A changing picture: With recovery in full swing, long-term growth is on the cards

The real estate market is poised for improvement in 2012 and 2013, as the emirate works to regain its reputation as a leading regional destination for investment.

The sector has recovered a substantial percentage of the losses suffered in the aftermath of the 2008-09 global economic downturn, although the scale of the market correction in those years should not be underestimated. According to a November 2012 Standard Chartered report, in 2006 Dubai’s real estate and construction sectors accounted for around 20% of GDP (and indirectly much more); by 2011 they contributed about 12%. While property prices have dropped significantly from their peak – as much as 50-60% in some cases – they are now showing signs of stabilisation, and importantly, much of the demand is being driven by end-users and long-term investors, not speculators.

CORRECTION: Some of the major consequences of the 2009-10 correction included falling sale prices, a considerable drop in apartment rentals, the exit of several real estate firms from the market, as well as a reduced talent pool, including developers, property managers, brokers and construction companies that have relocated to other markets. Although activity in Dubai is not expected to reach pre-crisis levels in the near future, the medium- and long-term outlook is fairly stable, according to most developers and other sector participants with whom OBG spoke.

“A few years ago Dubai went through a reverse migration and saw buyers leaving the market,” Sailesh Jatania, the CEO of Dheeraj & East Coast, told OBG. “Today, there is an influx of migration occurring between the Emirates and this has caused a rise in demand in Dubai’s finished properties market.”

Recent activity has been centred on the residential, retail and tourism segments, which are expected to continue as major contributors to growth for the foreseeable future. While the industry has made solid progress since the crisis, it does face a number of ongoing challenges. A handful of large mixed-use projects have been on hold since 2008, including: The World, Palm Jebel Ali, Palm Deira, The Universe, Dubai Waterfront, Tatweer Dubailand, Dubai Maritime City and Dubai Trade Centre Jebel Ali, among others (see analysis). As of October 2012, the delay of such projects had an estimated value loss of some $410bn. The office market, which was a major source of activity in the years leading up to the downturn, remains considerably oversupplied. Similarly, with several large tourism-related projects now under way, the hotel segment could become oversupplied in the coming years. Finally, some developers continue to have trouble finding financing for new projects, given that many banks remain cautious about lending in the post-credit-crunch environment.

STABILISATION: Despite these issues, most developers and other real estate players are looking ahead to growth going forward. According to Hesham Al Qassim, CEO of the property management group Wasl, “Dubai has a young real estate market that is still maturing. However, the correct rules are in place, and year-after-year the market continues to stabilise.” He went on to add, “The owners association is working on educating and regulating the market, which will take time. All the pieces are here and eventually investment will return to pre-crisis levels.”

Many developers have recently restarted work on projects that have been on hold since 2008, in addition to launching new projects in multiple segments. Demand is rising for high-quality, centrally located residential space, and as major multinational firms look to set up shop in Dubai, the office segment is expected to turn around as well. Similarly, over the past half-decade the emirate has worked to burnish its reputation as a major tourist destination, which has benefitted the hotel segment in particular. As such, the real estate market is expected to continue to grow for the foreseeable future.

OVERSIGHT & REGULATION: A variety of government entities are involved in regulating and managing the local real estate sector. The Real Estate Regulatory Agency (RERA), which was launched in July 2007, has a mandate to draw up, implement and enforce the emirate’s real estate regulatory regime. The agency, which falls under the umbrella of the Dubai Land Department (DLD), works closely with other government agencies to boost foreign investment in the local real estate sector. Since the 2008-09 downturn, RERA has worked to implement new laws in an effort to sufficiently protect investors and tenants, while simultaneously ensuring that developers are able to remain solvent and in good standing. According to the accounts of most local players, the agency has successfully balanced these opposing tasks over the past five years.

“Investors, both private and institutional, are looking very closely at the Dubai market in particular,” said Nicholas Maclean, the managing director of the Middle East at CB Richard Ellis (CBRE) UAE, a multinational property services firm. “The significant improvement in international commercial occupier activity has lead, for the first time in three years, to an increase in rental rates for the best quality and best located assets.”

LEGAL REFORM: RERA has implemented a variety of new policies in recent years. In January 2009, for example, the agency introduced a new rental law, which put in place a rent based on rental rates, with the goal of protecting tenants from large price hikes in the wake of the downturn. More recently RERA has levied a large number of fines on real estate companies that have not abided by the emirate’s real estate laws. In the first six months of 2012, for example, the agency fined 22 brokerages and other property firms a total of Dh900,000 ($244,980). In mid-September 2012 RERA announced that it would soon release an updated licensing legislation package, which is expected to result in greater protection against fraud for tenants, investors and owners alike. In addition to offering professional training for brokers and other real estate players, RERA recently began work on a real estate arbitration centre, which is expected to be up and running by the end of 2013. The agency’s efforts have paid off – in Jones Lang LaSalle’s (JLL) 2012 Global Real Estate Transparency Index, Dubai was ranked as the most transparent real estate market in the Middle East (ranked 47th worldwide out of 97 markets in total).

In addition to RERA, the DLD, which serves as the government’s main property management arm, oversees a variety of internal departments and agencies, including the Dubai Real Estate Institute, the Real Estate Appraisal Centre (Taqyeem), and a real estate investment and promotion division. The DLD also works with developers, brokers and other firms involved in the sector. The department has introduced various initiatives in recent years, with the goal of boosting activity in the market after the 2008-09 slowdown and ensuring that investors and end-users are protected. The Tanmia initiative, for example, was launched in September 2011 to reactivate activity at stalled projects, by and large through attracting additional investors (see Construction chapter). The DLD’s new Investor Protection Law (IPL), which is likely come into effect during the first quarter of 2013, is hoped to have a positive impact on investment in the sector (see analysis).

BY THE NUMBERS: Dubai has one of the largest real estate markets in the Middle East. As of mid-September 2012 the emirate was home to more than 6000 real estate companies, around 200 of which were licensed for property management and leasing, according to RERA. Market activity has improved substantially over the past two years, led by the residential, retail, tourism and infrastructure segments. According to data from the DLD, land transactions in the emirate reached Dh63bn ($17.15bn) in the first half of the year, up 21% from the same period the previous year, and equal to around 133 transactions per day. According to a recent CBRE report, “A notable rise in sentiment has been evident from both owners and investors and this has resulted in some localised price growth for a number of well-positioned products.” Indeed, increasing activity in the prime residential and hotel sectors, along with continued strong demand for prime retail space throughout the emirate, has resulted in a steadily improving outlook since at least mid-2011. The Dubai Economic Council forecast GDP to grow by 4-5% in 2012, up from 3% in 2011, due mostly to trade activity and the growing tourism sector, which bodes well for future real estate expansion. The IMF has estimated lower figures of 2.5% for Dubai and 3.5% for the UAE, respectively. Meanwhile, data from the Institute of International Finance, a global association of financial institutions, indicates that GDP for the UAE grew by 4.7% for 2011, which was up from 3.2% in 2010 and 3.7% in 2009.

OFFICE SPACE: The office market, meanwhile, remains substantially oversupplied, and has not recovered to the same extent as the residential segment. As of the end of the second quarter of 2012 Dubai boasted around 6.1m sq metres of office space, some 60% of which was located in single-owner buildings, while the remaining was under strata ownership, according to JLL. Nearly half of the office space in the emirate (47%) is in free zones, and in particular the Dubai International Financial Centre (DIFC), which is home to a substantial percentage of total supply. Since the beginning of 2009 the amount of office supply available in the emirate has nearly doubled, almost entirely as a result of projects launched before the downturn. Around 1.4m sq metres of new supply is expected to be completed before the end of 2013, according to JLL, and an additional 2.2m sq metres of office space is currently on hold.

Demand for affordable grade-A space in central locations, such as the DIFC, has remained relatively consistent since 2009. Prime rents in the DIFC have stayed fairly stable in late 2011 and 2012, at around Dh2370 ($645) per sq metre, compared to Dh1615 ($440) in other central areas. Similarly, the DIFC and other grade-A developments have maintained relatively high occupancy rates in recent years. The overall vacancy rate in the central business district is currently around 35%. Demand remains especially low for secondary grade-B and -C space, particularly in undeveloped and newly developed areas outside the city centre.

HOTEL & RETAIL: The hotel and retail real estate markets have performed well over the past half-decade, and have become major earners for many developers.

Super-regional shopping centres, which are defined as malls that hold above 74,000 sq metres of gross leasable area (GLA) and at least three anchor stores, comprised 64% of Dubai’s total GLA of 2.8m sq metres at the end of the second quarter of 2012. Mall of the Emirates and Dubai Mall, the largest malls by a substantial degree, both enjoy occupancy rates above 90%, steady footfall and solid returns (see Retail chapter).

While the retail segment is relatively saturated, Dubai’s large malls – most of which are operated by the developers that built them – are expected to remain major economic contributors in the long term. Dubai Mall, for example, is owned and operated by Emaar Properties, a government-owned developer, while Mall of the Emirates is headed by Majid Al Futtaim (MAF) Properties, the real estate arm of MAF Holdings, one of the largest private developers in the UAE.

The hotel segment has benefitted from Dubai’s rapidly expanding tourism market, which is a cornerstone of the emirate’s economy. As of the end of the second quarter of 2012 the emirate was home to 54,250 rooms, up slightly from 53,400 rooms during the same period the year before, according to JLL. Indeed, a number of new hotels are expected to open before the end of 2012, adding 4500 rooms in total. According to JLL, average hotel rates rose by around 7% in total during the first five months of 2012 on a year-on-year (y-o-y) basis, while beach hotels have seen rates jump by about 10% over the same period. Occupancy rates, meanwhile, have increased y-o-y over the past four years, reaching 83% in the first half of 2012, up from 79% in 2011, 76% in 2010 and 73% in 2009 (see Tourism chapter).

MAJOR PLAYERS: The three largest developers in the emirate are Emaar Properties, Nakheel Properties and Dubai Properties Group, all of which are government owned. Emaar, the single largest real estate development company in the Gulf, was founded in 1997. As of the end of 2011 the company had total assets of around Dh60bn ($16.33bn). A full one-third of this total is wrapped up in Downtown Dubai, the firm’s flagship project, which is home to Dubai Mall, Dubai Fountain and the Burj Khalifa, the tallest building in the world as of late 2012. While the aforementioned parts of the project are completed, a number of other components of Downtown Dubai are currently under construction, including a substantial amount of new grade-A residential and office space. In addition to Downtown Dubai, Emaar is responsible for a variety of other major master-planned projects in the UAE. These include Dubai Marina, Emirates Hills, Emaar Towers, Mushrif Heights, The Greens, The Springs, The Lakes, The Views, The Meadows, Umm Al Quwain Marina and Arabian Ranches. Emaar is active in major developments throughout the Middle East and further afield as well. Indeed, the property group has expanded its operations as far as China and Indonesia. In 2011 the firm pulled in total revenues of Dh8.11bn ($2.21bn). The retail sector contributed 26% of total revenues, while the hotel and hospitality segment accounted for 15%.

Nakheel, which was founded in 2000, nearly defaulted in wake of the 2008-09 downturn. A number of the group’s major projects were put on hold, including Palm Jebel Ali, Palm Deira, The Universe and Dubai Waterfront. Nakheel, in fact, needed write down $21bn worth of real estate projects. Since then, however, the stateowned company has restructured its leadership as well as undergone major debt restructuring. In August 2011 Nakheel completed a Dh59bn ($16.11bn) debt-restructuring programme, which has yielded positive results. In the first half of 2012 the firm cited profits of Dh767m ($208.77m), up 36.5% from Dh562m ($152.98m) in the same period the previous year. This was largely a result of the delivery of residential units at a handful of the company’s major projects, including Palm Jumeirah, Jumeirah Village and International City, among others. The firm also pulled in revenue from its retail properties, including Dragon Mart and Ibn Battuta Mall.

According to Ali Lootah, the chairman of Nakheel, told OBG, “Even as signs appear that the worst is over, we are now much more careful, very conservative and we don't move unless everything is carefully analysed.” Nakheel is nonetheless progressing on a number of other major projects in the emirate, including Jumeirah Park and Jumeirah Islands, among others. Dubai Properties Group, meanwhile, serves as the property division of Dubai Holdings, one of the government’s main investment arms. Founded in 2004, the company is involved in a handful of master-planned projects, including Dubailand, a global entertainment and leisure facility, and The Walk at Jumeirah Beach Residences, a large retail project. Other key real estate projects headed by Dubai Properties Group include Executive Towers, Vision Tower and the Business Bay Hotel at Business Bay; the Culture Village; and Tijara Town, among others.

PRIVATE OPERATORS: Dubai is also home to a variety of private developers including Damac Properties, MAF Properties and Union Properties, among others.

Damac, which was founded in 2002 under the Damac Group, is the largest private luxury property developer in the Middle East, having completed some 36 buildings in Dubai alone as of mid-2012. The firm currently has an additional 50 buildings under way throughout the MENA region. Major projects of the group within Dubai include the Park Towers at DIFC, The Waves at Dubai Marina and The Crescent at the International Media Production Zone, among others. In late September 2012 the firm completed the mixed-use Marina Bay building in Abu Dhabi, its first project in the emirate.

MAF Properties is one of the largest retail real estate developers in the Middle East. The firm constructed and manages Mall of the Emirates, the second-largest mall in the UAE, in addition to nine other malls in the region.

Union Properties, meanwhile, was founded in 1987 and today has total assets of around Dh5.5bn ($1.49bn). The company has been involved in a number of noteworthy projects in Dubai and elsewhere in the region.

GROWTH DRIVERS: The residential segment has delivered solid returns in a handful of central, high-quality developments, for example (see analysis), as have the hotel and tourism sectors. According to the Department of Tourism and Commerce Marketing (DTCM), the tourism regulatory body, Dubai’s hotels saw a 10% jump in business in 2011, with 9.3m tourists coming through the emirate, compared to 8.49m the previous year. According to official forecasts, expansion is set to continue for the foreseeable future. Dubai-based developers have also profited from a number of other key growth trends, including massive projects outside of the UAE, a substantial amount of foreign investment into the emirate, a focus on sustainable development, the government’s bid to host World Expo 2020 and the construction of the Mohammad bin Rashid City (see analysis). In the wake of the downturn, when many local projects were put on hold, a number of developers began to seek new opportunities abroad. As of mid-2012, leading local developers were involved in major projects throughout the region and further afield.

For example, Saudi Arabia has launched a substantial number of ambitious, large-scale housing, infrastructure and education projects in recent years. The kingdom has benefitted from the involvement of many Dubai-based developers, including Emaar and Nakheel, among others (see Construction chapter). This expansion is also evident in the joint venture between Arabtec and Saudi Binladin Group to complete a housing project in the kingdom worth Dh4.89bn ($1.33bn). Additionally, Arabtec also recently secured Dh270m ($73.49m) worth of projects in Qatar and Abu Dhabi, respectively. Both Saudi Arabia and Qatar, in particular, are likely to be significant sources of new construction contracts over the next decade. In 2011, Saudi Arabia awarded SR270bn ($63.88bn) worth of construction contracts, up 155% from 2010 and 32% from 2009. The kingdom will spend $240bn on housing alone by 2020.

According to a recent DLD study, foreign investment in real estate in Dubai reached Dh22bn ($5.99bn) in the first half of 2012, up substantially from the same period the previous year. Investors from India accounted for the largest portion of this total, buying 2153 properties for Dh3.75bn ($1.02bn) in total, followed by Pakistani investors, who purchased 1814 properties for Dh1.71bn ($465.46m), British investors (1564 properties for Dh2.53bn [$688.67m]), Iranian investors (1057 properties for Dh1.52bn [$413.74m]) and Russian investors (694 properties for Dh1.44bn [$391.97m]).

Since 2008, the Dubai Municipality has been working on the emirate’s green building regulations through a three-part regulatory framework due to become mandatory for all building permit applications by 2014. While some developers have complained of the cost of meeting new green regulations, others have embraced the new conditions, noting that energy-efficient buildings actually save money in the long term.

Finally, Dubai’s World Expo 2020 bid, which was launched in early 2012, has the potential to result in the development of a large number of new hotels, event centres and other tourism-related projects. The 2010 World Expo in Shanghai attracted around 73m visitors to the event over six months. Other competitors for the event include Izmir, Turkey; Ayutthaya, Thailand; Yekaterinburg, Russia; and Sao Paolo, Brazil. The winning city will be announced before the end of 2013.

OUTLOOK: The local real estate sector is facing some major challenges, notably regaining investor confidence and recommencing a number of stalled construction projects, as well as the need to attract the pool of talented developers that relocated in the aftermath of the crisis. While Dubai is the most transparent real estate market in the Middle East, issues with transparency remain. Additionally, many Dubai-based banks – both local and multinational – are still holding on to troubled assets acquired before the downturn. Consequently, many financial institutions are hesitant to issue credit for real estate development, and lending has yet to return to pre-crisis levels. The DLD’s new IPL is expected to have a positive impact on transparency, however, and the emirate has introduced several programmes to restart stalled projects, which is in turn likely to boost lending (see Construction chapter).

The positive market performance in the residential, retail, hotel and tourism segments over the past year and a half is the result of careful government oversight and a rapidly maturing domestic real estate sector.

According to a number of market analysts, the long-term impact of the downturn is expected to be positive. Given the emirate’s position as a regional centre for real estate development as well as wider competitive advantages, the sector seems well positioned for more measured growth in the coming few years.