The World Expo 2020 will be a key driver for growth and investment in Dubai’s real estate sector in the coming years, as the emirate ramps up to host the exhibition.

Dubai’s successful bid to host the event has helped boost confidence in the market. However, concerns are growing about potential overheating in the property sector and the emirate’s ability to deliver the event on time and under budget, according to speakers at the Dubai Real Estate 2020 conference, which was held on 9-10 June in the emirate.

“The key element for the market to focus on is… developing sustainable projects that attract the right type of investor”

Zain Quireshi, Mashreq

Dubai has said it will spend $7bn in preparation for hosting the event, but the eventual figure is likely to be far higher, said Khatija Haque, head of Mena research at local bank Emirates NBD. One aspect that makes projects related to the event unique is that they have a finite date that must be met, which means these projects are not likely to languish, as is often the case in other markets in the region, she said.

Changing market

The Dubai economy is much different today than it was in 2008 when the property market crashed, said Haque on the first day of the event. Six years ago, construction and real estate accounted for one-third of the economy, but that figure now stands at about 21 per cent. This is partly due to the rise of the tourism sector, which has grown from 12 per cent to 16 per cent of the economy and is poised to grow even faster in light of Dubai hosting the Expo in 2020.

Boosted by a large influx of professionals that are expected to descend on Dubai to work on projects related to the event, the population of Dubai is expected to rise to 3.5 million by 2020, according to Abdullah Rafia, assistant director-general of planning and engineering sector at the Dubai Municipality.

The population increase will help to create the demand needed to ensure new projects planned for the Expo will be viable. Bankers who spoke at the conference said the landscape has become more challenging for developers, with their projects being given much greater scrutiny before they are approved.

“The key element for the market to focus on is sustainability,” says Zain Quireshi, head of real estate at Dubai-based bank Mashreq. “We did get into situations where we tried to grow too fast, but now the government has taken the lead in trying to hold back supply of projects that are not viable. It’s all about developing sustainable projects that attract the right type of investor.”

One factor supporting the sustainability of the property market during the current growth phase is that fewer investors are relying on bank loans to finance purchases, said Haque. As a result, bank lending is no longer a main driver of real estate prices, which means the banking sector is much less exposed and so is in a stronger position.

Asked if investment were to dry up in Dubai if the political situation in the wider Middle East were to drastically improve, Haque said such a scenario is not likely in the near term. “While we hope that the [political climate] in the region will improve, it is likely to be gradual. The situation in the region not likely to change suddenly, so there is little risk of an impact on investment,” she said.

Risks in growth

While speakers were generally upbeat about the market and the steps the government has taken to avoid another correction, speakers were also cautious to point out that rapid growth in the market does carry risks.

Several made reference to a new report by the UAE Central Bank, which warned that the country’s real estate market might be overheating as rental yields in Dubai and Abu Dhabi indicate “growing imbalances”.

“We are mindful that markets are cyclical, so it’s right to assume that [the Dubai market] will be cyclical in the future,” said Tommy Trask, director of corporate ratings at the US’ Standard & Poor’s. “This is a market that is growing fast, which means that the cyclical swing will be more pronounced. That is especially the case when the real estate market is a large share of GDP.”

Several speakers, who suggested that the continued double-digit growth was not sustainable for the market, welcomed the slowdown in property prices in Dubai during the first quarters of this year. “We want the economy to grow, not 30 per cent in three months, but something more reasonable,” said Mohamad Khodr al-Dah, director of technical affairs at the Dubai Land Department.

Some speakers also warned of rising construction prices, traffic and logistical problems related to the build-up to the Expo.

“Dubai has as fixed time for delivering the Expo 2020, which could lead to a steep ramp-up in prices closer to 2020,” said Christopher Seymour, partner and head of property at UK consultancy EC Harris. “Significant demand for people and materials means that governments need to be proactive. For example, is it worth bulk ordering materials now? It’s about locking in materials now before demand gets too tight.”