Value for money: Market maturation has led to expansion in the residential segment in recent years

In late 2011 Dubai’s real estate sector began to show solid signs of recovery, led mostly by the residential segment, which has benefitted from increasing demand and rising prices. In the first quarter of 2012 the sector posted growth of around 4%, making it the best performing real estate market globally for that period, as per the Knight Frank Prime Global Cities Index.

“Occupiers and investors appreciate the fundamental economic indicators present in Dubai, which because of the quality of its infrastructure and labour pool, is an advantageos option in the region,” said to Nicholas Maclean, the managing director of the Middle East at CB Richard Ellis (CBRE) UAE.

Indeed, the recent expansion in Dubai’s residential real estate segment is representative of the maturation of the market as a whole. Local developers are steadily adopting a more long-term investment mentality, both as a result of straightforward market forces and a series of new government regulations aimed at improving transparency. The jump in market activity in the residential segment since mid-2011 is widely considered a direct result of these changes. Properties that offer affordability, high-quality build and, perhaps most importantly, good locations have seen greater demand. Overpriced buildings located on the outskirts of Dubai, or those with low-quality builds, meanwhile, have seen little change in activity over the past year.

IN FIGURES: According to data from Jones Lang LaSalle (JLL), a multinational real estate and property management firm, at the end of the second quarter of 2012 the total residential stock in Dubai reached 344,000 units, up around 3000 units from the first quarter of the year. A further 24,000 units are due to be delivered before the end of the year, though some of these projects could potentially be delayed. Both sale and rental prices for villas and apartments in Dubai have risen since the beginning of 2012. As of May 2012 villa sale prices in prime areas had jumped by around 21% year-on-year (y-o-y), and were around 9% higher than those in early 2008, according to JLL data. Concurrently, apartment sale prices were up around 1% in the same period, but down some 18% from early 2008 prices. Data released by Cluttons shows that sales prices at mid-range villas in Victory Heights and Arabian Ranches, for example, rose by 18.5% in the second quarter of 2012 compared to the same period in 2011, which was the single highest y-o-y increase since late 2008. Average residential rents in Dubai increased by 9% for villas and 6% for apartments in the second quarter of 2012, according to a 2012 report by Asteco, a UAE-based property management firm. High-quality apartments in established communities, including Dubai Marina and Downtown Dubai, meanwhile, saw rent increases of approximately 10%. By May 2012 villa rental rates were up by around 5% from early 2009 figures, while apartment rental rates remained down by around 30%, according to JLL.

With respect to data released by CBRE and the Dubai Land Department (DLD), the latter of which is the emirate’s property regulation and management arm, there were 3165 residential transactions in the second quarter of 2012, up 15% from 2745 transactions in the first quarter of the year. The total value of transactions jumped from Dh3.1bn ($834.82m) to Dh4bn ($1.09bn) over the same period of time.

The improving rental market in Dubai has attracted a considerable number of buy-to-let investors. As of mid-July 2012 average rental returns in Dubai were extremely favourable, and stood at around 8.44% during the second quarter of 2012, compared to about 7.7% in London late in 2011, as noted by Reidin, a Dubai-based real estate intelligence firm. A handful of developments in the emirate offer returns in excess of 8.5%, including The Greens, with annual returns of 9.37% in mid-2012; Jumeirah Lakes Tower, which offered 8.82%; and Discovery Gardens, at 8.63%.

SOLID FUNDAMENTALS: The residential market’s expansion over the past year is primarily a function of Dubai’s solid real estate fundamentals. The rapid growth of the sector in the years leading up to the 2008-09 downturn resulted in a concentration of developers, property managers, brokers, construction companies and other real estate-related firms in the emirate. While this talent pool has contracted in the years since the crisis, as of September 2012 Dubai was home to over 6000 real estate companies, according to the Real Estate Regulatory Agency (RERA), the government regulator, making it one of the largest markets in the region.

PENETRATING NEW MARKETS: As of mid-2012 the emirate’s largest developers continued to be very active in a handful of growing foreign markets, specifically Saudi Arabia and Asia (see Construction chapter). Forecasts by Saudi-based National Commercial Bank indicate that the kingdom is on course to spend SR234bn ($62.39bn) on new projects in 2012 alone. Indeed, a recent announcement by the Saudi government highlighted that the country needs to build 200,000 new homes on an annual basis to keep up with the rapidly expanding population in the coming years. According to CBRE, the kingdom is also at present the largest spender on education globally on a per capita basis. In fact, budget plans for 2012 included the planned construction of 700 new schools, as well as a significant number of universities and other large-scale integrated education projects. At the time of writing, a variety of Dubai-based developers were currently involved in projects in the kingdom or are looking at expanding into the country, including Emaar, Nakheel, Damac and Majid Al Futtaim Properties, among others.

Dubai’s reputation as a mature and transparent operating environment means that most developers are likely to continue to base their headquarters in the emirate, even as an increasing percentage of their activities over the coming decade may take place outside of the UAE. The government has worked to boost this reputation recently by introducing several new laws and regulations to improve transparency in the market. A new Investor Protection Law (IPL), set to be introduced by the DLD in the first quarter of 2013, is likely to have a positive impact in a number of areas. The IPL will allow owners to cancel contracts if a developer does not meet the stipulations laid out in a buyer’s agreement document or if the property is delivered late, for example. Additionally, the law will require that 20% of project development must be completed before a developer can begin selling the property, which is meant to reduce instances of cancellation after deposits have been made. “The IPL is the first law of its kind regionally and globally,” Sultan Butti bin Mejren, the director-general of the DLD, told OBG. “The DLD has devoted a significant amount of time and effort collaborating with a wide range of parties in the real estate market, as well as consulting and legal firms, to produce a text that meets Dubai’s ambitions in protecting investors.”

GROWTH DRIVERS: Population growth in the UAE is expected to be a major development driver for the residential real estate market in the coming years. Forecasts from the Abu Dhabi Chamber of Commerce show that the UAE’s population is will expand to 7.6m by the end of 2012, up 5.6% from 7.2m at the end of 2011. Expatriate residents make up nearly 90% of the population, and are predicted to account for a substantial percentage of the population growth in 2012.

According to a mid-February 2012 report released by QNB Capital, a Qatar-based investment house, the UAE has registered the fastest population growth across the region over the last decade. In 2004 the country’s population made up 11.3% of the total population of GCC states – by 2013 this number is due to grow to 18.2%. These figures point to solid long-term demand for residential real estate in Dubai for years to come.

The local residential property market has also benefitted from the Arab Spring in 2011-12. Like Qatar and Saudi Arabia, the UAE has remained stable throughout the regional unrest. Consequently, the emirate is considered a safe haven in an at times volatile region, especially among investors and businesses that have been affected by the upheaval in other parts of the Middle East, such as Egypt and Syria, among others. With this in mind, Dubai has seen a boost in economic activity in recent years, as money and business from elsewhere in the Middle East has shifted to the UAE. The growth in the residential real estate market in 2011 and early 2012 is closely linked to this inflow of foreign capital.