Returns for realty forecast to be 15%

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The real estate market in Dubai is underpinned by very strong fundamentals and investors can expect a 15 per cent return in 2008, said a report by Standard Chartered Bank.

“Put simply, demand outweighs supply and the market will be under supplied for years to come,” said the study. “Our view is that we will see growth rates of around 15 per cent in real estate prices this year. We would view any rise above this as a sign of overheating.

“When it comes to the real estate sector there is a concern that the market is overheated, prices are excessively high and that an irrational bubble has formed. In contrast, our view is that the market is underpinned by very strong fundamentals.”

However, the bank warns that excess liquidity and high inflation could lead to overheating. “With inflation running at 10 per cent and interest rates [at less than three per cent] tracking the United States under the currency peg framework, the demand for real estate is high.”

The report stresses the need for some form of monetary tightening to regulate the boom in the sector.

“This cannot happen without reforming the current dollar peg, either through a revaluation or a depegging, or both,” it adds.

The US Federal Reserve last week cut its interest rates again to boost the money supply in order to lessen the impact of the credit crunch and economic slowdown. Since the UAE dirham is pegged to the US dollar, the expansionary policy of the Fed is automatically imported to the Emirates.

This translates into lower interest rates, which rewards the borrower. But with it comes the danger of speculative inflows into the housing market, said the report.

In simple terms, this means banks in the UAE will be forced to lend at lower interest rates, adding to the already excessive liquidity in the market. This is bound to add fuel to Dubai’s already hot property market.

Moreover, imported inflation comes with the dollar peg and as the dollar – and with it the dirham – continues to fall, the cost of construction material is witnessing an upward spiral. This problem has been plaguing not only Dubai but also the rest of the GCC as the region witnesses a construction boom thanks to the high oil prices. Add to that labour shortages and the situation seems volatile, said analysts.

According to the Middle East Economic Digest, five years ago an Indian worker could earn as much as 400 per cent more in Dubai than he could hope to receive back home. But because of currency movements, rising inflation and the boom in India it is now estimated that the same worker can expect to earn just 40 per cent more – a 10th of the figure five years ago.

This is causing upward pressures on wages as well as labour shortages.

Last November, a major strike at the Burj Dubai site by labourers working for one of the largest contractors in the region led to a 20 per cent salary increase, a rise that rapidly spilled over to other sites.

Rising prices of building materials are also a problem.

Shortages are leading to more imports and the weak currency is exacerbating the problem. The price of cement rose by 25 per cent in just one week early this month, forcing some projects to be put on hold, said the report.

The problem of raw material shortages could be gauged from the fact that His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, exempted cement and reinforced steel from customs duties until further notice all over the country.

With projects in the infrastructure and property sectors worth billions of dollars under way in GCC countries, higher construction costs and shortages of workers have raised alarm not only in the UAE but across the region. However, despite these concerns, experts said the market is underpinned by very strong fundamentals – and this applies to both residential and commercial properties. The demand for land is also high, according to Gowealthy.com weekly land sales in Dubai reached Dh1.177 billion last week.

And, surpassing the previous week’s biggest single sale of Dh99 million for a plot on Sheikh Zayed Road, a similar site in the same locality sold for Dh115m on March 17.

The 55km strip of land between Jebel Ali and the  World Trade Centre is turning out to be the most lucrative area for investment in the emirate. Al Ruwayyah district has recorded the highest number of real estate sales – 96 – this month so far, followed by Palm Jumeirah – 35 – said Gowealthy.

In the commercial sector, occupancy rates are around 97 per cent to 99 per cent – among the highest in the world. The kind of growth the Business Bay area has witnessed remains unprecedented. The sales price per square foot in this area has reportedly risen by 90 per cent in 2007, on  par with property prices in London.

The market expects a significant rise in the supply of office space in the next 18 months to 36 months, which could ease price pressures, but the prices should not fall given the level of demand.

As far as the residential sector is concerned, demand remains high compared with supply. And prices are expected to remain high on the back of higher-than-expected population growth and a fall in the number of properties coming on the market. “Net new demand for residential units is estimated at around 70,000 a year, but the supply is only 57,000 units,” said the report. “Industry insiders suggest that only a third of the residential units planned for 2007 have been delivered.”

Bottlenecks in the supply of materials and the market structure are to blame for delays in some projects.

“The market is dominated by a small number of developers who pre-sell the properties before construction begins. If pre-sales slow down then construction slows down as well, and this acts as a natural stabiliser for the market.”

The market micro-structure also has an impact on rents, keeping them high.

Current rental yields in Dubai are relatively high, between seven and more than 10 per cent depending on the size of the unit. This compares to less than three per cent in the West.

In fact, the market is witnessing low occupancy rates only in those developments where investors prefer to keep their properties vacant in order to cash out in the near future rather than rent it out and “get stuck” with an annual contract, said a real estate broker in Dubai.

Population growth has added to the demand for properties. The growth is estimated to have averaged seven per cent year-on-year in past years but this has now gone up to 10 per cent.