The move forward: Modest gains a positive sign for future growth

Despite difficult economic conditions throughout much of the world, the property market in Ras Al Khaimah has remained relatively strong. Real estate prices peaked in 2008 and have since receded, with the low point coming in 2009 and 2010. However, the sector is now recording modest gains, and industry leaders expect demand to remain fairly constant over the next several years. Demand for residential properties in particular is increasing, notwithstanding some remaining oversupply in the RAK market. Higher lending levels are a further indicator of positive conditions.

For some time expatriates outpaced locals in real estate purchases, but this trend has subsided; expatriates now sign a significant number of lease contracts. Speculative buying was common several years ago, but this trend has also changed, with end users currently buying most of the property.

MARKET ORGANISATION: There are several primary players in RAK’s real estate market. Al Hamra Real Estate Development Company (AHREDC) is a privately-owned property development firm that was set up in 2003 at the request of Sheikh Saud bin Saqr Al Qasimi, then the crown prince and now the ruler of RAK. The company focuses primarily on the residential, retail and tourism markets. Sheikh Saud is one of the company’s private investors. The Al Hamra village, is AHREDC’s flagship project, covering some 660,000 sq metres on the shores of the Arabian Gulf.

Established in 2005, RAK Properties is a public joint stock company with support from the local government. According to RAK Properties, the firm operates with roughly Dh2bn ($544.4m) of capital and aims to guide RAK’s development in tourism and real estate projects. RAK Properties has been involved in a range of projects, including residential and office space, schools, health spas, retail property, and leisure and tourism infrastructure. In addition to developing real estate, RAK Properties acts as a property manager, handing over property to buyers and managing leasing operations. According to its most recent financial statements released in late-March 2012, RAK Properties reported a net profit of Dh46.09m ($12.55m) for the first quarter of 2012, up from a profit of Dh35.6m ($9.69m) for the same period the year prior. Total equity at the end of March 2012 was Dh3.49bn ($949.98m).

Another key player in the market, Rakeen Development, was set up in 2006 under the direction of Sheikh Saud. It is the sector’s most recent entrant. The property development firm is a public joint stock company owned by RAK Properties; AHREDC; the RAK Investment Authority (RAKIA), an investment advisory and free zone owner in the emirate; Reyada Investments; and RAK Airways. According to company reports, the firm launched with Dh3.4bn ($925.48m) in assets and Dh950m ($258.59m) in paid-up capital. The company is working to find a niche in sustainable and ecological building sectors, both locally and internationally.

SUPPORT & REGULATION: Although not solely focused on real estate, RAK’s Investment and Development Office (IDO) still exerts significant influence over the market. Established in January 2003, the IDO works to determine favourable investment options and assist related investors within the emirate. RAK Properties, for example, secured a substantial long-term loan of Dh91.8m ($24.99m) from the IDO in early 2011, according to the firm’s financial statements.

While the local government is taking steps to carefully monitor and oversee the development of the property market, real estate developers operating in RAK do not face difficult regulation requirements. RAKIA created the Real Estate Regulatory Authority in 2009 with the aim of ensuring compliance with regulatory construction standards already established. The oversight body also makes sure that RAKIA developments fully comply with contract clauses.

BY THE NUMBERS: The real estate and business services sector contributed an estimated 7.2% of RAK’s total GDP in 2010, according to recent data from the RAK Department of Economic Development (RAK DED). Though this figure is down slightly from 2009, when the industry contributed roughly 7.6% to the GDP, the sector has not contracted. Real estate and business services accounted for around Dh1.26bn ($343.31m) of GDP at production factor cost in 2009, and an estimated Dh1.27 ($344.44m) in 2010.

The RAK DED calculates that the production value of the real estate and business services sector reached Dh1.74bn ($472.27m), or 7.6% of the emirate’s overall economy in 2010. This represents a slight improvement from 2009, when the real estate and business services sector totalled roughly Dh1.59bn ($433.61m), or 7.5% of the economy. Gross fixed capital for the real estate and business services industries rose to an estimated Dh773m ($210.41m) in 2010 from Dh749m ($203.88m) the previous year. In terms of the overall economy, however, this figure shrank slightly from around 13.2% in 2009 to an estimated 12.5% of the emirate’s economy in 2010.

RENTS: Average annual rental rates for a one-bedroom apartment in RAK fluctuated between Dh23,000 ($6260) and Dh28,000 ($7621) during the fourth quarter of 2011, according to recent figures from Asteco Property, a Dubai-based firm. (Other firms, such as AHREDC, quote slightly higher amounts.) One-bedroom apartment rate averages were relatively similar in the other Northern Emirates. In Sharjah, for example, a one-bedroom flat cost between Dh20,000 ($5444) and Dh32,000 ($8710) on average during that period.

Average rental rates for a three-bedroom apartment in RAK were between Dh40,000 ($10,888) and Dh45,000 ($12,249) in the fourth quarter of 2011. RAK rates registered near the top of the market in the Northern Emirates, with three-bedroom flat rates in Sharjah averaging slightly higher than those in RAK, and rates in Ajman averaging somewhat less than those in RAK. Rental rates in the emirate have increased moderately by 5-8% over the second quarter of 2011, according to figures from AHREDC.

RESIDENTIAL MARKET: A number of key residential developments are currently under way in RAK. For example, the Dubai-based Select Group is developing a group of six buildings on Al Marjan Island – a cluster of five manmade islands near the Al Hamra area outside of RAK City, known as the Pacific. As of January 2012, construction on the mid-rise buildings was developing smoothly. Despite relatively difficult conditions in the real estate market during 2009 and 2010, the Pacific project has not been put on hold or scaled back.

Al Hamad Contracting Company is building the development, which is valued at $272m, according to recent figures from Zawya, a business intelligence firm in the Middle East and North Africa (MENA) region. With almost 70% of the Pacific properties sold, the Select Group aims to now sell the remaining 30%, with efforts primarily focused on expatriates. The Pacific includes studios and, one- and two- bedroom flats, in addition to golf suites and town houses. The firm hopes to earn Dh700-800 ($190-217) per sq foot.

MIXED-USE DEVELOPMENTS: Mixed-use developments make up a significant portion of RAK’s residential market, and several major projects have recently been handed over to buyers. RAK Properties began building the Mina Al Arab project in 2005 with the aim of creating a self-sufficient community in the emirate. The development covers 325 ha of land and is located outside of RAK City on 900 metres of private coastline. Roughly 60% of the development is either open or landscaped. Valued at $10bn by RAK Properties, the original plans call for a range of developments, including 3500 apartments, 388 villas and a number of office spaces, hotels and retail shops.

The project was modified somewhat, however, following the onset of the global economic downturn several years ago. Though the scale has been decreased, the development at Mina Al Arab is nevertheless moving ahead and a significant number of residential units have already been handed over.

By July 2010 RAK Properties had handed over 93 Mina Al Arab villas, and by mid-2011 the firm completed another 214, bringing the total to 307. In October 2011 RAK Properties began selling apartments in six of the development’s 20 apartment buildings, and apartments in all 20 buildings was due to be handed over by June 2012, according to the company. In addition to developments in the residential side of the project, retail shops at Mina Al Arab are starting to open.

TALL TOWERS: The twin Julphar Towers, another major mixed-use project for RAK Properties, are the tallest buildings in the emirate and provide residential, retail and office space. Construction on the 43-storey buildings began in 2006. The office tower includes 468 offices, and the residential tower is made up of 349 apartments, ranging from studios to four-bedroom flats and duplexes. Tri-level podiums with food and retail outlets are located at the base of each tower.

Property hand-over has begun, with around 75% of the residential tower has been sold in addition to more than 60% of the office tower. Retail space is also being sold. With free-zone status, the office tower offers business leaders an added incentive to lease space.

The Al Hamra Village is another large mixed-use real estate project currently under way in the emirate. Worth an estimated $1.9bn, the project is being developed by AHREDC and, in addition to residential properties, includes a golf course, a marina, two hotels (the Al Hamra Fort Hotel and Beach Resort and the Al Hamra Palace Hotel), the Al Hamra Mall and the Al Hamra Convention Centre. The properties are being developed in four phases. Work on the first phase began in 2005 and includes duplex townhouses overlooking the golf course. These were completed in 2008. Phase two began in 2005 and focused on building two types of villas – the smaller has a built-up area of 182 sq metres and the larger has a built-up area of 421 sq metres. Recently completed, phase three includes five apartment buildings, which will bring the total number of apartments in the Al Hamra Village to 2444. Townhouses and villas currently number 1089.

Over 80% of the phase three apartments have now been sold, according to recent data from AHREDC. Roughly 10% of the remaining unsold property will be leased to renters, and the other 9% will be sold. General occupancy for the project as a whole has reached 84%. AHREDC recently reported that its average selling price per sq metre is usually around Dh7000 ($1905).

With construction on phase three successfully completed, AHREDC has announced plans to commence part of phase four, which will include a Waldorf Astoria hotel, as well as a golf course, private beach and convention centre. AHREDC reports that a substantial number of Al Hamra Village buyers come from Europe. Another large segment of property buyers comes from the GCC region, composed of many who are looking to purchase a second home or holiday residence. Some owners are expatriate companies that buy residential properties for their employees. UAE law requires businesses to either supply employees with housing or to provide them with a housing stipend.

AFFORDABLE HOUSING: The procurement of appropriate housing for UAE nationals is a priority for the federal government, and the Sheikh Zayed Housing Programme (SZHP) is at the forefront of this effort. Though much of the MENA region is suffering from a lack of affordable housing, the Northern Emirates have largely avoided this problem. Operating with a budget of Dh1.3bn ($353.86m) in 2011, the SZHP provides three general services: interest-free loans for individuals building or purchasing a new home, as well as for those carrying out maintenance and expansion work on an existing home; non-refundable grants for those buying, building, maintaining or expanding a home; and government housing. One complex of housing built by the SZHP is located in Khett, about 20 minutes outside of RAK City. Construction of the cluster of 30 homes cost Dh14m ($3.81m) and was completed in 2007, according to the SZHP. Funding for both SZHP loans and grants comes from the Sheikh Saud Housing Programme (SSHP) at the local level.

According to the most recently available data from the RAK DED, the SZHP provided housing assistance to 933 individuals in 2010 at a cost of Dh461m ($125.48m). During 2006-09, the vast majority of beneficiaries received loans. However, this trend reversed itself in 2010, with the majority of beneficiaries, numbering 660, collecting SZHP grants and only 273 receiving loans. The programme provided assistance to over 4000 RAK citizens between 2006 and 2010, with Dh19.9bn ($5.42bn) spent on the effort.

MORTGAGE MARKET: In addition to direct assistance from the SZHP and SSHP, developments in the mortgage market should further boost the emirate’s residential sector. In October 2011 RAK Properties and United Arab Bank (UAB) signed an agreement that will enable buyers to access financing for properties. Under the agreement, UAB will offer mortgages with a 3.99% interest rate and customary sharia-compliant options, and loans will be granted at up to 85% of the property value. RAK Properties already has three other financing agreements in place with other banks, and AHREDC also has memorandums of understanding worked out with several local and foreign financial institutions.

TOURISM: The local real estate market has the opportunity to benefit from the emirate’s growing tourism industry, as the demand for hotel rooms and dining and entertainment facilities creates significant investment options for property developers. Most of RAK’s large development firms have recognised the potential in tourism-related projects and are in a position to capitalise on the industry’s potential.

According to recent data from the newly established tourism oversight body – the RAK Tourism Development Authority (RAK TDA) – over 800,000 visitors travelled to RAK in 2011, compared to roughly 600,000 in 2010. More importantly, RAK TDA expects around 1.2m to visit the emirate in 2013, indicating that tourist numbers should double in just two years time.

As increasing visitors travel to RAK, several key tourism infrastructure projects are under way. For example, Rakeen, a local government-backed developer, is in the process of building the Bab Al Bahr project on Al Marjan Island. In addition to 632 hotel rooms, the development will include apartments and office and retail space. The first part of the project was handed over to investors in March 2011 and consisted of 136 studio apartments, 356 one-bedroom apartments, 236 two-bedroom apartments and 104 three-bedroom apartments. The project’s second phase will include a five-star beachfront hotel. The project is scheduled to be finished by October 2012, and, according to an early estimate by Rakeen, the development will cost roughly $330m. Lending options will be available to buyers through India’s Bank of Baroda.

Both the tourism sector and the local property market should benefit from planned expansion at the Al Hamra Mall, which is part of the Al Hamra Village development. The mall is scheduled to be completed sometime between December 2012 and January 2013 and will include an entertainment centre and cinema. “Adding the cinema complex and entertainment centre at Al Hamra Mall will not only increase the value of the mall itself, but will also enhance the surrounding community as a whole,” said Barry Ebrahimy, the head of sales and marketing at AHREDC.

CHALLENGES: RAK’s property market has done reasonably well considering the economic upheaval of recent years, but the sector still faces a number of challenges. Demand is likely the largest obstacle, and much of this problem can be attributed to the 2008-09 financial downturn. With homebuyers taking advantage of unusually low property prices in Dubai rather than investing in the Northern Emirates, the RAK market has not fully recovered to pre-crisis levels. Fortunately this shift towards the Dubai market should ease as the emirate’s real estate sector strengthens.

High utility connection costs pose another challenge for RAK’s real estate sector. AHREDC reports that connection fees in RAK are as high as Dh1200 ($326.64) per KV-amp as of early 2012. Not only have costs risen, but expatriates moving to RAK are typically accustomed to paying much lower rates, though prices in RAK are similar to those elsewhere in the Northern Emirates. In the other emirates, connection charges are added to the purchase price of real estate, whereas in RAK, connection fees are charged separately.

Power outages have also occurred more frequently, as infrastructure appears to have not kept pace with population. “As more residential units enter the market, the importance of providing adequate facilities and amenities has become increasingly clear, and a major consideration in judging the overall appeal of real estate offerings for both end-users and investors,” said a report on the sector from international real estate firm CB Richard Ellis.

The federal government does have plans to update its utility infrastructure. In March 2011 the government approved Dh5.7bn ($1.55bn) for building further water- and electricity-related infrastructure over the next five years in the Northern Emirates.

OUTLOOK: Despite the recent financial crisis and the market repercussions that accompanied it, RAK’s real estate sector is steadily moving forward. A number of successes in 2011 stand out, including the new handovers at Mina Al Arab, the Julphar Towers and the Al Hamra Village mixed-use developments. With 70% of its residential units sold, the Pacific is also making notable progress. The SZHP is helping UAE nationals purchase homes and lending options are increasing.

Challenges such as utility infrastructure and lower levels of demand still need to be overcome, but such obstacles should not significantly slow down the sector’s growth. “Property demand has weakened since the asset bubble burst in 2008; however, the market in RAK has held up, and we maintain a positive outlook for 2012,” Ebrahimy told OBG. Indeed, the emirate’s real estate sector appears to have endured the economic crisis well and is now set for steady growth.