An Abu Dhabi department yesterday warned that property prices could fall because of oversupply, speculation and an absence of proper regulation.
The emirate's Department of Planning and Economy (DPE) said the real estate sector had leaped by an annual average of 22 per cent over the past five years and was expected to maintain high growth due to an economic upswing, a surge in the population and tourism, high public spending and other factors.
But despite the sharp growth in demand, supply is gaining ground and could sharply depress prices in the medium and long term.
"Real estate business in Abu Dhabi has many assets of success that can support the sector's growth in future," says the DPE's weekly report. "However certain challenges lie ahead: Housing units expected to be completed in the coming period outweigh the actual needs of different categories of customers, which makes a sharp drop in prices inevitable in the medium and long run unless a quick remedy is provided. More demand, local and otherwise, is necessary to offset over-supply.
"This reality is only confirmed by the fact that certain categories of real estate business – deluxe and sale-only housing units – are about to outweigh supply - a critical stage on which the whole future of the sector depends. The present malpractice of supplying these units regardless of the actual needs of prospective customers may lead to over-supply, thus pushing prices sharply down, which will have a negative impact on a once booming business."
The report notes that the high prices of buildings and construction materials, which skyrocketed in recent years, had a negative impact on the performance of construction business.
The authors expect the upward trend to continue, thus affecting supply, at a time when Abu Dhabi begins to suffer from an over-supply.
"The problem is worsened by speculators who tend to over-estimate the value of new units. This is a risky business which may result in a sharp drop in the value of new units, thus undermining the future of the sector and other supporting sectors such as building and construction," the report warns.
"Real estate is a vital business. That is why banks and businessmen's over-dependence on this sector has to be put under tight control. It is also necessary to speed up structural reforms plans in order to rectify the course.
"This is only possible by means of effective economic and financial policies to straighten out the supply-demand equation and secure a soft landing and a sustained growth."
The DPE is calling for the setting up of an index to monitor property prices and for new legislation to regulate mortgage loans to prevent bank crises.
"Prices usually vary from one unit to another in the same area and are set solely at owner/agent discretion, thus failing to reflect the true value," says the report.
"Real estate business control requires comprehensive, detailed statistics which should be released periodically to reflect the latest market developments.
"They should indicate new real estate projects, growth trends and indications, actual supply and types of housing units in demand."
According to the report massive funds are needed for the expanding real estate sector in Abu Dhabi – and this requires new bank regulations for funding.
"Commercial banks, basically operating under a low-risk, quick turn-over policy, are interested only in short-term finance. Moreover, these banks are not allowed by the Central Bank to provide property loans more than 20 per cent of actual deposit portfolios, at a time when finance needed during the next five years is estimated at Dh500 billion, which is almost 10 times the capital of all commercial banks combined. In addition, real estate finance market is faced with certain challenges in the absence of organising laws.
"However the UAE may find itself soon with one single option – orchestrated action by government and private agencies to introduce a variety of finance packages to both investors and consumers without undermining everybody's rights. All indications make the setting up specialised, cash-loaded real estate finance banks/ institutions inevitable."
The report shows that the UAE's real estate sector jumped from around Dh6.8bn in 2002 to Dh14bn in 2007, an annual growth of 22 per cent. It forecasts that growth will be maintained in the next two years.
"Real estate investment was motivated by other factors such as rising rent value, secure risk-free investment, streamlined real estate management procedures and quick turnover.
Statistics show that housing and commercial unit
construction costs were covered within less than five years on average against 10 years at minimum for the same business in the developed countries.
"Abu Dhabi has never seen such a building and construction spree. Many projects are underway, changing not only the face of the emirate but also local economy as well."
Drivers of Abu Dhabi's real estate sector
- Record economic growth – GDP growth rate reached 17 per cent in 2007
- Increasing government spending on infrastructure projects plus strong official support for real estate investment
- Growing local demand for housing and commercial units at a time when supply is much lower than demand
- Exploding population – the number of Abu Dhabi residents is expected to hit 2.11 million in 2025 compared with 1.5 million at the end of last year
- Strong demand for both residential properties and hotel apartments
- High standards of living and incomes
- High real estate investment turnover
- Massive reforms of real estate laws that opened new horizons for investment