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Dubai is a regional centre, but faces challenges

Posted by M.Erdogdu on 4 March 2017
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The real estate sector in Dubai is famed for the scale and scope of its ambitious projects, and it continues to play a major part in the emirate’s constant state of development. As a result, the emirate has become a global by-word for the grand and the iconic, continuously pushing the boundaries of architecture and planning, design and construction. That Dubai manages to do all this despite the dramatic ups and downs of recent years is testimony to its continued dynamism and forward thinking.

Currently, however, the emirate’s real estate sector faces some important challenges. A general oversupply – with more in the pipeline – has seen prices and yields slip. This has also coincided with oil and gas price falls, a global economic slowdown and regional security uncertainties. Yet Dubai remains a key business and transportation centre internationally, a regional safe haven, and is also well positioned to pick up on potential future upturns, such as those expected from the end to Iran’s trade restrictions. At the same time, building continues as the clock counts down to the Dubai Expo 2020.

A Dynamic Change

As recently as 1948, the British diplomat and oil prospector Edward Henderson was able to describe Dubai as a small “fishing town” lying across the Dubai Creek from the equally unimposing town of Deira. Back then, the emirate was little more than a collection of low rises, clustered around a souq (market), the waterfront and the palace, with transport confined to a few trucks and wooden boats. Now, it has a population of 2.42m, a GDP of Dh88.7bn ($24.1bn), and since 2014 is home to the world’s busiest airport by number of international flights. Back in 1955, too, the emirate had a total built-up area of just 3.2 sq km. Dubai Municipality was only established as recently as 1957, with 1960 seeing the first master plan for development. That year also largely forms the baseline for land ownership in the emirate, with Dubai’s regulations on this stating that where solid houses existed on plots in 1960, those houses and plots are normally at the disposal of their residents. All other land, meanwhile, is at the disposal of the ruler who can allocate land for utilities, sell it, lease it, or give it – the latter being “granted land” – enabling major projects to be undertaken without developers needing to deal with large numbers of owners.

Rapid Growth

The expansion of the city began in earnest in the 1980s, with construction of new ring roads, two bridges and the Al Shindagha Tunnel under Dubai Creek. Development of Port Rashid, the dry dock and the airport saw Deira become a major trading hub, with the World Trade Centre complex, built in 1978, one of the first major tower groups in the city. The construction of Port Jebel Ali, linked to Dubai and Deira by the Sheikh Zayed Road, also pushed urban development southwards. The new residential district of Jumeirah – originally known as New Dubai – came into being at this time.

The 1960 master plan was rapidly overtaken by these developments, too. A new strategy, the 1993-2012 plan, was drawn up, attempting to create a specific framework for Dubai’s spatial expansion. The strategy addressed the real estate challenges posed by the different regulations governing nationals and non-nationals. Regarding the former, the plan entitled male nationals to a plot of 1400 sq metres each, once they reach 20 years of age. Those who owned less than 935 sq metres of land when the 1993-2012 plan came into force received another 1400-sq-metre plot. Building a house on this land can be done at beneficial mortgage rates, with a range of public sector bodies responsible for these arrangements. Non-nationals, on the other hand, must look to the private sector to meet their housing needs.

The system necessitates the allocation of increasing amounts of new land to nationals. This accounts for the development of suburbs, such as Mazhar and Nad Al Hamar, which have large national populations.

This “suburbanisation” has also led to many nationals leaving their traditional neighbourhoods in the old centre for these suburbs, with mainly low-income expatriates then moving into the vacated properties. In Deira, for example, much of the residential and commercial population is now expatriate. Generally, however, most low-income expatriate workers reside in accommodation provided within the estates where they work (indeed, large industrial outfits must provide this by law), or in accommodation away from the main urban areas. In 2002 Dubai allowed expatriates to purchase property freehold, a step that triggered a major property boom fuelled by higher-income non-nationals. The Freehold Property Law was not put into practice until 2006, but allows non-UAE nationals to hold real property rights in certain areas of Dubai. Those rights are also registered with the Dubai Land Department (DLD). These areas currently include those around Sheikh Zayed Road, Jumeirah, Jebel Ali and along the Emirates Road.

Business Zones

The 1993-2012 master plan also established a series of zones dedicated to particular economic sectors the emirate wished to develop as part of its diversification strategy, including Internet City, Media City, Festival City, International City, Dubai International Finance Centre, Burj Dubai, Dubai Downtown and Dubai Marina. These mega-projects now largely shape the city, which expanded by 190 times its original size between 1900 and 2005.

The year 2002 also saw work begin on major land reclamation, with Jumeirah expanding into the sea via the Palm Jumeirah project – a manmade peninsula in the shape of a palm – and the Palm Jebel Ali, which is slightly larger than Palm Jumeirah. Another offshore project is World Islands, consisting of miniature versions of the world’s landmasses, which is currently under construction. By 2015, UAE property specialists Asteco were able to list 53 distinct areas in Dubai, ranging from the most expensive, such as Al Barari, Dubai Hills, Meydan, Jumeirah Golf Estates and Jumeirah islands, to “affordable” districts such as Residential City, Downtown Jebel Ali, Al Warqaa and the International Media Production Zone. Deira and Bur Dubai now feature among the latter group.

Major Developers 

The government has long exercised a central role in the real estate sector through three large holding companies – Dubai World, Dubai Holding and the Investment Corporation of Dubai – each of which includes property developers in its portfolio.

Three major developers are Emaar Properties, Dubai Properties Group (DPG) and Nakheel Properties. Emaar was established in 1997 as a publicly listed company with a substantial government stake and has since been responsible for key developments in the emirate including Dubai Marina. Nakheel is most noted for its waterfront developments including Palm Jumeirah and Palm Jebel Ali as well as Deira Islands. Nakheel’s various business units include development, which focuses on community and related developments; hospitality and leisure, which manages the company’s portfolio of hotels, beach clubs and community recreation centres; retail, which operates Nakheel’s shopping malls and neighbourhood retail centres; leasing, focusing on residential and retail leasing; and marine, which oversees the company’s marine-related activities. The firm sees a growth story in Dubai, as regulations and standards are beginning to eclipse those in the US and Europe.

DPG has one of the largest land banks in the region, and works in close collaboration with the government of Dubai to deliver on its vision of ranking among the most innovative nations in the world by 2021. In pursuit of this ambitious target, the firm has rolled out a clear roadmap that is fully synced with the current government plan, fostering the creation of destinations that embody the values enshrined in UAE Vision 2021. These values are centred on creating a smart and sustainable city populated by happy, creative and empowered people while meeting the evolving needs of a cosmopolitan and diverse population that grows at an average 7-8% a year. A developer of master-planned and self-sustained destinations, it has celebrated numerous successes including the launch of Serena and Arabella as affordable housing projects in the first quarter of 2016, and expanded its portfolio with high-end hospitality.

Following the unveiling of the iconic 1/JBR luxury tower and the Marriott Edition Hotel in Jumeirah Beach Residence (JBR), one of the most popular tourist destinations in Dubai, DPG is delivering projects that integrate residential, commercial and retail components that support the emirate’s growth as a global hub for business and tourism. Abdullatif Al Mulla, former CEO of DPG, told OBG, “The lower- and middle-income segments of the real estate sector were neglected for many years. Knowing Dubai attracted 14.2m tourists in 2015, the tourism sector is also expecting to increase its offering in three- and four-star hospitality projects, while we are also expecting more and more staff accommodation project to come to the market on the short and medium term.”

Another multinational, multi-product group turning its attention to projects in the UAE is Sobha Group. The firm has developments and investments in the UAE, Oman, Qatar, Bahrain, Brunei and India, but has indicated that Dubai is getting special attention due to its demographic story. “Dubai’s infrastructure, coupled with its quality and safety standards, surpass most, if not all, other cosmopolitan and financial centres,” PNC Menon, group chairman of Sobha real estate development company, told OBG. “The Indian subcontinent, Africa and the Middle East are home to over 3bn people, and Dubai has emerged as the most dynamic and global city in this region.”

Meanwhile, DAMAC Properties made a name for itself in 2014 when it issued a $650m five-year sukuk (Islamic bond) on the NASDAQ Dubai. The note was more than four times oversubscribed and gathered interest from institutional investors across Europe, the Middle East and Asia. As of early 2016, the firm had delivered more than 14,375 units, with more than 37,000 units in progress. Another active firm, Meraas Holding, recently announced its plans to work on The Green Planet, the region’s first bio-dome, that recreates the natural diversity of a tropical forest, located at City Walk. Real estate firm Meydan is another player in the sector and focuses largely on Mohammed Bin Rashid Al Maktoum City, which is a freehold development in Dubai that offers not only residential and commercial space but a variety of cultural and entertainment activities. Deyaar Development has the Central Park Towers, which has been sold up to 92%, the luxury mixed-used Atria project and the Midtown project aimed at the middle-class segment. Union Properties is a public company that focuses on residential and commercial projects.

Negotiating Crisis

Dubai’s property market was badly affected by the global financial crisis in 2008-09, in which the real estate sector suffered significant losses, with many projects put on hold or cancelled. Nakheel in particular was badly hit. Nakheel, along with Limitless World, was at the time a subsidiary of Dubai World, the state-owned holding company, which was obliged to try and restructure its debts at the start of 2009, a move that triggered a run and temporary closure of the UAE’s capital markets. As many of Dubai’s developers had borrowed extensively in the 2004-08 period to fund new projects, the sudden drying up of finance was fatal. Much of the debt had a short maturity, too, adding to developers’ woes. The crisis thus led to a period of major restructuring in the sector. This has been continuing ever since. Limitless, for example, continued to negotiate its debts in 2015 and concluded its financial restructuring in May 2016, when it announced an early repayment of DH1.9bn ($517.2m) on its outstanding bank debt. Others have been able to rebound faster – Nakheel announced in 2014 it would repay all its remaining bank debt four years ahead of schedule. Post-crisis, both Limitless and Nakheel separated from Dubai World to become fully-owned government entities. Emaar, meanwhile, emerged from the crisis faster still, with ratings agency Moody’s giving the company’s debts a “positive outlook” by 2015, noting that Emaar’s credit profile had “improved significantly”. Emaar was not alone in this recovery. Ahmad Khalaf Obaid bin Touq Al Marri, general manager of Union Properties, told OBG, “Dubai benefitted from the crisis, as it was a healthy step for the market to be corrected appropriately. There are now fewer speculative companies looking for short-term gains. This protects investors

Rules & Regulations

The crisis had a sobering effect on the sector, however, and also encouraged a psychology of extra caution among many sector analysts and investors. It has also led to a major tightening of the regulations, in an effort to guard against the kind of speculative excesses that lay behind the 2008-09 crash. To head off some of the over-leveraged developers, regulations are now in place that prevent a project from being launched unless a 20% construction guarantee has been provided and the land has been paid for in full. At the same time, escrow accounts with the DLD have been introduced that mean off-plan payments have to be tightly linked to actual construction work, with the DLD monitoring sites to make sure that the instalments made by off-plan purchasers are being used to fund the projects they are paying for. “Complying with the authorities and respecting the laws is the only way to bring a project forward,” Mohammed Al Habtoor, vice-chairman and CEO at Al Habtoor Group, told OBG.

This new caution has also led to much closer observation of price movements by the government, with the introduction of regulations to moderate any volatility. This was the logic behind a series of steps taken by the DLD and its regulatory arm, the Real Estate Regulatory Agency (RERA) in 2013. Back then, the department hiked the transfer fees on real estate transactions from 2-4% – a major increase, although still lower than in many other countries. The rates in the UK, for example, vary between 4% and 15%, with the MENA average at 6.9%. At the same time, the central bank also lowered the maximum loan-to-value (LTV) ratio, reducing the amount of leverage available to borrowers taking out mortgages.

In the case of nationals, for properties valued at Dh5m ($1.4m) or less, the LTV was capped at 80% of the value, while for properties over Dh5m ($1.4m), the LTV was set at 70%. If the property in question was a second home, the LTV was set at 65%. For non-nationals, the respective LTVs were set at 75%, 65% and 60% for the same three categories of property. For properties that are off-plan, the LTV is now even tighter: whether the buyer is a national or non-national, or the property a first or second home, the level is set at 50%. In addition, interest-only mortgages were given a five-year limit on the amount of time before payment of principle has to begin.

Closer Oversight

RERA, which came into being in 2007, has also tightened its regulations since the crisis. These also include rules governing the rental market and the relationship between tenant and landlord. Under these provisions, a rent increase cap has also been set by RERA, under a law brought in at the end of 2013, calculated according to the difference between the rent currently being paid and the market rent in a particular district. Calculating the latter is a key task that RERA performs, with the market rent index recalculated every four months.

The changes in the sector are clear to developers. Mirwais Azizi, chairman and owner of Azizi Group, told OBG, “After learning the lessons of the economic crisis, about 70% of clients are end-users, with the rest comprising speculators and investors. There was a greater percentage of speculators before 2008.”

Other Reforms

Dubai now also allows shortterm rentals, and even Air BnB-style sublets, provided that the property is registered. This has been controversial, however, with owners’ associations often taking a stance against allowing short-term rentals or sublets, as they may not have been allowed for in original rental contracts. The year ahead will likely see this tested legally, with some pressure to allow such arrangements in the lead up to the 2020 World Expo, when short-term visitor numbers will rise considerably. Another regulatory effort from the DLD is the introduction of a ranking system for real estate brokers, which started in January 2016. This grades them according to their experience, the number and size of transactions they have carried out and – crucially – their commitment to real estate regulations. Rankings from “general” to “gold” will then be issued. These efforts to regulate the market are largely aimed at owner-occupiers. Given the transient nature of most of the population, who as expatriates will likely leave Dubai after a time, many properties are bought as investments, either being rented out to non-nationals or kept for their expected capital appreciation. “It is still not a yield-driven market,” Craig Plumb, head of research for MENA at Jones Lang LaSalle (JLL) consultancy, told OBG. “Most property is being held for capital growth or for temporary use.”

Residential Roller Coaster 

The transient nature of much of the population and its exposure to international investment conditions can make for some volatility in the market, as expatriate and overseas investment inflows and outflows have a more immediate impact than in many developed markets. This can be seen in the average apartment sales prices for different areas of Dubai during the 2008-14 period. On average, prices in the fourth quarter of 2014 were 22% lower than in the fourth quarter of 2008, before the crash, with some districts major outliers from this. Business Bay and the DIFC saw 37% and 31% decreases in average apartment prices over the period, while Dubai Marina and Jumeirah Lake Towers saw declines of 8% and 11%, respectively.

Price Declines

By October 2015, industry consultancy Tasweek claimed a 12.7% year-on-year drop overall during the first three quarters, while JLL put the decline at 11%. Establishing a universally agreed price is challenging in Dubai, due to difficulties in obtaining accurate figures, with individual sales data hard to come by. The DLD does, however, publish regular totals of real estate transactions, which also show a decline in numbers during 2014/15. Comparing the first nine months of 2014 with the first nine months of 2015, total land transactions fell 16.9%, from 3131 to 2599, total building transactions decreased 20.7%, from 632 to 501, and total unit transactions were down 40.9%, from 18,952 to 11,198. In addition, Dubai-based daily Gulf News reported in April 2016 that rental charges for apartments continued to slow into 2016, with apartment and villa rents dropping around 5% year-on-year in February.

Oil and gas prices began falling in 2014, from around $115 a barrel in June to around $53 a barrel by the year’s end – the fastest 50% fall since the 2008 crash. By April 2016 prices remained low at around $41 per barrel. While Dubai itself is not a major oil and gas producer, much of the wealth flowing through it is linked to hydrocarbons. At the same time, the strengthening of the US dollar has had a significant impact on demand. The dirham is pegged to the dollar, which means that as the latter has appreciated against the euro and other currencies – especially the ruble – Dubai property has become relatively more expensive for European and Russian investors.

Growth Projects

Despite the challenges, developers anticipate continued growth. “We expect the real estate sector to record robust growth in 2016 led by economic activity driven by aviation, trade and tourism,” Ahmad Thani Al Matrooshi, managing director of Emaar Properties, told OBG. “We expect to see more people owning homes and the further maturing of the property sector will also be another opportunity for serious and long-term investors.” On the supply side, there has been a steady increase. Total supply delivery for 2015 is around 12,000 apartment units and 2000 villas, according to Asteco. A host of mixed-use projects are currently under way, many of which will continue to add supply in the years ahead.

Among these is Meraas Holding’s Dh6bn ($1.6bn) Bluewaters Island project, near JBR, which features residential units as well as what will be the world’s largest Ferris Wheel. Another giant project is Emaar Properties and Dubai Holding’s Dubai Creek Harbour, a 6-sq-km development, which will have 6.79m sq metres of residential property along with over 1m sq metres of retail space, 22 hotels and 851,000 sq metres of commercial property. Infrastructure roll-out is also under way for the Dh2bn ($544.4m) Dubai Water Canal, a project reported 33% complete in June 2015. This 3-km canal will connect Business Bay with the Gulf and will then become home to a range of waterfront properties, from villas to apartments, alongside retail, entertainment and office space.

Another mega-project is Nakheel’s Deira Island, a landfill development that will have a hotel and entertainment emphasis, alongside residential and retail complexes. Originally intended as the “third palm”, after Palm Jumeirah and Palm Jebel Ali, the island will add some 2400 apartments in its Deira Islands Towers and Boulevard developments. Also soon to be delivered is the $10bn Mohammed Bin Rashid Al Maktoum (MBR) City District 1, with the first and second phases of its villa developments due to hand over the keys in 2016 and 2017, respectively. MBR includes mansions and villas in three architectural styles located around Crystal Lagoons, an artificial water feature that includes the world’s largest manmade beach, at 7 km.

DPG had started preparing for construction of its flagship project at JBR in March 2016, with the final design completed and in the final stage of approval by the authorities. Located at the entrance to Jumeirah Beach Residence, the development already began registering clients and customers with the intent of purchasing in late 2015, with the tower set for completion and handover in 2019. The 42-story project will offer two-, three- and four-bedroom apartments and five-bedroom penthouses for a total of 153 units. Al Mulla told OBG, “In the past, developers in Dubai used to develop projects and wait for the customers to come and buy. Today, projects are built in phases, according to the amount of secured customers and the money coming in. It is a much more realistic and safe approach for both the customers and the developers.” Elsewhere, Aladdin City was announced in 2014, with work slated to begin in 2016. Taking its cue from the classic Arabian tales of Aladdin and Sinbad, it will focus around three interconnected towers constructed over Dubai Creek. The project will also provide a mix of residential and retail space.

Another major development is Al Habtoor City. It includes three 5-star hotels, three luxury residential towers, a permanent water-based theatre production and an array of retail and leisure facilities including boutiques and signature restaurants, as well as a boulevard, marina promenade, tennis academy and landscaped gardens. The multi-faceted zone is designed to attract residents, tourists and Emiratis alike. One of Al Habtoor City’s unique features is its central location on the newly developed Sheikh Zayed Road Waterfront. Approximately 20,000 visitors are expected to visit Al Habtoor City each day, making it a highly anticipated landmark in the city centre.

An entirely new satellite city, the Dh30bn ($8.1bn) Desert Rose, is also due to break ground in 2016, providing housing for 160,000 people in an area across the Emirates Road between Al Ruwaya and Al Aweer. This 4000-ha site will also be connected to the metro’s Green Line. The year 2016 will also see work start on Al Mamzar Beachfront, budgeted initially at Dh10bn ($272.2m). This will add 4000 residential units when completed, along with retail and hotel space.

Renewals

In addition to these new projects, there are also many stalled residential developments beginning to spring back to life. After 2008-09, many schemes fell victim to the crash, with efforts to resuscitate them often meeting mixed results. A key agency in project revival is Tanmia, launched by the DLD’s investment arm, the Real Estate Investment Promotion and Management Centre. Tanmia works to find developers who might be interested in reviving a project, providing them with due diligence and information from the DLD and chasing up any outstanding legal issues. Press reports from October 2015 indicated that Tanmia had so far successfully revived 46 projects, worth a total of some Dh11bn ($3bn).

Off To The Office

The office market has also seen prices fall, due to oversupply and the external factors mentioned above – although in recent times, rental rates have stabilised and demand for grade-A offices has increased. Over the 2008-14 period, office sales and rentals declined, but with a one-year time lag evident on the residential sales price cycle. By the third quarter of 2015 average sales prices had declined 2% on year-end 2014, although rental rates remained largely unchanged. Several trends are currently behind the figures, with a shift under way among many businesses from old to new premises, pushing up demand at developments such as DIFC, which saw average rental rates up 11% between the third quarter of 2014 and the third quarter of 2015, with a trend towards smaller serviced or fitted offices.

Quality office space belonging to single owners is the variety in highest demand, as tenants prefer dealing with a single landlord or owner, rather than a strata-type development where there may be multiple owners. Sales of offices saw solid activity in 2015, although sales prices witnessed only modest growth – up 1% in the DIFC and 2% in Business Bay, for example, comparing the third quarter of 2014 with the third quarter of 2015. Most of the grade-A office space is in the newer areas of the city, such as along Sheikh Zayed Road, the DIFC, Business Bay and Jumeirah Lake Towers. Some of recent transactions are also connected to the growing popularity and reach of the metro system, which has boosted demand for those towers located nearest to the stations. New supply coming on-line in 2015 helped keep leasing and sales prices down even though transaction numbers remained healthy. These had been up too between 2013 and 2014, by some 16% in total, according to DLD figures. Figures from JLL show new office supply of 704,000 sq metres in the second half of 2015, followed by 200,000 sq metres in 2016 and 338,000 sq metres in 2017. By the end of the first half of 2015, total office supply in Dubai stood at 2.8m sq metres, up from 7.6m sq metres at year-end 2014.

Room With A View

The hotel segment of Dubai’s real estate market is also undergoing a major expansion in supply, particularly in the run-up to World Expo 2020 and as economic diversification that includes leisure and family tourism increases. Officials expect some 25m visitors to the event, with 70% of them from abroad. In 2014 Dubai welcomed some 13.2m tourists. Thus a major expansion in supply is required, particularly as tourism is one of the pillars of both present and future economic growth in the emirate. Indeed, a target of 20m visitors per year has also been set for 2020 by the government. In response to this, the Department of Tourism and Commerce Marketing now offers incentives to encourage the development of mid-range hotels in particular.

Hospitality has, however, also been affected by the external factors mentioned above. Yet while tourist numbers from Russia and Europe may have declined, those from China and India have increased – a development that may also capitalise upon the shift to mid-range hotels. Since October 1, 2013, investors in three- and four-star hotels have been able to receive a waiver on the 10% municipality fee levied on the room rate for each night of occupancy. Government land is also being allocated specifically for four- and five-star hotel development. Supply is indeed increasing too, with JLL figures showing 3000 more keys due by the end of the second half of 2015, followed by 8500 more in 2016, 10,100 in 2017 – a peak year – and 9300 in 2018. The hospitality sector also features growing numbers of branded serviced apartments, often linked to a hotel. These have been particularly successful for prestige brands, with tie-ups occurring with brands such as Bulgari and Paramount.

Down At The Mall

Retail has also seen some major expansion in recent times, in terms of space if not in rental rates, which have slowed as customer numbers have been hit by the global slowdown and appreciating US dollar. Supply here is also increasing, in the short term mainly through extensions to existing malls – with Mall of the Emirates, Dragon Mart and Ibn Battuta all seeing expansion in 2015. The Dh25bn ($6.8bn) Mall of the World is also the focus of major expansions. The second half of 2015 alone was due to see 194,000 sq metres of additional space come on-line, while 419,000 sq metres more will arrive in 2016 and 82,000 sq metres more in 2017.

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