that a large number of developments are expected to hit the market this year.

 

At the end of 2007, a shortage of 26,000 housing units was recorded in comparison to the expected delivery of 40,000 units during 2006. This has resulted in rents rising during the first quarter of this year, said Asteco.

Due to delays in key projects the demand-supply gap resulted in rising rents, with the rent for two-bedroom apartments rising 18 per cent during the first quarter of 2007, compared to the same period the year before. The rents for single- and three-bedroom apartments increased by 14 and 13 per cent, respectively.

 

According to the International Monetary Fund, about 120,000 residential units are expected to be completed in the UAE over the period 2008 to 2010. Although capacity constraints have delayed some large real estate projects, especially in Dubai, there are indications that many of these projects will be completed shortly.

 

However, pressures on rents and prices in the Abu Dhabi market are expected to go on as the supply continued to slip in 2007, GIH said. Given the continued strong demand in the medium term, a sharp price correction in the real estate market is not expected.

 

HSBC suggested that higher commodity and labour costs, coupled with the falling dirham and interest rate cuts, will drive up property prices in Abu Dhabi by 25 per cent this year. According to the bank, year-on-year property price inflation hit 30 per cent in January 2008, while in the second half of last year, average rents increased 22 per cent and residential property prices rose by 18 per cent.

 

In addition, not enough of the projects in the pipeline will come on stream this year. Insiders estimate an overall shortfall of between 20,000 and 50,000 units.

 

High prices of steel and cement are contributing to the upward pressure on property costs and to overall inflation, and costs for both are expected to rise by nearly 20 per cent this year on the back of high transport prices and China’s continued construction boom.

Meanwhile, currency depreciation and higher food prices caused by global factors such as droughts, floods and a shift away from cereals to animal feed and biofuels have put upward pressure on wages, leading to increasing construction overheads.

 

Further demand-pull factors come from the Emirates’ growing population. A large proportion of UAE nationals are young and will soon be seeking housing of their own, while the fast-growing economy is drawing increasing numbers of expatriates, the Oxford Business Group (OBG) noted. As Abu Dhabi’s development strategy includes bringing in highly trained professionals from abroad, these pressures seem set to remain.

 

The demand for housing in the UAE is a function of both the population growth and pent-up demand, with residents upgrading to better dwellings, said GIH. “The influx of expatriates is a major factor that has been driving housing demand in the UAE, particularly in Dubai. This, coupled with delays in property delivery, has created upward pressure on house prices and rental costs in the UAE,” it added.

 

In the UAE, the average price per square metre of residential land rose by 67 per cent between 2006 and 2007. With the expansion of lands allocated for residential projects, volumes and values of deals are expected to increase during this year.

 

GIH, in its UAE economy report, said the real estate and business services sectors continued to grow in nominal terms, recording a CAGR of 20 per cent from 2003 to 2007. In 2007, real estate and associated business services constituted eight per cent of the UAE’s GDP, or Dh55.8 billion, recording a substantial growth of 21 per cent in 2007.

The sector was buoyed by the increasing investment in infrastructure, due to the country being positioned as an attractive tourist destination in addition to the increase in the residential and non-residential units.

 

Citing a Mazaya report, GIH said the demand for commercial and investment lands is on the up, with deals worth a total of Dh38bn recorded in 2007 compared to Dh8.7bn during 2006, an increase of 36.8 per cent.

 

The sector continues to attract investments as more companies vie to establish businesses and tourism projects to gain a large market share of the commercial and tourism activity of the world.

 

The average price per square metre of commercial land witnessed a noticeable rise during 2007 on the back of huge demand, rising 17.2 per cent during 2007 and by 33.3 per cent during the period from 2005 to 2007.

 

The changes and the approach towards revamping the real estate regulations in the UAE have been positive from the investors’ point of view, the GIH report added. The promulgation of new property laws in the individual emirates to regulate the sale and lease of land and buildings to citizens and expatriates kick-started the property boom.

The regulations vary from emirate to emirate, with some, including Dubai, permitting foreign residents to purchase freehold properties in designated areas, whilst others, such as Abu Dhabi, limit the acquisition of property by expatriates to leasehold.

The land departments in each emirate are now trying to frame regulations that will eventually create a unified property law.

 

The major legal landmarks in Dubai in 2007 have been the passing of a brokers’ law, an escrow law and the creation of the Real Estate Regulation Authority (Rera).

 

Brokers’ law, which came into force in January 2007, stipulates that all brokers, both individuals and companies, must be licensed with the Lands Department.

The department has been assigned the role of training and certifying all brokers to ensure that property transactions are conducted by licensed and trained brokers who are able to provide proper advice and a professional service to clients.

 

The passing of Legislation Law No8 makes escrow accounts compulsory for all Dubai off-plan developments, with money released only on the order of the Dubai Lands Department. This move marks an end to the days when any developer could launch a project and collect deposits without a guarantee that the funds would be used correctly.

 

Meanwhile, Rera was formed under the affiliation of the Dubai Lands Department in 2007 to unify and regulate all property market-related activities.

 

 

The numbers

 

26,000:  Shortage of housing units in 2007

30%:  Property price inflation in January 2008

 

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