Many have asked this question before, and many are wondering if we are really living a bubble in the real estate market in Dubai. This article is meant to shed some light on demand, supply and overall macroeconomic data, which will help answer this question.
Dubai as an economy has witnessed significant growth and diversification through continuous non-oil GDP growth recorded in sectors like real estate, finance and tourism. Available market data shows that Dubai economic growth has recorded a Compound Annual Growth Rate (CAGR) of 18 per cent over the past seven years with GDP exceeding $54 billion at the end of 2007. The Government of Dubai has announced the "Dubai Strategic Plan 2015" with a goal to grow GDP to more than $100bn by 2015, and has revealed a plan with significant investments to support infrastructure and the increasing demand for real estate, tourism and leisure sectors. Commitment to this plan is coming with a significant enhancement to the regulatory framework that is moving in the right direction to support future growth.
Population has grown more than 7.5 per cent annually over the past five years (currently at 1.6 million) and is expected to continue growing to exceed two million by 2010 according to Government statistics. Expatriates comprise more than 85 per cent of the population, and the recent explicit announcement of the possibility of granting a visa with the freehold investment will encourage more to consider Dubai as home.
A commitment from foreign institutions (mainly banks) is stronger than before with many relocating their offices to Dubai or opening their Middle East hub in Dubai.
GDP per capita is strong and the level of disposable income is high supporting the spending power. Available research supports the fact that Dubai real estate market is still attractive at current prices if looked at from the GDP per capita to selling prices angle compared to other markets like Hong Kong, Singapore, Japan and France. Furthermore, mortgage is coming heavily into the real estate market, which will help increase affordability and encourage residents to buy their own home instead of renting, especially with the continues increase in rent rates. Market statistics show that rent in Dubai has increased more than 15 per cent year over year despite the current rent cap of five per cent. According to market research, mortgage to GDP data show that mortgage penetration in the UAE in general and Dubai in specific is very low compared to other areas (5.9 per cent in UAE compared to 130 per cent in the US, 70 per cent in the UK and 10 per cent in Mexico). The above covers the demand and macroeconomic sides. Let us look at the supply side.
Considering the real estate boom that Dubai has seen in the past five years, significant supply has been committed to and is expected to come soon. Delays in construction activity, due mainly to capacity limits at the contractors side, has pushed the supply further allowing the demand/supply imbalance to continue, which caused the prices to continue to rise.
According to available research, more than 150,000 residential units, accompanied by more than 60 million sqft of office space and more than 15 million sqf of retail space are coming to the market by 2010. This should help restore the demand/supply balance and accordingly ease prices. Available research shows that the majority of the office and retail space is already pre-sold or pre-let, and that the question lies with the occupancy of the residential space coming and whether this will drive a correction in the overall market.
Available research further shows that the majority of the coming residential units are coming in the form of high-end apartments in high-rise buildings (a segment that is believed to be under pressure should delivery happen on time as planned). Low-rise apartments within communities and villa type residential units on the other hand have not yet been fully serviced and demand on these two segments is likely to continue to be strong.
Looking at the full picture shows that the demand is very strong considering the population growth, the Government commitment and the planned spending, the affordability and the low mortgage penetration in an environment of negative real interest rates. Supply on the other hand is significant and should it come on time as planned, it may cause the market to correct on the residential side. It is believed that any potential correction will heavily relay on the timing of the supply and the mismatch between the coming supply and the expected demand.
Available research supports the market capacity to absorb the office and retail supply. It further shows that significant residential real demand is concentrated in the medium to low income category of customers (who are currently living and working in Dubai and will be attracted to buy to ease the pressure of rental increase on their income). This demand is believed to be smart and not speculative and is interested in apartment type of products that are (a) value for money product and (b) will be delivered as promised. High income customers will continue to be more attracted to villa type products than high-rise luxury apartments. According to the above analysis and available market research, it is believed that should we see correction; it will likely be in a specific market segment and not the overall real estate market. This will heavily depend of the timing of the supply and the degree of the mismatch between the supply coming and the demand expected. Fundamentally, the market is strong and the right product will attract the right demand.
Zaid S Ghoul is Chief Financial Officer with Union Properties