Select Group has been an active developer of towers in Dubai Marina for more than a decade. During that time, the local property firm has experienced firsthand the cyclical nature of Dubais property market.
As prices have ebbed and flowed, the company has remained positive on the trajectory of the emirates property market. That commitment has been tested as the market cools in 2015 and the company delivers its latest development in Dubai Marina Marina Gate.
[Select Group] is not that dependent on off-plan sales to see the [Marina Gate] project through to completion
The project, for which the third tower will be launched later this year, is a sizeable one. It has three towers with a total 1,500 units and a built-up area of about 3.9 million square feet.
People are asking if it is the right time to launch a 500-unit tower when the market has already softened, says Mustafa Pooya, chief commercial officer at Select Group. For us, that was what we set out to do, and we sold enough of the first two towers so we can build the third, so we are not that dependent on off-plan sales to see the project through to completion.
Select Groups ability to deliver demonstrates how much more mature and, therefore, robust Dubais property market is in 2015 when compared with the previous and much more severe correction of 2008 and 2009.
In 2008 and 2009, you could not take a walk around the [Dubai] Marina, every 400 metres there was something under construction, there was no retail, and there were just isolated pockets that were finished, says Pooya.
Today you walk out of the six original Emaar [Properties] towers and you walk a 7 kilometre circuit round the marina and 75-80 per cent of the buildings are ready, and the retail is there. The entire area has been transformed.
Dubai Marinas success is a product of the extraordinary levels of infrastructure investment made before 2009.
The infrastructure at the Marina cost billions of dollars to build and it is very hard to replicate, says Pooya. You can go out in the middle of the desert and build villa communities. That is easy. To build another Marina, Palm [Jumeirah] island, or Downtown district takes a lot of infrastructure spending and you might not see that happening again for two reasons: first, when the government of Dubai spent this kind of money [between 2003 and 2008] credit was easy to come by; and second, investors were so confident you could point at something on the map and ask if someone would like to buy an apartment there, no one would ask questions, they would just say sure here is my deposit.
Those elements have gone, Pooya adds. Investors are more cautious, they ask awkward questions and at the same time easy funding is not quite there.
The difficulty of replicating developments such as Dubai Marina and Downtown Dubai means the properties within them outperform the rest of the market.
These areas that are mature and have come a long way will always command a premium and even if there is a softening of the market, says Pooya. You would not see it as much in these areas as you would, for example, villa communities.
The Marina Gate development will feature three towers with a total of 1,500 housing units
The investment case in these established areas is further enhanced by the fact that the space to develop new projects is constrained, which drives up prices.
Take central London, for example: why do people buy there today? Supply is very constrained and even through prices have gone up to extent that where yields have dropped to 1.5-2 per cent people are still buying because they dont care about yield. If they did, they will buy student housing and get an 8-9 per cent return, says Pooya.
It is similar here in Dubai. Yields are lowest in Downtown, where they are probably 3-4 per cent. [In] the Marina and the Palm [Jumeirah], it is a little bit better, but if you go to Discovery Gardens and newer communities, you can get an 8-9 per cent return, so people [are] looking for combination of cap appreciation and rental yield.
The projects currently being delivered in 2015 are of a much more modest scale when compared with those being developed in 2008, and as a result the extent of any potential over supply is far more limited.
In 2008, Dubai Waterfront was supposed to have been 1.5 billion square feet, it was to double the population of Dubai. To put it into perspective the entire Business Bay is 60 or 70 million square feet. You also had Arabian Canal, Dubailand, and you had Palm Deira that was supposed to be larger than Paris, so altogether you had 5.5-6 billion sq ft of projects that were going to be built, says Pooya.
The scale of development today is nothing compared with that. These megaprojects are not being announced as before. Also bear in mind that at same time private developers were also coming out there and launching every day as they did before 2008. Even since the market has picked up [in 2011] you have not had many of those.
Private developers have not been able to launch new projects as easily because of legislation introduced by Dubais Real Estate Regulation Authority (Rera).
Rera has been introducing more regulations to make sure a crash does not happen again. Land has to be paid for in full. You cannot launch an off-plan project until the land is paid for, you cannot launch until you have constructed 20 per cent of the project, and if you are planning to launch without 20 per cent of construction, you have to give a bank guarantee for the 20 per cent, says Pooya.
There was a time when Rera would give back the guarantee when 20 per cent of the construction was done, now they keep it until the project is completed. [Previously, developers] could launch with just a schematic design, now you need a detailed design before you launch, and that protects the investor because you have done so much of the design work there will be little variation, so what you see is what you get.
The more regulated market has not stopped Select Group from the projects that will follow Marina Gate.
Real estate development is not as simple as buying and selling, because what we want to launch takes years to bring to market, so we are essentially always in development mode. We are looking at potential projects in the Marina, we are looking at something in Downtown and also looking at mid-income housing, says Pooya.
We feel that in the future there is going to be demand for mid-income. Our focus would be on apartment blocks, and we would look at areas where there is no infrastructure risk. Since 2009, we only go for areas where we simply acquire a piece of land and build a project and there are still central locations [in Dubai] where one can easily accomplish that.